Livestock Insurance: Which is Better, LRP or LGM?

Livestock Insurance: Which is Better, LRP or LGM?

You know better than anyone that the best laid plans for your farm or ranch can be destroyed in the blink of an eye, especially given the recent decline in market prices and margins. Thankfully, there are two livestock insurance products subsidized by the federal government that help protect your profitability against market volatility: Livestock Gross Margin (LGM) and Livestock Risk Protection (LRP).

Table of Contents

With constant changes in the live market caused by retail price resistance, foreign imports, political pressure, and other factors, these two policies bring some stability to an otherwise temperamental market.

“For ranchers and producers that are constantly fighting for pull in the market, livestock protection can give them that bottom line point and peace of mind,” says ProAg Senior District Sales Manager, Todd Kluser. “It helps provide a guarantee of the continuation of your operation by securing a minimum price lock (LRP) or margin (LGM).”

As with most insurance policies, there are many nuances and options to consider when choosing livestock insurance. How do these two products work, what is the difference between them, and how do you determine which makes most sense for your livestock operation? First, we’ll cover the basics.

What is Livestock Gross Margin (LGM)?

In the event of a drop in livestock market prices or increases in feed market prices, Livestock Gross Margin (LGM) covers your gross margin loss. This product is available for dairy, swine, calf-finishing, and yearling operations.

How does it work? For dairy producers, LGM protects you against a gross margin loss, which is the market value of the milk minus the feed costs. In cattle and swine operations, it recovers your gross margin loss when the animal market value declines and when the feeder cattle and feed costs rise.

The main benefits of an LGM policy include:

  • Protects your profits against a gross margin loss (market value of livestock minus feed costs)
  • Can be customized to your needs and goals by the number of animals, the timeframe and the deductible
  • There is no minimum or maximum coverage, and no margin calls or brokerage fees.
  • The expected gross margin and the actual gross margin is determined by futures prices.
  • It is federally subsidized at nearly any level.
  • New for 2022! You can purchase coverage on a weekly basis (vs monthly) giving you more effective and timely risk-management.

What is Livestock Risk Protection (LRP)?

When the market price drops (according to USDA’s Agricultural Marketing Service), a Livestock Risk Protection (LRP) policy makes up the difference. This product is available for fed cattle, feeder cattle, lambs, and swine.

How does it work? You specify the number of head and the specified time period, and set a floor price based on national CME Group futures. It’s like securing a put option except your upside price potential is not affected, just the downtrend. At the end of your given timeframe, if RMA determines that the ending value is below your policy’s floor price, you may qualify for a payout of the difference between your coverage price and ending value.

The main benefits of an LRP policy include:

  • Peace of mind that your floor price will be secured without losing your upside price potential
  • A range of coverage levels from 70 to 100% of the expected ending market value of your animals
  • A customized policy based on your situation and goals that has no minimum head requirement and recently increased maximum head limits.
  • Generally lower cost than other coverage options available
  • Federal subsidies are available for this product and there are no margin calls or brokerage fees
  • Premiums are no longer due until the end of coverage, allowing you to budget more efficiently
  • New for 2022! You can extend coverage to unborn calves and sell your livestock 60 days (vs 30) prior to the policy end date.

What are the main differences between LGM and LRP?

Aside from the aforementioned differences in the way these two policies work, there are a few notable factors that distinguish them. As stated, LGM does not have any head limits, which makes it a great policy for operations of all sizes. LRP has no minimums, making it ideal for small operations, and the recent increase in maximums makes it more attractive to larger producers than before.

Since locking in prices in the futures market requires a sizable number of pounds or animals in your contract, the flexibility of both LGM and LRP offers major benefits, ensuring that any size operation can get the livestock protection that fits their needs.

“Whether you have one head or many, if you’re looking for a way to lock in your revenue or gross margin, livestock protection is a good fit for just about any operation.” ― Whitney Redig, ProAg District Sales Manager

Recent Updates to LGM and LRP

Beginning with the 2022 crop year, you will be able to select LGM coverage weekly instead of just once per month. “This is really a pivotal change as it gives ranchers and producers even more flexibility in managing risk for their operation,” says ProAg Western Region Senior District Manager, Jacqueline Da Rocha.

