Understanding Basics of Managing Your Farm Risks
Essential to Profitability Says MU Extension Specialist
"Mother Nature" can be unpredictable and markets can fluctuate. The recent events in the beef industry, with Tyson Foods processing plant burning, has caused a sharp down turn in feeder cattle prices.
Producers wishing to mitigate price and weather do have some options.
"The volatile conditions of today's cattle market often causes producers to have more questions than answers, especially in determining how to manage the downside effects on their business," said Kyle Whittaker, county engagement specialist in agriculture and environment with University of Missouri Extension.
Livestock Risk Protection (LRP) is a viable and flexible way to manage the price risk associated with increased market volatility. LRP provides flexibility by providing a variety of coverage periods, based on Chicago Mercantile Exchange (CME) offerings.
Coverage prices and rates are established daily using the CME daily price limits and are market based, so daily fluctuations can occur.
"To qualify producers must own their livestock when they enroll in the program and retain ownership until the last 30 days of the insurance contract expiration," said Whittaker.
The advantages of LRP are the ability to insure on a per head basis, utilize adjustment factors to set the floor price for any class of cattle. LRP policies can cover feeder cattle, in two different weight classes (under 600 lbs. and 600 - 900lbs), fed cattle, Brahman type, and dairy.
Contract must include number, type of cattle, sex of calves, target weight, coverage period and coverage price. The USDA administers the LRP program, but policies must be purchased through a local insurance agent.
The premium paid by the producer is subsidized by the federal government, which recently raised from 13% to 20-30% depending on the type of cattle.
"This increase simply means the premiums are cheaper than before," said Whittaker.
LRP does not cover death or disease of an animal. If the cash price index for the insured cattle falls below the coverage price selected, the producer collects an indemnity equal to the difference.
To mitigate drought risk producers can choose to participate in Pasture, Rangeland and Forage protection (PRF). PRF has been available in Missouri since 2009.
For Missouri, it is based on a rainfall index, which provides coverage when precipitation falls below an area's long-term, historical norm. The rainfall index uses data from the NOAA Climate Prediction Center, the land covered is in a grid, based on longitude and latitude.
Landowners must select at least two 2 -month periods where precipitation is important to their operation. These periods are called index intervals. Your insurance payments are determined by using NOAA CPC data for the grid(s) and the index(s) you choose to insure.
"When the final grid index falls below your trigger grid index you may receive an indemnity," said Whittaker.
PRF is also subsidized by the federal government, the percent subsidized ranges from 51% - 59% depending on the coverage level chosen. Similar to a LRP policy, PRF policies are purchased through a local insurance agency, but are administered by the USDA.
"LRP insurance is a price risk tool available to cattle producers, sheep producers and swine producers to protect against price decline and minimize losses. PRF protects against drought, which can be beneficial for livestock and forage producers," said Whittaker.
More information can be found on the USDA's website (search Risk Management Agency) or from a local insurance agency that provides these polices.
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