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Combining Livestock Risk Protection Insurance with Private Market Tools for Effective Cow-Calf Risk Management Plan

James Mintert

Summary

The Livestock Risk Protection (LRP) contract was re-introduced in October 2004 following a 9 month removal from the market for underwriting changes. An RMA grant facilitated KSU’s development of a livestock/beef cow case problem to teach individual producers how LRP works and how it compares to other risk management tools. Participants are given the option to sell calves at weaning or to background the calves and sell them as feeder cattle. Participants can manage their price risk by purchasing LRP, purchasing CME put options, selling CME futures, making forward cash sales or a combination. The simulation, which covers a one-year production cycle, provides participants an opportunity to compare results from various risk management tool combinations.

The case problem also includes a grain sorghum enterprise that is used for livestock feed and cash grain sales. The case problem includes grain sorghum yield risk and participants must make a decision to insure the crop or retain the risk. Participants also make marketing decisions for the grain sorghum enterprise that includes livestock feed as a means of marketing a portion of the crop.

This adult education approach has been demonstrated in the past to be a very effective teaching method. It allows producers to make individual decisions in a realistic case farm exercise that is directly applicable to their operation. These are day-long workshops provide producers the opportunity to gain a greater understanding and knowledge of these risk management tools when working through a realistic case farm exercise.

Details

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