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
- What is Livestock Gross Margin (LGM)?
- What is Livestock Risk Protection (LRP)?
- What are the main differences between LGM and LRP?
- Recent Updates to LGM and LRP
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.