Covering Your Assets

Here's the Beef

Covering Your Assets

It may just be me, but it seems everything imaginable impacts the cattle market. Yes, occasionally it swings in a positive way, but human nature dictates you never really remember those.

As an industry, we are at an all-time low in overall cattle numbers, and beef demand is at near all-time highs. Macro-economic principles suggest when a product’s supply is low and demand is high, the overall price should be at least stable, if not high. As such, it gives one pause to wonder why – over the last month (Sept. 20, ’23 to Oct. 20, ’23) – the CME feeder cattle index hemorrhaged $22.53/cwt, in excess of $180/hd for an 8-weight calf.

The CME feeder index is a representation of the cash market, not the futures, which sometimes just does what it wants based on squiggly lines and algorithms (i.e., technical analysis). Thus, wherever you sell your calves, they’re worth less today than a month ago.

However, the answer to the “Why” – whether it be the drier corn belt, a tumultuous geopolitical atmosphere, constant federal reserve policy unknowns or just a plain old short-term blip on the way to a long-term correction – is really not what’s important.

The real question is: how, as producers, we manage such clear market volatility?
Risk management, at least within the cattle sector over the last 30 years, has been primarily dominated by two preferences:

  1. A direct market position, or “Hedge,” and
  2. A potential market position (to be exercised or not), or “Option.”

In my experience, due to their contract expectations, potential margin calls, time value of the strike price and/or brokerage fees to administer, neither of these solutions are plausible for most producers.
However, there is a little-known alternative first utilized in 2003 that might be worth your consideration and taking a little deeper dive into how it may be beneficial.

Livestock Risk Protection (LRP) is a price insurance policy offered by the United States Department of Agriculture’s (USDA) Risk Management Agency (RMA) available for both feeder and fed cattle, as well as lamb and swine. I, myself, have used this alternative on several occasions to mitigate market risk. For most producers, I find this option more suitable as it eliminates the negatives discussed above often associated with hedges and options.

In addition, the USDA subsidizes a portion of the premium, so costs are lower, and you can insure anywhere from one to 12,000 head (even unborn calves), depending upon the size of your operation and whether you retain ownership. There are no margin calls with LRP, and you pay for the policy at termination rather than initiation.

It’s important to understand LRP does not guarantee a price for your particular cattle. But, due to its reliance upon the CME Feeder Cattle Index for market valuation, it does offer a price floor against major market volatility within the broader regional landscape. Furthermore, it’s important to note that, much like insurance coverage in other areas for your consideration, producers must fill-out an application and purchase the insurance through a certified agent to be eligible to receive the subsidy. Once all the paperwork is complete, there are many sources for specifics on how and what to buy, but for all types of producers who own at least half the cattle insured, there is likely something of good value there.

My personal experiences with these policies have been quite good, though not all have paid an indemnity. Much like, “you don’t buy life insurance hoping to die,” you should not buy LRP hoping the market takes a nose dive. I do not utilize LRPs for all cattle because, quite frankly, the market risk for all cattle is absolutely not the same.

I tend to see the benefits for LRP utilization primarily in our smaller heifers, as these cattle tend to hang around the longest, and will be discounted the greatest against their steer counterparts.

The two biggest pieces of knowledge I can share for those truly interested in utilizing these tools are:

  1. Coverage prices are posted at 3pm, and insurance must be taken by market-open the following business day, so establish a relationship with your desired agent and make sure he or she is willing to work late or early to meet these requirements, and
  2. Marketings of the insured cattle must be within 60 days of the termination date, so choose your coverage length wisely.

Obviously, an extensive overview of the LRP topic goes beyond our abilities here, but if interested, I recommend conducting your due diligence at for more information.

Overall, I think if they knew more about it, more producers could benefit from this service.

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