Livestock Insurance: Overview Livestock Risk Protection (feeder cattle, fed cattle, same) Livestock Risk Protection (LRP) for swine Livestock Risk Protection (LRP) for slaughter lambs The insurable types and weights of feeder cattle under livestock insurance Insurance against price changes Indemnity calculations Speaker Notes: There are several types of insurance that handle production and revenue risks for most crops grown in Wyoming. Now let’s look at a price insurance product available for livestock producers. Feeder cattle, fed cattle, swine and slaughter lambs can all be covered by insurance policies in Wyoming. We’re going to take a look at highlights of the livestock risk protection (LRP) insurance primarily as it relates to feeder cattle, fed cattle, and swine.

Livestock Insurance: LRP for Feeder Cattle Overview Livestock covered by LRP in Wyoming includes: Feeder Cattle Fed Cattle Swine Slaughter lambs History of LRP offerings: Feeder cattle coverage was first offered on 6-9-03 Feeder cattle endorsement suspended by RMA on 12-24-03 after BSE case of previous day Feeder cattle endorsement resumed on 9-30-04 Speaker Notes: Livestock risk protection insurance is available in Wyoming for feeder cattle, fed cattle, swine, and slaughter lambs. Feeder cattle coverage was first offered on June 9, 2003; however the endorsement was suspended on Dec. 24, 2003 after BSE, “mad cow disease”, was allegedly found the previous day in the US. The feeder cattle endorsement resumed on Sept. 30, 2004.

Livestock Insurance: LRP for Feeder Cattle Geographic Coverage The program has expanded by geographic coverage, type and weights of feeder cattle Now available in all counties of Wyoming and in all counties of 36 other states LRP for feeder cattle offerings and limitations Producers remain subject to basis price risk Speaker Notes: Initially, LRP was available in 10 states including Wyoming. It has been expanded by geography, coverage, type and weights of feeder cattle. It’s now available in all Wyoming counties and in 36 other states. Livestock Risk Protection for feeder cattle offers a single-peril price protection for feeder cattle producers. The insurance for feeder cattle may reduce the downside price risk for feeder cattle producers, but it does not eliminate other risks. For instance, it does not cover sickness or death of the cattle or insure against possible risking feed costs. Producers remain subject to the “basis price risk” which is the difference between a producer’s actual cash market sale price and the Chicago Mercantile Exchange (CME) index value.

Livestock Insurance: LRP for Feeder Cattle Basics of LRP Product Offered: Protection for producer against decline in cattle prices below the established coverage price Insurance Period: Offered for 13, 17, 21, 26, 30, 34, 39, 43, 47 or 52-week periods The producer will choose a time closest to the time cattle will be marketed or time when cattle will reach the desired weight Speaker Notes: Let’s look at some of the basics of Livestock Risk Protection insurance for feeder cattle. LRP feeder cattle insurance protects the producer against a decline in prices below the established coverage price. The insurance is offered at a wide range of time periods from 13 up to 52 weeks. Most feeder cattle coverage will fall in the 34 to 39 week time span. You, as the producer will choose a time closest to the time the cattle will be marketed or a time when the cattle will reach a desired weight.

Livestock Insurance: LRP for Feeder Cattle Basics of LRP (cont.) Application: An application is required to purchase insurance coverage Specific Coverage Endorsement: A producer must file a Specific Coverage Endorsement for each group of feeder cattle to be insured. Several endorsements may be filed under one application as long as beneficial interests are the same Speaker Notes: In order to buy the insurance, an application must be submitted in order to purchase insurance coverage. It establishes the producer’s eligibility. You must also file a form indicating beneficial interest with the application and also file a specific “coverage endorsement” for each group of feeder cattle that is to be insured.

Livestock Insurance: LRP for Feeder Cattle Types and Weights of Feeder Cattle Insurable Steer feeder cattle < 6.0 cwt for steers and bulls and steers only from 6.0 to 9.0 cwt Heifer feeder cattle < 6.0 cwt and heifer feeder cattle from 6.0 to 9.0 cwt Predominantly Brahman heifers, steers, and bulls < 6.0 cwt and predominantly Brahman heifers and steers from 6.0 cwt to 9.0 cwt Predominately dairy heifers, steers and bulls < 6.0 cwt and predominately dairy heifers and steers 6.0 to 9.0 cwt Speaker Notes: Listed here are the types and weights of feeder cattle that are insurable under LRP insurance. Let’s read through this slide together.

Livestock Insurance: LRP for Feeder Cattle Types and Weights of Feeder Cattle Insurable (cont.) “Crop” year: [June 1 to June 30] Annual Policy Limits: The maximum number of head of feeder cattle that may be covered during a crop year is 2,000 head Endorsement Limits: A limit of 1,000 head of feeder cattle may be insured under any one Specific Coverage Endorsement Speaker Notes: The annual policy limits the number of head of feeder cattle that may be covered during a “crop” year to 2,000 head. In addition, a limit of 1,000 head of feeder cattle may be insured under any one Specific Coverage Endorsement.

