Livestock insurance useful tool

However, they could be particularly useful as producers look at high grain prices and possibly increased risk for their businesses. “They’re useful tools for the toolbox,” explains John Law-rence, an ag economist at Iowa State University and Iowa Beef Center director. Both programs are federally subsidized but can be purchased through private insurance companies, often those already handling crop insurance. The only caveat is producers must first be approved.

So, they should contact a licensed broker now if they think they may want to buy a policy. That saves time when they decide to make a purchase. Still, the two programs can be useful, Lawrence says. They won’t guarantee a profit — that’s not what insurance is designed to do — but they can reduce risk. The LRP is designed to protect farmers against declining market prices, Lawrence explains.

They work much like a put option except they are more flexible. For example, to get a futures contract or option on livestock, farmers must have a minimum number of pounds or animals (generally that is 40,000 lbs.)

LRP contracts can be smaller, thus allowing smaller producers to get risk protection or for large producers to get it on smaller groups of animals.

One other difference between the LRP and options is the LRP contract has a fixed expiration date.

In short, it provides a price floor with an opportunity to retain upside movement.

Source: Iowa Farmer Today

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