The major change for LRP is that premiums are now due at the end of coverage, instead of having to pay up front like the old days. This allows ranchers to pay after you have earned money or even deduct it from your payout if you qualify for one. Additionally, LRP will now allow you to sell livestock 60 days before the policy end date versus only 30 days like it used to be.

At Scott Colville Crop Insurance, we passionately help farmers protect their livelihoods against whatever nature throws at them. Whether it’s bad weather, natural disasters, or poor yields: we help you determine the right combination of policies for your business and get you the highest returns possible so you can sleep soundly at night. Contact us today with any questions or invite us to visit to your farm.


The History of Crop Insurance Works and How it Works

The History of Crop Insurance Works and How it Works

The Federal Crop Insurance Program Protects Farmers in Case of Loss


Table of Contents

Farming is a risky business. The average American won’t borrow as much money in their lifetime as a farmer might borrow for just one season. And even if you don’t have to borrow, one bad season could still take you out of business or prevent aspiring farmers from ever getting started.

Not only that, but commercial property and farm insurance policies don’t include crops as covered property. Because of this, farmers must purchase crop insurance to cover losses related to weather and equipment failures.

There are two primary categories of crop insurance: multiple (multi-) peril crop insurance (MPCI) and crop-hail insurance, also known as named peril. Multi-Peril Insurance is subsidized by the federal government, whereas crop-hail insurance, which is sold through private insurers, is not.

Overview & History of the Federal Crop Insurance Program

The Federal Crop Insurance Program (FCIP) is a partnership between the federal government and private insurers. The FCIP is operated and managed by the Risk Management Agency, which is part of the USDA.

In the 1930s, the Great Depression and the Dust Bowl left many farmers unable to grow enough food to feed their own families let alone make any money. So, Roosevelt leveraged the New Deal to create the first federal safety net for agriculture.

What is now the Federal Crop Insurance Program has grown significantly through the decades as new legislation has expanded the program and made it more and more affordable. Today, many farmers purchase insurance through the FCIP and reap the benefits in times of need.

According to the USDA, roughly 83 percent of U.S. crop acreage is insured under the FCIP. In 2020, the Federal Crop Insurance program insured more than 380 million acres of farmland through more than 1.1 million crop insurance policies.

How Multi-Peril Crop Insurance Works

There are 13 private insurers who manage the policies offered through the Federal Crop Insurance Program, which are all approved by the USDA. These private insurance companies work through independent agents to collect premiums, issue policies, and pay claims. When a farmer files a claim for crop losses, they usually receive payment within 30 days.

The FCIP insures the insurance companies, so if a claim exceeds the premium that the insurer has collected, the government covers their losses and vice versa. So if the insurer collects more in premiums than it pays out in claims, the government gets a share of the profit.
The Federal Crop Insurance Corp (FCIC) is the program’s overseeing arm of the federal government. The FCIC determines the rates and develops the policies based on market data from recent years. This entity also subsidizes administrative expenses for participating insurers.

Farmers who wish to purchase insurance must do so before laying down seeds. Learn more about the Multi-Peril insurance that Colville Crop offers. 

What Crops Do the Federal Crop Insurance Program Cover?

The FCIP does not cover all crops, only a select few. The USDA Risk Management Agency determines which crops each county will insure each year based on the demand for coverage and risk of loss in that county.

The crops that are typically insured under the FCIP include:

  • Corn
  • Wheat
  • Soybeans
  • Potatoes
  • Cotton
  • Dry peas
  • Apples
  • Blueberries
  • Citrus
  • Pumpkins
  • Walnuts

If your crop isn’t covered in your area, you or your insurance agent may ask the Risk Management Agency to expand the program to cover that crop in your county.

What Policies are Available through the FCIP?

