Cattle Outlook & Risk ManagementCattle Outlook & Risk Management
James Mintert, Ph.D.James Mintert, Ph.D.Professor & Extension State Leader Professor & Extension State Leader
Department of Agricultural EconomicsDepartment of Agricultural EconomicsKansas State UniversityKansas State University
Nevada Cattlemen’s Association ConventionNevada Cattlemen’s Association ConventionElko, NevadaElko, Nevada
November 17, 2006November 17, 2006
www.agmanager.info/livestock/marketingwww.agmanager.info/livestock/marketing
[email protected]@ksu.edu
U.S. Cattle InventoryJ anuary 1, 1975-2006
50
60
70
80
90
100
110
120
130
140
75 80 85 90 95 00 05Year
Million
Head
Source: USDA & K-State Research & ExtensionKSU Dept. of Ag Econwww.agmanager.info
A Shrinking IndustryA Shrinking IndustryResponding to a Lack of Profitability Responding to a Lack of Profitability
Current inventory is about 26% Current inventory is about 26% smaller than in 1975smaller than in 1975
Rising Productivity Is Partially ResponsibleRising Productivity Is Partially Responsible
Dressed Beef Production . Per Cow Per Year .
200
250
300
350
400
450
500
550
600
650
700
50 55 60 65 70 75 80 85 90 95 00 05 10
Year
Po
un
ds
Beef Production Per Cow
30 Year Trend
Source: USDA & K-State Research & Extension .
But Weaker Demand Was Key But Weaker Demand Was Key Beef Demand 1980-1998Beef Demand 1980-1998
Annual Retail Choice Beef Demand Index
88 86 8379 76
70 6966 65 62 59 58 56 55 53 51
94
50
0
10
20
30
40
50
60
70
80
90
100
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98Year
Ind
ex V
alu
e
Source: USDA, Dept. of Commerce & K- State Research & Extension Price Deflated By CPI, 1980 =100 for Beef Demand Index
KSU Dept. of Ag. Econ. www.agmanager.info
Annual Retail Choice Beef Demand Index
52 54 56 5559
63
50
0
10
20
30
40
50
60
70
80
90
100
98 99 00 01 02 03 04Year
Inde
x V
alue
Source: USDA, Dept. of Commerce & K- State Research & Extension Price Deflated By CPI, 1980 =100 for Beef Demand Index
KSU Dept. of Ag. Econ. www.agmanager.info
Measuring Changes In Beef DemandMeasuring Changes In Beef Demand1998-20041998-2004
Demand in ’04 Was Up About 25% from 1998 Level
Measuring Changes In Beef DemandMeasuring Changes In Beef Demand1998-20051998-2005
Annual Retail Choice Beef Demand Index
52 54 56 5559
63 61
50
0
10
20
30
40
50
60
70
80
90
100
98 99 00 01 02 03 04 05Year
Ind
ex V
alu
e
Source: USDA, Dept. of Commerce & K- State Research & Extension Price Deflated By CPI, 1980 =100 for Beef Demand Index
KSU Dept. of Ag. Econ. www.agmanager.info
Beef Demand During All of ’05 Decreased About 4%But Demand in ’05 Was Still Up About 21% from 1998 Level
Demand Improved Steadily from ’98 through ’04Demand Improved Steadily from ’98 through ’04Downward Blip in ’02 Following 9/11Downward Blip in ’02 Following 9/11
Annual Retail Choice Beef Demand Index% Change From Prior Year
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Year
% C
ha
ng
e F
rom
Pri
or
Ye
ar
.
Source: USDA, Dept. of Commerce & K-State Ag. Econ.
Downturn Got Underway in mid-2005Downturn Got Underway in mid-2005
Quarterly Retail Choice Beef Demand Index% Change From Prior Year
-15%
-10%
-5%
0%
5%
10%
15%
98.1 99.1 00.1 01.1 02.1 03.1 04.1 05.1 06.1Year & Quarter
% C
ha
ng
e fro
m P
rio
r Y
ea
r
Source: USDA, Dept. of Commerce, & K-State Ag. Econ.
Beef Demand ShiftersBeef Demand ShiftersWhat’s been taking place recently?What’s been taking place recently?
Demand index does not indicate why shifts occurDemand index does not indicate why shifts occur
• Possible reasons for recent downturnPossible reasons for recent downturn
– Low carb diet effect has worn offLow carb diet effect has worn off
– Larger chicken suppliesLarger chicken supplies
– Consumer’s disposable income growth slowingConsumer’s disposable income growth slowing
• Expect more domestic demand weaknessExpect more domestic demand weakness
• How do we turn this around?How do we turn this around?
