Livestock Insurance Web Site: A Learning Tool For Producers, Insurance Agents, and Educators

Motivation

In the last several years, cattle feeders and swine finishers have experienced increased volatility in both their output selling price and their major commodity input costs. For cattle feeders, these main risks include changes in fed cattle, feeder cattle, and corn prices (Mark, Schroeder, & Jones, 2000). The same also holds true for swine as lean hog, corn, and soybean meal markets have been more variable in recent years.

Significant changes in prices underscore the importance of effective risk management strategies, yet many producers report struggling to utilize risk management tools. There are a variety of reasons why producer use of traditional risk management tools has remained low. Some producers indicate that hedging lowers their net price or increases price variability on average. Selling crops or livestock that have not yet been raised, paying margin calls, and dealing with brokers all appear to be risk-inducing activities for some producers. Many indicate their use of forward contracting and hedging is limited, most by their understanding of the market institutions, contracts, and logistics of these risk management techniques (Schroeder, Parcell, Kastens, & Dhuyvetter, 1998; Asplund, Forster, & Stout, 1989; Goodwin & Schroeder, 1994; Musser, Patrick, & Eckman, 1996).

In response to relatively low producer use of traditional risk management tools like futures and options, USDA Risk Management Agency (RMA) developed insurance products that provide price and margin protection to livestock producers that address some of their concerns about using traditional risk management tools. RMA first offered Livestock Risk Protection (LRP) insurance in 2001, followed by Livestock Gross Margin (LGM) insurance in 2002. These pilot programs were initially only available to swine producers in a few selected states; however, the programs have been expanded to include fed cattle and feeder cattle in a number of states.

Description of LRP and LGM

LRP insurance is a single-peril price risk insurance policy that insures the selling price of the livestock. It is available for feeder cattle, fed cattle, swine, and lambs in twenty states. LRP essentially creates a floor selling price for livestock, while allowing producers to take advantage of price increases. As such, it is similar to hedging with put options. However, LRP does not involve purchasing options or futures and offers some unique benefits for producers:

• No minimum number of head to insure


• No commission costs or brokers


• Guaranteed premium pricing


• After-hours price protection


• Partial basis risk coverage

LGM insurance is available for calf and yearling cattle finishing operations and farrow to finish, feeder pig finishing, and segregated early weaned (SEW) pig finishing operations in 20 states. LGM provides protection against a decline in the feeding margin by simultaneously hedging the corn and feeder cattle input costs and the fed cattle selling price (in the case of cattle) or the corn and soybean meal input costs and the market hog selling price (in the case of swine) as a bundled option. LGM offers producers several of the same benefits listed above for LRP.

About the Web Site

To assist livestock producers, insurance agents, and educators in understanding the relatively new LRP and LGM insurance programs, as well as how to practically implement these tools in a risk management plan, University of Nebraska-Lincoln Extension developed educational materials that are available on a new Livestock Insurance Web site <http://www.livestockinsurance.unl.edu>.

The site features two home study courses, one for LRP and one for LGM. Each contains a video Webinar, slides, and a self-study guide organized into five chapters of information. Topics covered include a basic overview of the program and underwriting rules, how the insurance works (including step-by-step examples of how indemnities are determined), additional policy provisions, basis and purchasing considerations, and hedging outcomes using the insurance products under different market conditions. Users can view the videos and all the materials online without cost, or obtain the video Webinar series on DVD by visiting the Web site.

The Livestock Insurance Web site also contains an in-depth analysis of basis risk associated with LRP and LGM insurance, which differs from traditional basis risk (Coelho, Mark, & Azzam, 2008). Visitors to the site can also make use of the resource center that contains additional links to issues and information associated with LGM and LRP, a glossary, frequently asked questions, and examples of all policy forms. The Livestock Insurance Web site can provide important information to producers, insurance agents, and educators as they consider when to use livestock insurance products.

What the Web Site Offers

The educational materials provided on the Web site include:

• Video Webinars


• PowerPoint® presentations


• Self-study guides


• Resource library


• Policy forms


• Basis tables


• Glossary of terms


• Frequently asked questions


• Links to other educational resources and daily market information

User Friendliness

The information contained on the Web site offers an analysis and interpretation of LGM and LRP that is presented in a succinct and precise manner. The policies are explained so that novice livestock producers or insurance agents can readily understand and use either of the livestock insurance programs. Even advanced policy details, such as indemnity calculations and basis risk, are presented step-by-step, allowing users to easily follow along. Because the material is presented in a number of different ways, all types of learners (kinesthetic, visual, and auditory) can benefit from the explanations and examples provided.

Summary

In response to livestock producers' need for risk management tools without some of the drawbacks associated with the futures and options market, USDA RMA developed two types of livestock insurance: LRP and LGM. Because these are relatively new products, producers, insurance agents, and educators alike need to learn how the programs create price protection. Therefore, the Livestock Insurance Web site was created to offer video Webinars, self-study guides, and other resource materials. The educational resources draw on concepts that range in difficulty; however, the thorough explanations provided throughout the Web site allow the livestock producers to better understand and implement LRP and LGM in their risk management portfolios.

References

Asplund, N. M., Forster, D. L., & Stout, T. T. (1989). Farmers' use of forward contracting and hedging. Review of Futures Markets, 8, 24-37.

Coelho, A. R., Mark, D. R., & Azzam, A. Understanding Basis Risk Associated with Fed Cattle Livestock Risk Protection Insurance. Journal of Extension [On-line] 46(1) Article 1RIB6. Available at: http://www.joe.org/joe/2008february/rb6.shtml

Goodwin, B. K., & Schroeder, T. C. (1994). Human capital, producer education programs, and the adoption of forward-pricing methods. American Journal of Agricultural Economics, 76, 936-47.

Musser, W. N., Patrick, G. F., & Eckman, D. T. (1996). Risk and grain marketing behavior of large-scale farmers. Review of Agricultural Economics, 18, 65-77.

Mark, D. R., Schroeder, T. C., & Jones, R. (2000). Identifying economic risk in cattle feeding. Journal of Agribusiness, 18, 331-344.

Schroeder, T. C., Parcell, J. L., Kastens, T. L., & Dhuyvetter, K. C. (1998). Perceptions of marketing strategies: producers versus extension economists. Journal of Agricultural and Resource Economics, 23, 279-93.