Multi-peril policies can cover a loss of yields or revenue due to frost, drought, disease, excess moisture, and other natural causes.

A yield-based policy will provide a payout if your yield is less than your historical yield, and thus requires a few years of history to purchase. Catastrophic coverage, which is the basic policy, will pay out if your losses exceed 50 percent of your typical yield. You receive 55 percent of the estimated market price of the crop. It does not require a premium, only an administrative fee. You can purchase a higher level of coverage if you pay a percentage of the premium–the government covers the rest.

Most farmers will choose a revenue-based policy to cover a single crop. Alternatively, they can purchase whole-farm revenue protection to cover all of their crops. These types of policies protect your revenue in case of lower yields or a decline in harvest prices, or both. Revenue protection policies cover yield losses due to natural causes such as hail, frost, drought, excessive moisture, wind, disease, or pests. Also when harvest prices differ from their projected prices at the time of planting, these policies can help recoup your losses.

If you are considering a revenue-based policy, you will select the amount of coverage you want based on the percentage of yield averages. The majority of farmers will choose between 50 and 75 percent, but you may cover up to 85 percent of the yield average.

If your farm experiences a loss on a crop that is not covered by the Federal Crop Insurance Program, then you may apply for crop disaster assistance. Losses covered under this program include inability to plant, lower yields, or loss of inventory caused by natural disasters.

Crop-Hail (or Named Peril) Insurance

Crop-Hail Insurance, also called Named Peril Insurance, offers farmers additional coverage that provides a cushion for when your crop losses don’t meet the minimum threshold to claim the federal coverage. Crop-Hail policies must be purchased through private insurers and are not subsidized by the government.

Insurers offer different levels of coverage with varying deductibles. Despite its name, Crop-Hail Insurance can cover more than just hail. Other disasters covered under these policies include wind, fire, lightning, vandalism, and malicious destruction of property. They may also cover costs incurred from replanting.

Crop Insurance: The Bottom Line

Farmers have a lot to consider when it comes to choosing your crop insurance policies each planting season. Every farm is different, so every farm should have a customized insurance plan that is designed to help you reach your business goals.

At Scott Colville Crop Insurance, we take extra care to help our farmers understand all the different options, look at all the factors that come into play, and calculate which combination of policies will serve them best. We want our farmers to sleep soundly at night knowing that they have a solid plan in place to shield them from disaster.

Contact us today to request a visit to your farm. We would love to see the business you have built and help you protect it as best we can.


7 Notable Myths About Crop Insurance

7 Notable Myths About Crop Insurance

Are crop insurance myths keeping you from getting the crop insurance coverage that would benefit you the most? Are you tossing and turning at night worrying about things you can’t control? You’re not alone.

Crop Insurance is complicated and ever-changing, much like farming, so it’s easy to get wrong. Most crop insurance products are subsidized by the Federal Crop Insurance Program, further complicating things. It takes years to get a good understanding of how crop insurance works, and decades of continuous learning to make it work in your best interest. Due to the complexities, many farmers still do not have adequate coverage.

Lucky for you, we’ve put in the decades and crunched the numbers six ways ‘til Sunday. In this article, we break down the most notable myths about crop insurance and how they might be hindering your farm’s success.

We hope this guide helps you make better decisions about your business, but we always recommend getting specific advice from a knowledgeable crop insurance agent.

Crop Insurance Basics

Before we start, let’s go over the basics of crop insurance.

Farmers, ranchers and landowners purchase crop insurance to protect their crops from things like natural disasters, diseases, insects and market pricing drops. There are two types of insurance: named-peril (or crop-hail insurance) which covers hail storm damage, and multi-peril crop insurance (or MPCI), which covers most other natural disasters as well as irrigation failures. Some MPCI policies may also offer price protection in the event of a dip in the market.

The main difference between the two types is that MPCI is subsidized under the Federal Crop Insurance Program and crop-hail is not. There are 13 private companies that provide coverage for the FCIP. All crop insurance products have set pricing based on past data.

