Livestock insurance can protect against price losses
While crop insurance has been popular for a long time, producers have largely overlooked similar safety nets for livestock. But that may be changing, a University of Missouri Extension agriculture economist said.
Two forms of livestock insurance have been available for a number of years through the USDA Risk Management Agency, Ray Massey said, at the recent 2013 Missouri Swine Institute in Columbia.
Livestock Risk Protection (LRP) guards producers against a drop in livestock prices. Livestock Gross Margin (LGM) insurance protects producers from losses of gross margin, from either falling livestock prices or rising feed costs.
"It is a price protection. It has nothing to do with yield," Massey said. "When you talk about crop insurance, we frequently assume that it is insuring yield. But when you go with livestock insurance you are really buying price protection on your livestock."
These types of insurance would not pay producers for a disease outbreak or high death rate, Massey said. Rather, they lock in a price for the livestock and, in the case of LGM, a price for the feed.
With feed prices highly variable right now, LGM might be a good way for producers to reduce that variability, Massey said.
Producers also can lock in livestock prices through the futures market, but that requires a contract for a large number of animals. One advantage of LGM and LRP is they offer price protection similar to what producers would get from futures contracts, but for any number of animals they want.
Another advantage of these programs is they are federally subsidized, which makes them less expensive than other forms of insurance Massey said.
Massey noted that livestock insurance is based on the national market price, not the actual price producers receive.
"That is really critical to understand," he said. "Your price may be above or below what the national market was on the Chicago Board of Trade, but your cost of production or revenue is not what the insurance policy is going to use. They will calculate with the national market price from the Chicago Board of Trade reports."
For more information on livestock insurance, log on to www.rma.usda.gov/livestock.