International Trade Outlook International Trade Outlook
Net Exports of U.S. Cattle, Beef, & By-Products1979-2005
-2.00
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
3.00
79 81 83 85 87 89 91 93 95 97 99 01 03 05
Year
Bil
lio
n $
Source: U.S. Dept. of Commerce & LMIC Net Exports = Exports - Imports
U.S. Was A Net Exporter From 1981-2003U.S. Was A Net Exporter From 1981-2003
Top 5 Importers Top 5 Importers Accounted for 91% of U.S. ExportsAccounted for 91% of U.S. Exports
Top 10 Importers of U.S. BeefRanked by Value of Imports in 2003
Other Category Consists of All Other Destinations
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
Japan Mexico S. Korea Canada HongKong
Taiwan Russia China Kuwait Egypt Other
Destination
Va
lue
(T
ho
us
an
d $
)
.
.
Source: USDA-FAS .
U.S. needs to U.S. needs to recapture these recapture these markets to regain markets to regain $’s and volume$’s and volume
Annual Cattle Imports From Canada .
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
Year
Millio
n H
ea
d .
Source: USDA & LMIC, 2006 Projected
Cattle Imports from Canada Are IncreasingCattle Imports from Canada Are Increasing But Remain Well Below 2002’s Record LevelBut Remain Well Below 2002’s Record Level
Jan-July 2006 imports Jan-July 2006 imports 32% below 2002’s and 32% below 2002’s and 21% below 2001’s21% below 2001’s
Beef Imports From Canada DeclineBeef Imports From Canada Decline
Annual Beef Imports From Canada .
0.0
0.2
0.4
0.6
0.8
1.0
1.2
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Year
Billio
n P
ou
nd
s .
Source: USDA & LMIC, 2006 Projected
Result: U.S. Imports Falling Below 2005’sResult: U.S. Imports Falling Below 2005’s
Annual U.S. Beef Imports
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Year
Bil
lio
n L
bs.
Source: USDA & LMIC, 2006-2008 Forecasts
Where Are We Headed?Where Are We Headed?TradeTrade
• Other countries may have comparative advantage Other countries may have comparative advantage in cow-calf productionin cow-calf production
• U.S. strength is in high quality beef productsU.S. strength is in high quality beef products
• Exports to Pacific Rim increasing in ’07Exports to Pacific Rim increasing in ’07
• Regaining market share will take several yearsRegaining market share will take several years
– Market access is keyMarket access is key
• Consumer incomes in importing countries are key Consumer incomes in importing countries are key to long-run growth in exportsto long-run growth in exports
Long, Slow Road to Export RecoveryLong, Slow Road to Export Recovery
Annual U.S. Beef Exports
0.0
0.5
1.0
1.5
2.0
2.5
3.0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Year
Bil
lio
n L
bs.
Source: USDA & LMIC, 2006-2008 Forecasts
Export Recovery Means Net Beef Export Recovery Means Net Beef Imports in 2007 Could Be 1/2 2004’sImports in 2007 Could Be 1/2 2004’s
Annual U.S. Net Beef Imports
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Year
Bil
lio
n L
bs.
Source: USDA & LMIC, 2006-2008 Forecasts
Supply Side in the U.S. Supply Side in the U.S.
Mid-Year Inventory Was Above 2005’s, And…Mid-Year Inventory Was Above 2005’s, And…
U.S. All Cattle & Calves Inventory J uly 1 Inventory
100
105
110
115
120
125
130
135
140
145
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05Year
Mill
ion
Hea
d
Source: USDA & LMI C
J uly 1 Inventory = 105.7 Million Head 1.1% Above J uly 1, 2005 Inventory & 6.5% Below J uly 1, 1995 Inventory
Strong Profitability Encouraging Expansion, But…Strong Profitability Encouraging Expansion, But…
Estimated Kansas Cow-Calf Returns .
-100
-50
0
50
100
150
200
250
300
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05
Year
$'s
Per
Co
w
.
