The Numbers Show its Better Than Average

By: Brandon Willis

When is the best time to use LRP? That is the million-dollar question. And while nobody truly knows the answer because none of us can predict unpredictable markets, historical data offers clues that may help maximize LRP’s potential. This article compares net-indemnities (payouts after cost) under different market conditions to determine if they varied based upon the strength of the market. Put another way, LRP protects against unexpected price declines. Are prices more likely to fall when they start high?

Ranchers Insurance, LLC specializes in LRP and invests in tools meant to help clients maximize LRP’s potential. This analysis utilizes a proprietary tool that looks back at historical LRP transactions and calculates LRP performance using historical LRP data, coupled with current LRP subsidies. The tool doesn’t utilize every possible sale but rather randomly selects historical sales events to simulate performance. 

Three scenarios are compared below – two for feeder cattle and one for fed cattle. Under each one, we evaluate between three to five price thresholds and determine LRP’s net-indemnity. Scenarios range from those that asses all LRP sales regardless of market prices to those that only focus on LRP sales during stronger markets to determine if LRP’s net-indemnities were correlated with higher market prices. All scenarios only evaluate the highest coverage levels (between 97.5% and 100% of the Expected Ending Value) since, based on previous analysis they frequently were the best coverage for producers.

Scenario #1: Insuring an 800-pound steer approximately 4-months into the future. 

Results: Historically, when one purchased without utilizing a price floor (minimum threshold), the net indemnity was $13.77 per head over time. When one only utilized LRP with a $150 price threshold, the average net indemnity doubled to $30.08. Finally, with a $155 price threshold the average net indemnity increased to $39.85. 

 

17 weeks/feeder cattle net indemnity based up expected prices graph

Scenario #2: Insure an 800-pound steer 34-weeks ahead, or approximately 8-months into the future. 

Results: Like the results for a 17-week endorsement, this scenario reflected higher net indemnities for LRP purchases during stronger market conditions. When a minimum threshold of $145 was applied, net indemnities nearly tripled. Yet, there was a modest but not significant increase in net indemnities when the minimum price increased above $145. 

34 weeks/feeder cattle net indemnity graph

Scenario #3: Insuring fed cattle utilizing a 30-week endorsement. 

Results: Historically, LRP for fed cattle hasn’t performed as well as LRP for feeder cattle. In general, LRP for fed cattle pays indemnities less frequently. Without a minimum price threshold, LRP for fed cattle would have resulted in a negative net indemnity over time. However, during periods of high prices, LRP’s results significantly improved. Producers finishing out cattle should balance the benefits of LRP compared to USDA’s Livestock Gross Margin. 

30 weeks fed cattle average net indemnity graph

Conclusion: What do the numbers tell us? In short, during strong cattle markets, LRP performs well when comparing net-indemnities. Perhaps it’s due to the age-old adage often used in commodity markets “the cure for high prices is high prices.” 

LRP has a positive net indemnity for feeder cattle regardless of market conditions, but the net indemnity doubles when prices are above $145-$150. A producer may want to be more selective for fed cattle and utilize it during more robust markets. If you would like further analysis specific to your operation, call us at (866) 374-2112. 

About the Author: The author oversaw USDA’s insurance programs as the administrator of the Risk Management Agency from 2013 to 2017. Before that, he served as a senior adviser to U.S. Secretary of Agriculture Tom Vilsack. He owns Ranchers Insurance, LLC, an insurance agency that specializes in LRP. You can reach Brandon at (435) 213-0463 or brandon@ranchersinsurance.com