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Livestock Insurance: Overview

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Presentation on theme: "Livestock Insurance: Overview"— Presentation transcript:

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2 Livestock Insurance: Overview
Livestock Risk Protection (feeder cattle, fed cattle, same) Livestock Risk Protection (LRP) for swine Livestock Risk Protection (LRP) for slaughter lambs The insurable types and weights of feeder cattle under livestock insurance Insurance against price changes Indemnity calculations Speaker Notes: There are several types of insurance that handle production and revenue risks for most crops grown in Wyoming. Now let’s look at a price insurance product available for livestock producers. Feeder cattle, fed cattle, swine and slaughter lambs can all be covered by insurance policies in Wyoming. We’re going to take a look at highlights of the livestock risk protection (LRP) insurance primarily as it relates to feeder cattle, fed cattle, and swine.

3 Livestock Insurance: LRP for Fed Cattle Overview
History Geographic Coverage LRP-Fed Cattle Attributes Application Offsetting Transaction Speaker Notes: LRP-Fed cattle is another offering under Livestock Risk Protection. It was first offered in 2002, is a price risk management tool that provides fed cattle producers downward price protection against a decline in national fed cattle prices. LRP-Fed Cattle is available in all Wyoming counties and all counties in 36 other states, including several states where Wyoming ranchers retain ownership and custom feed cattle to slaughter weight. LRP-Fed Cattle is applicable to fed cattle to be marketed at slaughter weights between 1,000 and 1,400 pounds that are expected to grade select or higher with a yield grade of 1 to 3. Although this insurance protects fed cattle producers against a decline in national fed cattle prices below an established coverage price, it does not cover sickness or death loss or insure against possible rising feed costs. Producers remain subject to "basis price risk", which is the difference between a producer's actual market sales price and the AMS cash price used to specify the actual ending value against which this insurance product is settled. Producers need to work with the crop insurance agent to make application for LRP-Fed Cattle, establish beneficial interest and file a "specific coverage endorsement" for each group of fed cattle to be insured. Limits are 2,000 fed cattle per endorsement and 4,000 head per producer per year. Producers are not allowed to take offsetting positions in the commodity futures or options markets so as to convert the premium subsidy on this insurance to their personal use.

4 Livestock Insurance: LRP for Fed Cattle Basics
Target Weights Endorsement Length Expected Ending Value Coverage Prices Premium Rate Actual Ending Value Current and Archived Information Speaker Notes: Several terms that are specific to LRP-Fed Cattle are here on the slide. Let’s go through each one. Target Weights: Target weights refer to the anticipated weights of fed cattle, on a hundredweight basis at the end of the insurance period and, as this insurance product covers both steers and heifers, refers to the average weight of all covered cattle. Endorsement Length: LRP-Fed Cattle is offered in 13, 17, 21, 26, 30, 34, 39, 43, 47, and 52 week endorsement lengths. Producers are to select an endorsement length closest to the sales date of fed cattle. Expected Ending Value: Expected ending values reflect prices for fed cattle, in dollars per hundredweight, that are expected to occur at the end of the endorsement period. Coverage Prices: These are the prices per hundredweight within an endorsement length at which a producer may choose to insure. Concurrent with a producer's choice of a coverage price the producer has selected a coverage level, the portion of the expected ending value represented by the coverage price selected. Premium Rate: For each coverage level within an endorsement length there is a "rate", a premium rate specified. Furthermore, the premium subsidy rate for LRP-Fed Cattle is 13 percent, irrespective of the coverage level. Actual Ending Value: Actual ending value for fed cattle at the end of an endorsement period is the cash price for fed cattle as calculated by the Agricultural Marketing Service (AMS) in a report titled 5 Area Weekly Weighted Average Direct Slaughter Cattle. This price series is the Live Basis Sales, Steers, "35-65 % Choice" category. Current and Archived Information: Information on expected ending values, coverage prices and levels, premium rates and ending values for each business day may be located at: At that site, look under Browse by Subject and select livestock and then locate Livestock Risk Protection and select for fed cattle.

