Livestock Risk Protection insurance is another opportunity to manage market unknowns.

New livestock insurance programs give swine and cattle producers a new tool for managing price risk. Livestock Risk Protection (LRP) is sold by private crop insurance agents who have been specially trained by USDA's Risk Management Agency (RMA).

"For a premium, livestock producers can buy downside price protection for a specific period of time," said Frank Burch, crop insurance agent, Palmyra, Mo. "It can be good protection against an unexpected drop in the market."

LRP insurance was initiated in Iowa 2 years ago. In 2003, the program expanded to a few more states, but not Missouri. Then the program was suspended for several months following the BSE case in Washington state. In October 2004, the LRP pilot program was reintroduced and expanded to include Missouri and 18 other states, including Iowa, Kansas and Oklahoma. A change was made to add feeder cattle of all weights, with adjustments for heifers, Brahman and dairy cattle.

"LRP insurance protects only price, not pounds or profits," said Mary Sobba, University of Missouri ag business specialist in Audrain County. "Producers can protect against declining prices by buying an insurance contract with a specific coverage price. If market prices fall below the specific coverage price [by the end of the contract period], an indemnity is paid to the producer reflecting the difference between the insured price and the actual settlement price."

If prices stay above the specific coverage price, the LRP contract simply expires. In this, LRP coverages resemble put options on futures. However, with LRP, you can insure the price on any number of head (from one to 1,000 in a single policy called a "specific coverage endorsement"); whereas options require trading in futures-contract units-about 65 to 70 head of cattle.

But it's not easy to make side-by-side comparisons with LRP and futures options. LRP contracts are not available when the Chicago Mercantile Exchange (Merc) is open; you cannot compare the premium on an LRP policy with the premium on a put option in real time and choose whichever is least expensive.

"The RMA publishes each day's LRP prices and premiums on their Web site after the Merc is closed," said Tony Brown, crop insurance agent, Butler, Mo. "That means we agents don't know the price and premium until 5 p.m. or later each day. That is not especially handy for either agents or producers."

"Although LRP offers price protection, producers using LRP still face basis risk," Sobba added, referring to the "when and where" differences between local cash price and the Merc price.

"To use LRP successfully, a producer needs to have some knowledge of his local basis. For example, if you're a Missouri cattleman who finishes steers in a Kansas feedlot, the feedlot where the cattle are sold represents the basis."

And LRP doesn't provide any guarantees as to rate of gain, cost of production, sickness or death loss.

"There are daily sales limits for the program, as well as annual funding limits," said Sobba. "The maximum daily sales limit is $1 million, unless otherwise set by RMA. Also, catastrophic measures are in place that will shut down the LRP market if something extreme happens-another BSE case, for example."

Here are details on each of three classes of livestock that may be insured under LRP:

Feeder cattle

Policies (specific coverage endorsements) may be bought for up to 1,000 head of feeder cattle for periods from 13 to 52 weeks. Two weight ranges are covered: cattle up to 600 pounds and cattle weighing 600 to 900 pounds. Adjustments are made for heifers, Brahman and dairy cattle.

A producer can select coverage ranging from 70 to 95 percent of the expected ending value of the cattle. Ending values are based on the Merc Settlement Index.

Fed cattle

Coverage can be purchased for up to 2,000 head of steers or heifers expected to weigh between 1,000 and 1,400 pounds, grading Select or better, at the end of the insurance period, which can run from 13 to 52 weeks. The annual limit per producer is 4,000 head. Producers can select coverage ranging from 70 to 95 percent of the expected ending value.

Ending values or settlements are based on the USDA Five-Area Weekly Weighted Average Direct Slaughter Cattle price, live basis.

Swine

An LRP contract may be purchased for up to 10,000 hogs that are expected to reach market weight near the end of the insurance period (13 to 26 weeks). The annual limit per producer is 32,000 head. Ending values are calculated on the Merc's Lean Hogs futures contract and indemnities are based on the USDA Agricultural Marketing Service price upon which lean hog futures contracts settle.

Sobba outlines how LRP could work with feeder cattle: Say you own feeder steers that have an expected end value of $84.55 per hundredweight in 21 weeks. You buy a contract at 92 percent of that value, which gives you a covered price of $77.79. If at the end of the 21-week period, the Merc feeder cattle price index is higher than $77.79, you would receive no indemnity payment. However, if the price index is below $77.79 per hundred, you would be paid an indemnity equal to the difference between the coverage price and the ending value of the Merc feeder cattle price index.

Sobba's example does not take into account the cost of the insurance. LRP premiums are subsidized 13 percent by RMA, which also covers the cost of administration of insurance contracts and agent commissions. Still, whether LRP coverage is an economic option depends on how much it costs.

"The premium for LRP coverage is usually a bit less than with a put option, but not much less," said Frank Burch. "But there can be advantages with LRP, compared with put options. With LRP, you can insure the price on any number of feeder cattle, from one head to 1,000 head.

"Lenders indicate that they like LRP, too," Burch added. "A lender can protect his collateral by putting an attachment on an LRP policy. He cannot very well do that with an options contract."

Swine, fed beef and feeder cattle producers who are interested in LRP coverage should contact their local crop insurance agent.

"And you may want to complete an application, even if you don't actually take out LRP insurance," said Tony Brown. "We've had several inquiries already. The potential may prove to be bigger than current funding of the program allows."

The LRP insurance year runs from July 1 through June 30.

"If a calf producer is looking at buying some price protection against the traditional fall slump in prices, he might want to get his application in before June 30," Brown said.