The 7 Most Notable Myths About Crop Insurance

Myth #1: Crop insurance costs more than it pays.

Not even close–thanks to subsidies from the Federal Crop Insurance Program, the cost of crop insurance is very affordable and can even payout more than what you would have made selling your full harvest at premium prices. Where commercial private insurance ranges from just 2-to-7 percent of the liability, subsidized products cover 55 and 100 percent of the liability. In the long run, the cost of crop insurance coverage is quite low, especially considering how much you stand to lose when you don’t have it.

Myth #2: Crop insurance is like roulette.

Crop insurance is actually more of a numbers game that’s easy to win when you know all the inputs and do all the right calculations. When we help farmers understand their options, we look at every product from every angle and come up with an insurance plan that gives you the best possible return on your investment. You might not win every time, but if you’re consistent over multiple years, you will win in the long run.

Farming is the real casino. I can’t tell you how many times I’ve heard farmers say that farming is like going to the casino every day. Any number of unforeseen natural or man-made disasters can arise out of the blue and destroy your livelihood leaving you unable to recoup your losses. Even just small shifts in the market or weather can hinder your best-laid plans. With the right crop insurance plan, you will never have to worry about forces outside your control.

Myth #3: Crop insurance is only for the big guys.

There are dozens of different insurance products and thousands of ways to slice them in order to make them work for farms of all sizes and types. Even if a product isn’t offered in your county, a good crop insurance agent can appeal to the government on your behalf.

If you consistently make smart insurance decisions, it doesn’t matter how big you are, you should always come out on top, or at least as good as you would have been otherwise.

Myth #4: Crop insurance only covers natural disasters, which get free government aid.

Natural catastrophes are only one of the many types of loss covered by both private and federally subsidized crop insurance products. Other types of loss covered can include market price fluctuations, irrigation system damage, a reduction in yields due to smaller changes in weather patterns, and many other circumstances that disrupt your cash flow and ability to repay loans. In fact, many lenders won’t approve you without crop insurance.

Sure, you could qualify for disaster relief in some cases, but it can take years for the funds to reach your bank account. Crop insurance pays out within 30 days of filing your claim. Quite often, we turn in a claim in September (or sometime during the year) but the claim doesn’t get finalized until the crop is harvested, typically not until November or December. When it comes to apples, for example, we will turn in a claim in September, but the claim won’t be finalized until March when all the apples have been sold, then the payout comes within 30 days.

Myth #5: Crop insurance requires too much of my already limited time.

Yes, there is a lot of paperwork that must be done for crop insurance, especially for certain crops like apples, but your agent should do most of the grunt work for you. Just as important as filling out loan applications, tax filings, and Ag Census, crop insurance is vital to your business and will save you time (and heartache) in the long run.

Myth #6: Crop insurance is the same for every farm regardless of where you get it.

It is true that crop insurance policies are highly regulated by the government and therefore the same across the board. However, the levels and types of policies you choose can have vastly different outcomes for your farm. When you work with an independent agent, like us, you know that you are being sold a product because it’s in your best interest, not because it makes the insurer the most money.

Myth #7: Crop insurance can distort the market and supplant other risk-mitigating practices.

Extensive data mining, algorithms, and training programs for agents and adjusters all work to ensure crop insurance is being applied properly. Crop insurance always responds to market factors, not the other way around. Thorough checks on the programs ensure farmers are making decisions based on the market, not based on the crop insurance products available.

Crop insurance is a risk management tool that you can take to the bank, both to recoup losses and to borrow money at lower interest rates. That said, farmers should (and do) still use every tool at their disposal to manage their risk from crop rotation and cover crops to market hedging.

The Moral of the Story

If you’re still not convinced that crop insurance is a valuable tool that you can leverage to ensure your farm’s success, call us. We will come to your farm to answer all of your questions in terms you can understand and help you decide which products make the most sense for your farm and why. With this knowledge and the right policies in place, you can soothe your inner worrywart and get the much-needed sleep you deserve. Because good sleep is not a luxury for farmers, it is a necessity.