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Livestock Risk Protection (LRP) and Livestock Gross Margin (LGM), were introduced in Iowa in July 2002. These products represent new alternatives to market risk management. Insurance policies purchased in July 2002 expire in Jan. 2003, while LRP is available year round, producers considering LGM for the next insurance period must sign up by Jan. 31.

LRP protects livestock producers from declining hog prices by guaranteeing a specified price level. LGM was designed to protect producers from both declining hog prices and rising feed prices.

Gary May, William Edwards and John Lawrence, ISU Extension agriculture economics specialists, evaluated the outcome of LRP and LGM policies purchased in July to cover hogs marketed between August 2002 and January 2003. They compared the outcomes of those policies with similar risk management strategies using options on futures prices.

"Producers did not appear to collect indemnity payments from either insurance product, suggesting prices turned out as well as expected at the beginning of the insurance period," says May. "Indemnities under LGM accrued during August-September price crash, but were eliminated as prices rallied later in the year. LRP coverage was not yet available in August and September."

The conclusions of this analysis are:

• Insurance premiums were substantially lower than the premiums in the comparative option strategies.
• LRP offered a higher return to risk management than its corresponding option strategy.
• The combined put/call option strategy offered a higher return to risk management than LGM.
• None of the products offered a positive net return to risk management or a profitable price during the insurance period.

The entire report is available at: http://www.econ.iastate.edu/outreach/agriculture/livestock/LivestockInsurance.pdf.

Source: Iowa State University Extension - 28th January 2003