Livestock Insurance: LRP for Feeder Cattle Coverage Prices and Levels Coverage Levels Price Adjustment Factors Use of Price Adjustment Factors Off-setting Transaction Speaker Notes: Coverage prices are the prices that may be insured by the producer. The prices change daily and may be obtained from the RMA website. Coverage levels are based on the chosen coverage price and range from 70 to 95% of the expected end value. Price adjustment factors account for differences between steer prices and prices of other types and weight of cattle and are included in the specific coverage endorsement. Price adjustments are applied to expected ending values, coverage prices and actual ending values prior to entry on the RMA website. Price adjustments are applied to expected ending values, coverage prices and actual ending values prior to entry on the RMA website. Producers must not enter into any transaction that would have the effect of converting any portion of the premium subsidy provided by the FCIC into funds available for the producer’s use. Therefore, no offsetting position may be taken in the commodity futures or options market on the same set of cattle.

Livestock Insurance: LRP for Feeder Cattle Actual and Expected End Value of Feeder Cattle This is the expected prices at the end of an insurance period for each specific type and weight of feeder cattle announced daily on the RMA website Actual End Value This is the value of the cash settled CME feeder cattle index on the end date of the insurance period, adjusted by RMA for feeder cattle type and weight Subsidy Level RMA provides a 13% subsidy on LRP feeder cattle Speaker Notes: The expected end value is the expected price at the end of an insurance period for each specific type and weight of feeder cattle. The price is announced daily on the RMA website. The actual end value is the value of the cash settled Chicago Mercantile Exchange feeder cattle index on the end date of the insurance period, adjusted by RMA for the feeder cattle type and weight. The subside level for LRP feeder cattle insurance is 13%.

Livestock Insurance: LRP for Feeder Cattle Example Speaker Notes: In this example, Brian Redford, the producer has 1,000 head of steers with an expected end weight of 800 pounds. The current date is October 26th and Brian expects to market the steers on April 26th or 26 weeks. The expected end value as found on the RMA website is $103.84 per hundredweight. The coverage level is 86.58% for a coverage price of $90.00.

Livestock Insurance: LRP for Feeder Cattle Example Speaker Notes: Brian knows the insured value of the cattle is the number of head times the expected end weight times the coverage price for a total insured value of $720,000. The premium as specified on the RMA website is about 2%. Multiplying the premium rate times the insured value gives a total premium of $14,496. The subsidy rate is 13% on all the contracts. Multiplying the subsidy rate times the total premium gives a subsidy amount of $1,884. Subtracting this subsidy from the total premium reduces the premium to $12,612 that Brian will pay. On a “per head” basis, this premium would be $12.61 per head. Therefore, for a premium of $12.61 per head, he can protect himself from any downward price movement below $90.00 hundredweight on the CME.

Livestock Insurance: LRP for Feeder Cattle Indemnity Calculation: Example 1 Suppose a producer actually sells 1,000 800-pound steers on April 26th for $85.00/cwt The CME-reported actual ending value is $85.00/cwt Would the producer receive an indemnity? Let’s look at the calculations Speaker Notes: Let’s take a look at several examples that will help clarify some of the points made in this lesson. Suppose Brian sells 1,000 800-pound steers on April 26th at a price of $85.00 per hundredweight. The CME reported the actual ending value at $85.00 per hundredweight. Will Brian receive an indemnity? Let’s go through the calculations together.

Livestock Insurance: LRP for Feeder Cattle Indemnity Calculation: Example 1 Speaker Notes: Yes. He will receive an indemnity. The 1,000 head of cattle at 800 pounds or 8 hundredweight multiplied by the difference between the coverage price of $90 and the CME closing price of $85 gives an indemnity due the producer of $40,000. The actual revenue from the 1,000 feeder calves that were sold is calculated. The revenue received from the sale of the feeder calves is 1,000 head times the end weight of 8 hundredweight times the sale price of $85 which is $680,000. Added to this is the indemnity of $40,000 that is received. Subtracting the premium cost of $12,612 gives a net revenue to the producer of $707,388. By purchasing the LRP insurance, the producer increased his net revenue by over $27,000 compared to the net revenue without the LRP insurance.

Livestock Insurance: LRP for Feeder Cattle Indemnity Calculation: Example 2 Suppose a producer actually sells 1,000 800-pound steers on April 26 for $82.00/cwt The CME-reported actual ending value is $85.00/cwt Will the producer receive an indemnity? Let’s look at the calculations Speaker Notes: Suppose another producer, Steve Fisher, actually sells 1,000 800-pound steers on April 26 and sells them for $82.00/cwt. The CME reported actual ending value is $85.00/cwt. Will Steve receive an indemnity? Let’s go through the calculations together.