Source: KS State Farm Mgmt. Assoc. Returns Above Variable Costs
US RANGE AND PASTURE CONDITIONPercent Poor and Very Poor, Weekly
0
10
20
30
40
50
60
May Jul Sep
Percent
Avg.2000-04
2005
2006
Livestock Marketing Information Center
Data Source: USDA/NASS
Poor Pasture Conditions Poor Pasture Conditions Could Be Holding Back ExpansionCould Be Holding Back Expansion
U.S. Beef Cow Slaughter Up 17% vs. 2005 U.S. Beef Cow Slaughter Up 17% vs. 2005
Weekly F.I . Beef Cow Slaughter
30
35
40
45
50
55
60
65
70
75
01/07 02/25 04/15 06/03 07/22 09/09 10/28 12/16
Week Ending
Th
ou
san
d H
ead
2005 2006 5 Yr Avg
Source: USDA & K-State Research & Extension
KSU Dept. of Ag Econwww.agmanager.info
But Producers Have Been Holding Back HeifersBut Producers Have Been Holding Back Heifers
Cow & Heifer Slaughter vs. Cattle Herd Growth Rate .
70
80
90
100
110
120
130
50 55 60 65 70 75 80 85 90 95 00 05Year .
Fe
ma
le S
ltr.
% o
f S
tee
rs
.
-6%
-4%
-2%
0%
2%
4%
6%
He
rd G
row
th R
ate
.
Female % of Steer SlaughterHerd Growth Rate
Source: USDA & K-State Research & Extension2006 estimated through September 2006
KSU Dept. of Ag Econwww.agmanager.info
Slaughter Is Expected To Rise ModestlySlaughter Is Expected To Rise Modestly
Annual U.S. Commercial Cattle Slaughter
31323334353637383940414243
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Million
Head
Source: USDA & K-State Research & Extension 2006 partially estimated, LMIC Forecast for 2007-2008
Year
Long Term Trend Toward Higher WeightsLong Term Trend Toward Higher WeightsBut Will Rising Grain Prices Hold Weights Down?But Will Rising Grain Prices Hold Weights Down?
Commercial Cattle Carcass Weights .
550
575
600
625
650
675
700
725
750
775
800
70 75 80 85 90 95 00 05
Year
Dre
ssed
Wt.
/H
ead
(Lb
s.)
.
Trend
Source: USDA, LMI C, & KSU
And Beef Production Will Rise CyclicallyAnd Beef Production Will Rise Cyclically
Commercial Beef Production
20
21
22
23
24
25
26
27
28
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Year
Bill
ion
Pou
nd
s
Source: USDA & K-State Research & Extension 2006 partially estimated & LMIC forecasts for 2007-2008
KSU Dept. of Ag Econwww.agmanager.info
Prices Near Record High in ’06 & Again in ‘07Prices Near Record High in ’06 & Again in ‘07
Kansas Direct Slaughter Steer Prices .
60
65
70
75
80
85
90
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Year
Pri
ce
($
/cw
t.)
Source: AMS-USDA, Dodge City, KS, 2006 & 2007 forecast
But Higher Corn Prices Lead To Lower Bids for FeedersBut Higher Corn Prices Lead To Lower Bids for Feeders
Kansas Combined Auction (Dodge City, Pratt, Salina) Weekly Weighted Average 700-800 Lb. Steer Prices
85
90
95
100
105
110
115
120
125
01/06 02/17 03/31 05/12 06/23 08/04 09/15 10/27 12/08Week Ending Date
Pri
ce (
$/c
wt.
)
2005
2006
5 Yr Avg
Source: AMS-USDA, Dodge City, KS & K-State Research & Extension
KSU Dept. of Ag Econwww.agmanager.info
Cattle Feeders Will Adjust Bids Based Upon Higher Feed CostsCattle Feeders Will Adjust Bids Based Upon Higher Feed CostsPrices in ’07 Headed LowerPrices in ’07 Headed Lower
Dodge City, KS 700-800 Lb. Steer Prices .
60
65
70
75
80
85
90
95
100
105
110
115
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Year
Pri
ce (
$/c
wt.
)
Source: AMS-USDA, Dodge City, KS & KSU, 2006 & 2007 forecast
Rising Corn Prices Pushing Prices LowerRising Corn Prices Pushing Prices Lower
Kansas Combined Auction (Dodge City, Pratt, & Salina) Weekly Weighted Average 500-600 Lb. Steer Prices
95
100
105
110
115
120
125
130
135
140
145
01/06 02/17 03/31 05/12 06/23 08/04 09/15 10/27 12/08
Week Ending Date
Pri
ce (
$/c
wt.
