1. Agricultural Marketing
ECON 337:
Agricultural Marketing
Lee Schulz
Assistant Professor
Chad Hart
Associate Professor 1

2. Livestock Price Risk Tools
Livestock Futures and Options
Livestock Revenue Insurance
Livestock Revenue Protection (LRP)
Livestock Gross Margin (LGM)
Factsheets
Premium calculator 7 2

3. 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

4. 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

5. Livestock Risk Protection
Guarantees available are posted at:
Posted after the CME closes each day until 9:00 am Central Time the next working day
Assures that guarantees reflect the most recent market movements

6. LRP Example

7. 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., head
LRP can be purchased for any number of head or weight

8. 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, you’re locked in

9. 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
There is a version for dairy as well 7 9

10. 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 7 10

11. LGM Guarantees for Hogs
Farrow to Finish
Gross margin per hogt =
2.6*0.74*Lean Hog Pricet - 12 bu. * Corn Pricet-3
- ( lb./2000 lb.) * SoyMeal Pricet-3
Finishing
2.6*0.74*Lean Hog Pricet - 9 bu. * Corn Pricet-2
(82 lb./2000 lb.) * SoyMeal Pricet-2
SEW
2.6*0.74*Lean Hog Pricet – 9.05 bu. * Corn Pricet-2
(91 lb./2000 lb.) * SoyMeal Pricet-2

12. LGM Guarantees for Cattle
Yearlings
Gross margin per headt =
12.5*Live Cattle Pricet – 7.5*Feeder Cattle Pricet-5
- 50 bu. * Corn Pricet-2
Calves
11.5*Live Cattle Pricet – 5.5*Feeder Cattle Pricet-8
- 52 bu. * Corn Pricet-4

13. 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 7 13

14. LGM-Swine Farrow-to-Finish, Jan. 2014
March
April
May
June
July
Gross Margin
$90.08
$99.05
$114.60
$118.51
$116.19
Lean Hog Price
$90.23
$94.08
$101.98
$103.83
$102.55
Corn Price
$4.29
$4.30
$4.31
$4.32
$4.35
Soybean Meal Price
$462.70
$438.37
$431.62
$424.87
$417.59 7 14

15. LGM Example Say we insure 100 hogs in April and choose a $2 deductible
Our LGM policy is protecting us against gross margins below $97.05 per head
When April comes, the insurance company will compute the actual margin using the same formula as was used for the guarantee 7 15

16. LGM Example
If the lean hog price fell to $88 per cwt., the corn price fell $4.00 per bu., and the soybean meal price stayed at $ per ton, then the actual gross margin is
Actual gross margin per hogt =
2.6*0.74*$ bu. * $ ( lb./2000 lb.) * $438.37
= $75.72 per head
Per head indemnity = $ $90.94 = $6.11 7 16

17. 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 7 17

18. 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.

19. 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

20. Class web site: See you in lab, Heady 68.
See you in lab, Heady 68.