5 Livestock Insurance: LRP for Fed Cattle Example
Speaker Notes: Now let's look at Larry's fed cattle operation for an example transaction. On October 5th he had 1,000 head of cattle that he expects to reach a target weight of per hundredweight when he markets them in early January. He determines that a 13 week endorsement period is appropriate for these cattle and selects a coverage price of $83.80 per hundredweight which is percent of the expected ending value of $ per hundredweight. He had previously made application with his insurance agent and had established his beneficial interest in these cattle at 100 percent. He works with his agent to complete a specific coverage endorsement for these fed cattle.

6 Livestock Insurance: LRP for Fed Cattle Premium Calculations
Speaker Notes: Larry works with his insurance agent to determine the premium that he will have to pay, up-front, to buy this price risk insurance. They establish the insured value of these fed cattle to be $984,650 by multiplying the 1,000 head times hundredweight per head times $83.80 per hundredweight times 1.000, reflecting his 100 percent share in these fed cattle. The premium rate is specified on the web site for fed cattle on the October 5 page for fed cattle in the 13 week endorsement period with a $83.80 per hundredweight coverage price. Multiplying the $984,650 insured value times the premium rate yields a total premium of $9,177. Subtracting from this total premium the 13 percent premium subsidy of $1,193 provides Larry with his $7,984 premium.

7 Livestock Insurance: LRP for Fed Cattle Example
When will a producer be indemnified for a decline in national fed cattle prices? Note that the price at which the producer sells his fed cattle does not enter this calculation How is the indemnity calculated? Speaker Notes: A producer carrying LRP-Fed Cattle coverage will be indemnified when the actual ending value for the fed cattle determined as a cash price from a specific Agricultural Marketing Service price report is less than the coverage price selected by the producer. Producers must remember that the price at which they actually sell their fed cattle does not enter into these calculations. The indemnity is determined by multiplying the number of head by the average target weight per head times the difference in the coverage price less the actual ending value times the producer's ownership share in the fed cattle. Indemnity = [Number of Head Insured x Target Weight, in hundredweight x (Coverage Price - Actual Ending Value)] x Insured Share

8 Livestock Insurance: LRP for Fed Cattle Example
Larry actually marketed his 1,000 head of fed cattle on January 2 The actual ending value for the 13 week endorsement period he selected, posted on January 2, indicated an actual ending value of $ for the fed cattle in which he 100 percent ownership share Will Larry receive an indemnity for his fed cattle? Let’s look at the calculations Speaker Notes: Larry marketed his 1,000 head of fed cattle in early January. The actual ending value for these cattle was $ per hundredweight. Will Larry receive an indemnity for his fed cattle? Let’s go through the calculations together.

9 Livestock Insurance: LRP for Fed Cattle Example
Speaker Notes: No. Larry would not receive any insurance indemnity for this 1,000 head of fed cattle because the actual ending value was greater than the $83.80 per hundredweight coverage price at which he insured. But what would have been the situation if the actual ending value had been $80 per hundredweight? Larry would have been indemnified because the actual ending value of $80 was less than the $83.80 per hundredweight coverage price at which he insured in early October. The indemnity calculation would have been 1,000 head times hundredweight per head times $83.80 less $80 per hundredweight times Larry’s ownership share of Consequently, $44,650 would be paid out to Larry.

10 Livestock Insurance: LRP for Fed Cattle Summary
Fed cattle producers may use LRP-Fed Cattle to protect against a decline in the national-level prices of fed cattle This product does not address other risks such as animal sickness, death loss, increases in feed costs, and price basis risk Speaker Notes: In this section of Livestock Insurance, we have learned that LRP-Fed cattle is available for fed cattle producers in all Wyoming counties to insure against national downward price movements for fed cattle. This product does address risks such as sickness and death loss, and perhaps most importantly, basis price risk. There are endorsement limits of 2,000 head and crop year limits of 4,000 head of fed cattle that may be covered under LRP-Fed Cattle.


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