)
2005 2006 5 Yr Avg
Source: AMS-USDA, Dodge City, KS &K-State Research & Extension
KSU Dept. of Ag Econwww.agmanager.info
Higher Feed Costs Mean Lower Prices Are AheadHigher Feed Costs Mean Lower Prices Are AheadCycle Peak in ’05 & ‘06Cycle Peak in ’05 & ‘06
Dodge City, KS 500-600 Lb. Steer Prices .
6065707580859095
100105110115120125130135
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Year
Pri
ce
($
/cw
t.)
Source: AMS-USDA, Dodge City, KS & KSU, 2006 & 2007 Forecast .
Ethanol, Corn Prices, & Cattle Ethanol, Corn Prices, & Cattle
3 Largest Corn Crops On Record3 Largest Corn Crops On Record
Total U.S. Corn Production
3
4
5
6
7
8
9
10
11
12
13
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05
Year
Pro
du
ctio
n (
Bill
ion
Bu
.)
.
Source: USDA WASDE Report: 11.09.06
KSU Dept. of Ag Econwww.agmanager.info
But Corn Usage Has Been Growing RapidlyBut Corn Usage Has Been Growing Rapidly
U.S. Total Corn Usage
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05Year
Billion
Bu
.
.
Domestic Corn Usage
Trendline
Source: USDAWASDE Report: 11.09.06
KSU Dept. of Ag Econwww.agmanager.info
Ethanol Usage Growing RapidlyEthanol Usage Growing RapidlyFood, Alcohol, & Industrial Corn Usage
% of U.S. Production
0%
5%
10%
15%
20%
25%
30%
35%
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05Year
Perc
en
t of
Pro
du
ctio
n
Source: USDA & KSUWASDE Report: 11.09.06
2006 Estimate
KSU Dept. of Ag Econwww.agmanager.info
U.S. Will Need More Corn AcresU.S. Will Need More Corn AcresHow Do We Get Them?How Do We Get Them?
U.S. Corn Planted Acreage
60
65
70
75
80
85
90
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06Year
Million
Acr
es
.
Source: USDAWASDE Report: 11.09.06
KSU Dept. of Ag Econwww.agmanager.info
It Will Take Higher PricesIt Will Take Higher Prices To Push Acreage Higher To Push Acreage Higher
U.S. Average Corn Price .
$1.50
$1.70
$1.90
$2.10
$2.30
$2.50
$2.70
$2.90
$3.10
$3.30
$3.50
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05Year
Avg
. Farm
Pri
ce (
$/B
U.)
.
Source: USDAWASDE Report: 11.09.06
KSU Dept. of Ag Econwww.agmanager.info
Average Prices Average Prices Will Be Higher Will Be Higher and Frequency and Frequency of Price Spikes of Price Spikes Could IncreaseCould Increase
Where Are Corn Prices Headed?Where Are Corn Prices Headed?Higher Corn Prices Spell Trouble for Livestock ProducersHigher Corn Prices Spell Trouble for Livestock Producers
Kansas Monthly Corn Prices
1.251.501.752.002.252.502.753.003.253.503.754.004.254.504.755.00
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05
Year
Co
rn P
rice
($/
bu
.)
Source: USDA-Kansas Agricultural Statistics & K-State Research & Extension
1985-1989 Average = $2.23/bu.1990-1994 Average = $2.40/bu. 1995-1999 Average = $2.65/bu.2000-2004 Average = $2.23/bu.2004 Average=$2.59/bu.2005 Average=$2.02/bu.
Ethanol increases the Ethanol increases the likelihood of price likelihood of price spikesspikes
Increasing Market Volatility Means Managing Increasing Market Volatility Means Managing Risk Will Be More Important In The FutureRisk Will Be More Important In The Future
Livestock Risk Protection Insurance: Livestock Risk Protection Insurance: How Does It Work?How Does It Work?
LRP-What Is It?LRP-What Is It?
• Livestock Risk Protection (LRP) InsuranceLivestock Risk Protection (LRP) Insurance
• LRP for feeder cattle available in NevadaLRP for feeder cattle available in Nevada
– Provides protection against a decline in CME Feeder Provides protection against a decline in CME Feeder Cattle Price Index while you own cattleCattle Price Index while you own cattle
• CME Feeder Cattle Price Index is a 7 day weighted average CME Feeder Cattle Price Index is a 7 day weighted average of cash feeder cattle prices across the U.S.of cash feeder cattle prices across the U.S.
How Does LRP Work?How Does LRP Work?
