By Scout Nelson
The cattle industry has seen a noticeable shift with the rise of Livestock Risk Protection (LRP). Traditionally a tool for cow-calf producers, LRP's recent surge in popularity is evident in the growth from 80,000 head covered in 2020 to a whopping 4.2 million in 2023. This change hasn't gone unnoticed in states like Texas, South Dakota, and Nebraska, where over 400,000 heads were insured.
While LRP's popularity grows, it's essential to note its impact on the broader market. The 2022 U.S. calf crop stood at 34.5 million head, so while the share of LRP is growing, it's still not as prevalent as corn or wheat acre insurance. The 2023 fiscal year saw an insurance value of nearly $7 billion for feeder cattle and close to $2 billion for fed cattle.
The driving force behind LRP's popularity is the increased subsidy on its premiums. Traditional hedges with futures now come with higher margin calls, making LRP more attractive. Put options, another choice, are more expensive initially and aren't subsidized like LRP.
From a risk standpoint, the current scenario implies LRP buyers are getting slightly more coverage. This increase in coverage is supported by the fact that the combined subsidy for both fed and feeder cattle was over $110 million in 2023.
Producers should be cautious due to potential payouts from LRP, which typically leads to a drop in cattle prices. As the week closes, cattle markets experience a decline, with fed cattle and boxed beef prices dropping.
Photo Credit: USDA
Categories: South Dakota, Livestock