Improved Livestock Insurance: Critical Margin Management Tool

For many of us involved in the pork industry, the calendar shift to June means the World Pork Expo is upon us once again. The event serves as the unofficial start to the summer season for many stakeholders and gives us all the opportunity to meet friends, colleagues and industry professionals in person.

We look forward to the conversations we will have – many of which will likely touch on topics such as domestic disease mitigation, Chinese demand and tight global grain and oilseed balance sheets. Each of these areas is of critical importance and has been covered in detail in specialist publications over the past few years. But another topic worth discussing at this year’s gathering is the good work being done on behalf of livestock producers by the USDA’s Risk Management Agency and its Federal Crop Insurance Corporation.

The USDA has offered two livestock insurance products to hog producers for nearly two decades. Livestock risk protection is an insurance product designed to protect against a decline in market prices. Livestock gross margin for hogs provides protection against loss of hog gross margin (market value of livestock minus feed costs).

Several rounds of LRP and LGM amendments approved by the FCIC over the past two years have made insurance products a valuable part of many producers’ risk management toolbox. These changes have broadened the appeal to producers by increasing premium subsidies, increasing head limits, extending the duration of endorsements and easing pressure on producer cash flow. As a result, participation in insurance programs has increased significantly.

LLC Raw Materials and Ingredients Coverage

The latest round of LRP reviews, announced in April 2022, continued to build on recent improvements and will likely increase participation in these important programs. An amendment increased both crop year approval and head limits starting with crop year 2023, which runs from July 1, 2022 to June 30, 2023.

Previously, the limit per hog approval was 40,000 head, or 150,000 head per producer for each crop year. Recent changes increase these limits to 70,000 head per endorsement and 750,000 head per crop year. This amplified the number of animals that could be protected against future market price declines, significantly strengthening the safety net for hog producers. There has never been an annual bud limit of LGM-Swine.

Many of the changes announced were intended to increase the options available to producers. Where previously breeders had to choose between one program or the other, now they can use both. An insured cannot, however, insure the same category of livestock with the same end month or have the same insured livestock insured under several policies. This allows flexibility in decision-making and enables producers to make the best choice for their own financial situation and operation.

LRP policies have also been changed to allow any covered cattle to be “marketable” (meet a minimum weight requirement) by the end date of an endorsement. Previously, protected pigs had to actually be marketed within 60 days of the end date or retain ownership on the end date.

Recent changes were also intended to allow a wider range of ownership structures to participate in the program, better reflecting the diversity of participants in the hog production sector. Previous policy language stated that only producers who owned sows under the same entity that owned and marketed finished pigs could purchase LRPs for unborn pigs. This limited the number of producers who could protect the future marketing of pork beyond 6 months in time. This policy now states that sows must not belong to the same entity name that they are marketed. Proof of ownership before an indemnity is issued is also required, which reinforces the integrity of LRP.

Other changes to the programs include reducing the time period for insurance companies to pay claims from 60 days to 30 days, clarifying how head limits are tracked when an insured entity has multiple owners, providing insured producers with greater choice in how they receive benefits and changing the duration of approval for swine to a minimum of 30 weeks for unborn swine and a maximum of 30 weeks for all other pigs. These enhancements to the LRP and LGM programs have reduced costs and increased grower flexibility, taking two relatively unused programs and making them widely available in the industry for growers of all sizes.

We view these insurance products as important additions to growers’ toolbox for managing margins over time. It is important to note that the decision to use the LRP is not a decision either/or with exchange traded instruments. Many producers have also found it useful to root LRP hedging into other futures and options strategies. With enormous uncertainty and volatility proliferating in equity and commodity markets today, setting floors through subsidized insurance programs could make a lot of sense for many farmers.

A great example of how one could implement LRP or LGM as part of a risk management strategy is to look at open market pork margins towards the end of the year. Despite multi-year highs in corn futures prices and high soybean meal prices resulting from the conflict in Eastern Europe, drought in South America and a slower-than-normal pace of domestic planting, free market margins for the 4e quarter offer producers the opportunity to protect slightly above-average profitability. Looking at the chart below, there is a very strong seasonal trend for December lean hog futures as well as the 4e quarterly margins fall from early June to the first week of August.

LLC Raw Materials and Ingredients CoverageCIH Fig 2 052722.JPG
LLC Raw Materials and Ingredients CoverageCIH Fig 3 052722.JPG

Although many producers are not willing to simply lock in these margin levels with direct forward buying and selling, some may be willing to establish protection with floors and maintain an upside opportunity by using one or the other insurance products. The seasonal charts above indicate that it could be a good time to do so over the next few weeks. On the one hand, the latest Hogs and Pigs report indicated a continued reduction in the availability of market hogs compared to a year ago. On the other hand, continued weakness in export demand or agricultural production issues could squeeze the above-average open-market margins offered today. LRP or LGM could be a good start to establish coverage given current margin levels and the seasonal trend of lower margins over the next two months.

The enrollment process for LRP and LGM is straightforward, and program costs are consistent across all agencies. The value the agent brings is their expertise, tools and analysis. contact us or visit us at booth V361 in the Mixed Industries Building at this month’s World Pork Expo to discuss effective applications of these tools and how these programs could fit into your risk management approach. .

Source: Dustin Baker and Joe Hrusovsky, CIH, who are solely responsible for and fully own the information provided. Informa Business Media and all of its affiliates are not responsible for any content contained in this information asset.

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