To use LRP to protect against a price To use LRP to protect against a price decline, decline,
– you would purchase LRP insurance for a you would purchase LRP insurance for a particular set of cattle (# of hd. & ending wt.)particular set of cattle (# of hd. & ending wt.)
– you must choose you must choose – Coverage Price (this is similar to an option’s Coverage Price (this is similar to an option’s Strike PriceStrike Price))
– End Date (e.g., the date coverage ends)End Date (e.g., the date coverage ends)
– Price you pay is known as LRP premiumPrice you pay is known as LRP premium
DefinitionsDefinitions Expected End ValueExpected End Value
A forecast of the CME Feeder Price Index on the A forecast of the CME Feeder Price Index on the insurance policy’s end date insurance policy’s end date
Coverage LevelCoverage Level
The % of the expected end value covered by the The % of the expected end value covered by the policypolicy
DefinitionsDefinitions Coverage PriceCoverage Price
Level of protection provided by policy in $/cwt.Level of protection provided by policy in $/cwt.
Expected End Value X Coverage Level = Coverage PriceExpected End Value X Coverage Level = Coverage Price
End DateEnd Date
The date that coverage period ends for each contractThe date that coverage period ends for each contract
You selects weeks of coverage desired You selects weeks of coverage desired (within limits set by RMA-usually 13 to 39 weeks)(within limits set by RMA-usually 13 to 39 weeks)
LRP Feeder Cattle PremiumLRP Feeder Cattle Premium
To calculate actual LRP premium you must knowTo calculate actual LRP premium you must know
Number of cattle ready for market (weighing Number of cattle ready for market (weighing less than 9.0 cwt) on End Dateless than 9.0 cwt) on End Date
Target Weight per headTarget Weight per head
Ownership share in cattleOwnership share in cattle
LRP Feeder Cattle PremiumLRP Feeder Cattle Premium
Insured Value EqualsInsured Value Equals
# of Head x Target Weight (cwt) x Coverage Price # of Head x Target Weight (cwt) x Coverage Price x Ownership Share (%)x Ownership Share (%)
Total Premium EqualsTotal Premium Equals
Insured Value x RateInsured Value x Rate
Producer Premium EqualsProducer Premium Equals
Total Premium minus USDA SubsidyTotal Premium minus USDA Subsidy
USDA Subsidy = 13% of Total PremiumUSDA Subsidy = 13% of Total Premium
LRP Premium Calculation ExampleLRP Premium Calculation Example
An operation has 100 head of feeder cattle on An operation has 100 head of feeder cattle on Aug. 16Aug. 16
Expects to market the feeder cattle at a target Expects to market the feeder cattle at a target weight of 7.00 cwt each in mid-Novemberweight of 7.00 cwt each in mid-November
Insured share is 100 percentInsured share is 100 percent
Assume Expected End Value (updated daily Assume Expected End Value (updated daily by RMA on its website) is $116.45 per live cwtby RMA on its website) is $116.45 per live cwt
Premium Calculation ExamplePremium Calculation Example
Producer selects a coverage price which is a % of Producer selects a coverage price which is a % of the Expected End Value published by RMAthe Expected End Value published by RMA
Assume producer selects $110 per cwt. coverage Assume producer selects $110 per cwt. coverage price (e.g., 94% of RMA’s Expected End Value)price (e.g., 94% of RMA’s Expected End Value)
For this coverage price, the rate is 0.6773%For this coverage price, the rate is 0.6773%
The premium subsidy is 13 percent The premium subsidy is 13 percent
Premium Calculation ExamplePremium Calculation Example
100 head * 7 cwt = 700 cwt.100 head * 7 cwt = 700 cwt.
700 cwt. * coverage price ($110) = $77,000700 cwt. * coverage price ($110) = $77,000
$77,000 * insured share (1.00) $77,000 * insured share (1.00) = $77,000 Insured = $77,000 Insured
ValueValue
Premium Calculation ExamplePremium Calculation Example
$77,000 * rate of 0.006773 = $521.52 Total Premium$77,000 * rate of 0.006773 = $521.52 Total Premium
$521.52 * .13 (subsidy) = $67.80 subsidy$521.52 * .13 (subsidy) = $67.80 subsidy
$521.52 (total premium) minus $67.80 subsidy$521.52 (total premium) minus $67.80 subsidy
= producer premium of $453.72= producer premium of $453.72
= $0.65/cwt. producer paid = $0.65/cwt. producer paid
premium premium
Calculating IndemnityCalculating Indemnity
Indemnity is payable if actual ending price is Indemnity is payable if actual ending price is less than coverage priceless than coverage price
Calculate indemnity by:Calculate indemnity by:
Multiplying number of head by target weight (in Multiplying number of head by target weight (in live cwt.)live cwt.)
