ECON 337:

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ECON 337 Agricultural Marketing

Chad Hart Assistant Professor chart_at_iastate.edu 51
5-294-9911
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Livestock Price Risk Tools

• Livestock Futures and Options
• Livestock Revenue Insurance
• Livestock Revenue Protection (LRP)
• Livestock Gross Margin (LGM)
• http//www.rma.usda.gov/livestock/
• Factsheets
• Premium calculator
• http//www.extension.iastate.edu/agdm/ldcostsretur
  ns.html

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Livestock Risk Protection (LRP)

• Price risk insurance coverage for hogs, fed
  cattle, feeder cattle, and lamb
• Insurance protects against low livestock prices
• 70 to 100 guarantees available for cattle and
  hogs, based on CME futures prices

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Livestock Risk Protection

• Coverage is available for up to 26 weeks for hogs
  and 52 weeks for cattle
• Works sort of like a put option
• Premiums are subsidized, the government pays 13
  of the premium

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Livestock Risk Protection

• Guarantees available are posted at
  http//www3.rma.usda.gov/apps/livestock_reports/
• Posted after the CME closes each day until 900
  am Central Time the next working day
• Assures that guarantees reflect the most recent
  market movements

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LRP Example
http//www.extension.iastate.edu/agdm/livestock/pd
f/b1-50.pdf
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LRP vs. Futures/Options

• Futures and options have fixed contract sizes
• Hogs 400 cwt. or about 150 head
• Fed cattle 400 cwt. or about 32 head
• Feeder cattle 500 cwt., 60-100 head
• LRP can be purchased for any number of head or
  weight

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LRP vs. Futures/Options

• Futures hedge or options can be offset at any
  time before the contract expires
• LRP can not be offset, once you buy the coverage,
  youre locked in

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Livestock Gross Margin (LGM)

• Insures a margin between revenue and cost of
  major inputs for cattle, hogs, and dairy
• Protects against decreases in cattle/hog prices
  and/or increases in input costs
• Hogs
• Value of hog corn and soybean meal costs
• Cattle
• Value of cattle feeder cattle and corn costs
• Well talk about dairy later in the semester

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Livestock Gross Margin

• Cattle (coverage for up to a year out)
• Calves
• Yearlings
• Hogs (coverage for up to 6 months out)
• Farrow to finish
• Finishing feeder pig
• Finishing SEW pig

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LGM Guarantees for Hogs

• Farrow to Finish
• Gross margin per hogt
• 2.60.74Lean Hog Pricet - 12 bu. Corn Pricet-3
• - (138.55 lb./2000 lb.) SoyMeal Pricet-3
• Finishing
• Gross margin per hogt
• 2.60.74Lean Hog Pricet - 9 bu. Corn Pricet-2
• (82 lb./2000 lb.) SoyMeal Pricet-2
• SEW
• Gross margin per hogt
• 2.60.74Lean Hog Pricet 9.05 bu. Corn
  Pricet-2
• (91 lb./2000 lb.) SoyMeal Pricet-2

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LGM Guarantees for Cattle

• Yearlings
• Gross margin per headt
• 12.5Live Cattle Pricet 7.5Feeder Cattle
  Pricet-5
• - 50 bu. Corn Pricet-2
• Calves
• Gross margin per headt
• 11.5Live Cattle Pricet 5.5Feeder Cattle
  Pricet-8
• - 52 bu. Corn Pricet-4

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Livestock Gross Margin

• Has deductibles, like car or home insurance
• For cattle, deductibles from 0 to 150 per head
  by 10 increments
• For hogs, deductibles from 0 to 20 per head by
  2 increments

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LGM-Swine Farrow-to-Finish, Feb. 2012
April May June July August
Gross Margin 78.74 93.20 91.74 91.59 90.59
Lean Hog Price 89.88 98.83 99.57 99.66 99.25
Corn Price 6.05 6.22 6.40 6.42 6.43
Soybean Meal Price 311.70 322.15 332.60 333.85 335.10
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LGM Example

• Say we insure 100 hogs in April and choose a 2
  deductible
• Our LGM policy is protecting us against gross
  margins below 76.74 per head
• When April comes, the insurance company will
  compute the actual margin using the same formula
  as was used for the guarantee

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LGM Example

• If the lean hog price fell to 88 per cwt., the
  corn price fell 6.00 per bu., and the soybean
  meal price stayed at 311.70 per ton, then the
  actual gross margin is
• Actual gross margin per hogt
• 2.60.7488 - 12 bu. 6.00 - (138.55 lb./2000
  lb.) 311.70
• 75.72 per head
• Per head indemnity 76.74 - 75.72 1.02

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LGM Issues

• Only available on the last business Friday of the
  month
• Is a complicated insurance policy
• Works like an Asian basket option
• Asian uses a price average
• Basket covers more than one commodity
• Like a put on cattle/hogs and calls on feeder
  cattle, corn, and soybean meal

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Who can benefit from LGM/LRP?

• Producers who depend on the daily cash market or
  a formula related to it.
• Producers with low cash reserves.
• Smaller producers who do not have the volume to
  use futures contracts or put options.
• Producers who prefer insurance to the futures
  market. No margin account.

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Some Risks Remain

• LRP, LGM do not insure against production risks
• Futures prices and cash index prices may differ
  from local cash prices (basis risk)
• Selling weights and dates may differ from the
  guarantees

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• Class web site
• http//www.econ.iastate.edu/chart/Classes/econ337
  /Spring2012/
• Have a great weekend!