Hedging Cattle Markets with LRP

A cow-calf pair in a field
28 May 2024

There are many risks facing farmers and ranchers today. Uncontrollable weather, increasing land costs, variable crop yields, volatile commodity prices, labor challenges, elevated input prices, and machinery pose issues for the producer. Price risk is one of the biggest challenges facing farmers—especially cow/calf operations. Success follows operations that identify and manage risks using tools such as insurance. 

The cow/calf operation is the agriculture segment most challenged with price risk options and adoption. This is mostly due to selling their cattle at auction barns, which bring together buyers and sellers but doesn’t provide a future cash contract like elevators do for crops. There are many reasons to be bullish on cattle prices, but it is unlikely that the current high prices reflect long-term supply and demand equilibrium, meaning there is plenty of price risk facing cow/calf producers today.

The previous price channel for feeder livestock has been between $1.30 to $1.60 shown in the chart below. Today’s November feeder cattle futures are around $2.56 per pound. We don’t know what the next long-term channel will look like but let’s assume it’s above the previous channel at $1.60 to $2.00. This would indicate a 50-cent pullback is likely at some point, albeit we don’t know when or if this will occur. A 50-cent decrease on a 750-pound steer amounts to a potential revenue reduction of $375 per head. This is a substantial risk that the producer doesn’t need to accept.

Graph Showing Feeder Cattle Prices

You can avoid this scenario by hedging with a Livestock Risk Protection (LRP) policy. LRP was created by the Risk Management Agency (RMA) to provide a management tool that insures against declining market prices for feeder cattle, fed cattle, and swine. LRP works like a put option by providing a guaranteed price floor with the ability to sell livestock at higher prices if the market increases.   
Coverage can be purchased anytime during the year once a policy is set up with contract lengths varying from 13 to 52 weeks for cattle. Target weight selection can be up to 1,000 pounds for feeder cattle and 1,000 to 1,600 pounds for fed cattle. These two features allow the producer to align the weight and end date on the contract with the expected sale weight and date of their physical cattle.  
Here’s an example of how it works. Let’s say a cow/calf operation that calves in April and sells 700-pound calves in November can lock in a minimum price they know they will receive come November. Doing so removes a large operational risk for the producer and the lender. At the time of this writing, many operations are finishing up with calving and likely just had a profitable 2023 year with historically high cattle prices. LRP allows this operation a high probability of another good year in 2024 by locking in the prices today for November.  
The quote in the chart below is for 700-pound steers with an end date of 12/03/2024. The rancher can sell 60 days before this date or any time after. However, the contract indemnity will be based on prices on the week of 12/3/2024. You can see the expected ending value is $254.53. This number multiplied by the chosen coverage level will give you the coverage price. The higher percentage coverage level equals a higher premium, but also a higher coverage price/guarantee. This producer knows that he will receive $1,717.72 per steer calf come November.  

Chart showing LRP Coverage Levels

LRP is a great tool for risk mitigation that provides a subsidized price floor with limited basis risk as the contract is settled with an indexed cash price. It provides numerous options with target weights, number of head, and end dates. LRP quotes are easy to read and understand compared to futures and option contracts. Adding an insurance policy like LRP is a great tool for risk mitigation. Contact your AgCountry office to learn how an LRP policy can work for you. 



Adam Pilgrim
Written By: Adam Pilgrim
VP Loan Officer - Jamestown