Subtract actual ending value from coverage priceSubtract actual ending value from coverage price
Multiplying total weight by difference between Multiplying total weight by difference between actual ending value & coverage priceactual ending value & coverage price
Indemnity Calculation ExampleIndemnity Calculation Example
Expected End Value for 13 weeks of Expected End Value for 13 weeks of coverage is $116.45 per live cwt.coverage is $116.45 per live cwt.
Producer selects a coverage price of $110 Producer selects a coverage price of $110 per cwt. (e.g., 94% of Exp. End Value)per cwt. (e.g., 94% of Exp. End Value)
Actual End Value is $97.77 per cwt. (e.g., Actual End Value is $97.77 per cwt. (e.g., CME Feeder Cattle Index = $97.77 on CME Feeder Cattle Index = $97.77 on End Date)End Date)
Indemnity Calculation ExampleIndemnity Calculation Example
100 head * 7.00 cwt = 700 cwt.100 head * 7.00 cwt = 700 cwt.
Subtracting actual ending price of $97.77 from Subtracting actual ending price of $97.77 from the coverage price of $110 = $12.23/cwt.the coverage price of $110 = $12.23/cwt.
Multiplying 700 cwt. by $12.23/cwt = $8,561Multiplying 700 cwt. by $12.23/cwt = $8,561
Multiplying $8,561 by insured share of 1.00 = Multiplying $8,561 by insured share of 1.00 = gross indemnity payment of $8,561gross indemnity payment of $8,561
Net indemnity payment = $8,107.30Net indemnity payment = $8,107.30
Indemnity Calculation ExampleIndemnity Calculation Example
What happens if CME Feeder Index on End What happens if CME Feeder Index on End date = $112?date = $112?
Subtracting actual ending price of $112 from Subtracting actual ending price of $112 from the coverage price of $110 = neg. $2/cwt.the coverage price of $110 = neg. $2/cwt.
Therefore, no indemnity payment is made to Therefore, no indemnity payment is made to producerproducer
This is analogous to a feeder cattle put option This is analogous to a feeder cattle put option that that expires worthlessexpires worthless
LRP Coverage Prices & LevelsLRP Coverage Prices & Levels
• Price guarantees change dailyPrice guarantees change daily
• Premiums change dailyPremiums change daily
• Coverage available ranges fromCoverage available ranges from
– 70% to about 95% of Expected End Price, 70% to about 95% of Expected End Price,
– Max guarantee generally less than 95%Max guarantee generally less than 95%
PremiumPremium Premium quotes via RMA’s Premium Calculator Premium quotes via RMA’s Premium Calculator
available on USDA-RMA’s web siteavailable on USDA-RMA’s web site
Premium must be paid on day LRP insurance is Premium must be paid on day LRP insurance is purchased for coverage to be providedpurchased for coverage to be provided
Rates available atRates available at
http://www.rma.usda.gov/toolshttp://www.rma.usda.gov/tools
Under livestock reportsUnder livestock reports
Or use link on AgManagerOr use link on AgManager
www.agmanager.info/livestock/marketingwww.agmanager.info/livestock/marketing
LRP SummaryLRP SummaryLRP protects against a decline in LRP protects against a decline in
Feeder cattle price level as measured by CME Feeder Feeder cattle price level as measured by CME Feeder Cattle Price IndexCattle Price Index
LRP does NOT guarantee the basisLRP does NOT guarantee the basis
LRP does not guarantee a cash priceLRP does not guarantee a cash price
Policy does not cover any other perilPolicy does not cover any other peril
LRP SummaryLRP Summary
Insure the exact number of head that you chooseInsure the exact number of head that you choose
Flexible contract size matches “small” operations vs. Flexible contract size matches “small” operations vs.
Feeder cattle futures that represents about 67 steers Feeder cattle futures that represents about 67 steers weighing 750 poundsweighing 750 pounds
Live cattle futures that represents about 33 steers Live cattle futures that represents about 33 steers weighing 1200 pounds weighing 1200 pounds
Can incrementally minimum price a few head at a Can incrementally minimum price a few head at a timetime
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