Livestock Insurance: LRP for Feeder Cattle Indemnity Calculation: Example 2 Speaker Notes: Yes. He will receive an indemnity. The 1000 head of cattle at 800 pounds or 8 hundredweight multiplied by the difference between the coverage price of $90 and the CME closing price of $85 gives an indemnity due the producer of $40,000. The actual revenue from the 1,000 feeder calves that were sold is calculated. The revenue received from the sale of the feeder calves is 1,000 head times the end weight of 8 hundredweight times the sale price of $82 or $656,000. Added to this is the indemnity of $40,000 that is received. Subtracting the premium cost of $12,612 gives net revenue to the producer of $683,388. Recall that Steve was expecting $103.94 per hundredweight or $831,520. Without LRP, Steve would have received $656,000, but with the LRP, he received $683,162. Not that Steve’s actual sales price does not affect the indemnity.

Livestock Insurance: LRP for Feeder Cattle Indemnity Calculation: Example 3 Suppose the producer actually sells 980 750-pound steer calves on April 26 2% death loss Reported within 72 hours Lower sales weight The producer sells the calves for $85.00/cwt The CME-report actual ending value is $85.00/cwt Will the producer receive an indemnity? Let’s look at the calculations Speaker Notes: Looking at another example, let’s suppose that another producer, Richard Bennett actually sells 980 750-pound steer calves on April 26th and that he had a 2% death loss that was reported within 72 hours to RMA. Richard’s calves were lighter by 50 pounds than the anticipated weight. He sold the calves for $85.00 per hundredweight. The CME reported an actual ending value is $85.00 per hundredweight. Will Richard receive an indemnity? Let’s go through the calculations together.

Livestock Insurance: LRP for Feeder Cattle Indemnity Calculation: Example 3 Speaker Notes: Yes. He will receive an indemnity. The 1,000 head of cattle at 800 pounds [expected weight] or 8 hundredweight multiplied by the difference between the coverage price of $90 and the CME closing price of $85 gives an indemnity due the producer of $40,000. The actual revenue form the 980 feeder calves that were sold is calculated further. The revenue received from the sale of the feeder calves is 980 head times the end weight of 7.5 hundredweight times the sale price of $85 is $624,750. Added to this is the indemnity of $40,000 that is received. Subtracting the premium cost of $12,612 gives net revenue to the producer of $652,588. Recall that Richard was expecting $103.94 per hundredweight or $831,520. Without LRP, the producer would have received $680,000. With the LRP, the producer received $707,388. Not that Richard is not insuring for the 2% death loss that occurred nor is he insured for the rate of grain. However, Richard is compensated for price difference on those that died.

Livestock Insurance: LRP for Feeder Cattle Speaker Notes: Let’s look at a comparison of Livestock Risk Protection and options for feeder cattle. Livestock Risk Protection and the CME “put” options both protect against downside price risk. First let’s look at LRP. For LRP, the selected “coverage price” is the producer’s price floor and requires the payment of a premium. This insurance premium is paid to an insurance agent. If price declines below the insured level, the producer receives an indemnity. LRP is subject to basis risk as it protects the producer from a decline in the CME feeder cattle price index but it does not protect the producer from a decline in the producer's actual sale price but there are a 13% subsidies on LRP premiums. In comparison, for options, the selected “strike price” is the producer’s price floor and requires a payment of a premium. This premium is paid to a broker. The options premium increases in value when prices decline below the strike price. The increases in premium value are reflected in the producer’s brokerage account. No payouts are received if market prices remain above the strike price. Both LRP and options are subject to basis risk. Both products protect the producer from a decline in the CME feeder cattle price index. Neither product the producer from a decline in the producer’s actual sale price. You need a brokerage account for options and will pay brokerage fees. Subsidies are not available for option premiums. There are no price adjustments for vary weights. However, when compared to LRP, a producer may buy higher price coverage levels than LRP. There is more timing flexibility because the producer may sell an option prior to expiration. A producer can re-purchase an option at any time.

Livestock Insurance: LRP for Feeder Cattle Summary Livestock Risk Protection for feeder cattle The insurable types and weights of feeder cattle under livestock insurance Insurance against price changes Indemnities for transactions The difference between LRP insurance coverage and an options coverage Speaker Notes: In this section of Livestock Insurance we have covered how feeder cattle of several different types can be insured against price changes that occur on the Chicago Mercantile Exchange. Producer receive insurance indemnities when the CME actual end value is less then the coverage price at which they insured.