Latest / CattleUSA Daily / 291: What Can LRP Do For You and How Does a Policy Actually Work in Today’s Market

Transcript

291: What Can LRP Do For You and How Does a Policy Actually Work in Today’s Market · CattleUSA Daily

0:00
In today's episode, we are bringing on Samantha Kosarite to
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come and talk about LRP. And I have a very long list of
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common questions that people typically have about LRP or
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questions that Samantha just constantly gets about LRP that
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we're going to come on today and just run through really quickly.
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I've got a list of like 3334 questions, something like that
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that we're going to run through on LRP, what it means, what it
0:28
is, what it isn't, what does coverage mean, what doesn't it
0:31
mean, All of these different nuances that come along with
0:34
LRP. Before we hop into today's
0:37
podcast episode with Samantha, if you're watching on YouTube,
0:39
make sure you hit that subscribe button and like this episode.
0:42
And if you're watching on any of our other podcast platforms,
0:44
make sure that you take a second to go follow the show, go rate
0:47
and review it, share it with a friend, do all of those things.
0:49
This just continues to help us reach new people and make a
0:52
larger impact within the beef industry.
0:55
Everything that Samantha and I talk about today, I'm going to
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have link down in the show notes where you can get a hold of a
1:00
member of the Cattle USA insurance team or just call them
1:04
to talk about what your options are.
1:06
Or if I asked 33 questions today, but if there's a question
1:10
that we didn't answer, they are going to be the perfect people
1:14
to answer all those questions for you.
1:16
So as we go through the episode, just know that down on the show
1:18
notes, you can have further information on what insurance
1:22
is, what it looks like for you, and how to get a hold of
1:24
Samantha or one of the members of our team.
1:26
Without further ado, let's go ahead and hear from Samantha
1:28
Koza Wright. Welcome to the Cattle USA Daily
1:34
podcast, your go to source for the latest livestock markets,
1:38
industry insights and the updates shaping agriculture
1:41
today. I'm your host, Lauren Moylan, a
1:43
passionate advocate for agriculture here to keep you
1:46
informed and connected. Now let's dive into today's
1:49
episode. Samantha, welcome back to the
1:55
podcast once again. We are here to chat some more
1:59
LRP things and I'm excited because I have a list of 34
2:04
questions that I'm going to ask you that are common questions
2:09
that people ask about LRP or coverage or insurance, which is
2:13
all the things, all the things, right?
2:15
So I am so excited. Do you have anything to kind of
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say before we jump in? Yeah, I'm.
2:20
Excited to start. I'm ready when you are, Lauren.
2:22
All righty, perfect question number one.
2:25
Does LRP cap my upside? It does not.
2:27
So LRP stands for livestock risk protection and it doesn't cap
2:31
your upside, it's just downside market risk protection.
2:34
So if the market goes higher, you're able to fully take
2:37
advantage of the higher cash market or you pay your premium
2:40
and that indemnity resort you back to that LRP cash floor.
2:43
Do I have to sell the cattle when the policy ends?
2:46
You do not. For feeder cattle, there is no
2:49
cash sale required. The only stipulation is you
2:52
cannot sell them more than 60 days before the coverage end
2:55
date, but you can sell them absolutely anytime after.
2:58
For fed cattle, there is a little bit of a shorter window I
3:02
guess you would say, and you can sell them 60 days before or 60
3:06
days after. It offers still a lot of
3:08
flexibility, but you do not have to sell them on the coverage end
3:12
date and you don't have to sell them by the coverage end date.
3:14
There is that 60 day window on either.
3:16
Side does my LRP policy settle off my cash sale?
3:20
It does not So it settles against for feeder cattle
3:24
settles against the CME Feeder Cattle Index, which is a 7 day
3:27
weighted average on a yearling cash auction steer across the 12
3:32
major cattle producing states O. It settles off the CME feeder
3:36
cattle Index for feeder cattle. If your coverage price is lower
3:41
than or excuse me if the coverage price is higher than
3:43
the CME feeder cattle index at your coverage end date, then you
3:47
will find yourself in a claim situation.
3:48
And like I said that indemnity will resort you back to that LRP
3:52
cash floor for fed cattle. It settles off the cash average
3:57
for I think 80 to 95% choice steers.
4:02
So that's what it settles against for the Fed cattle.
4:05
But like I said, it does not settle against your cash sale.
4:07
It is 100% protecting declines in the market.
4:12
What does my policy settle off of?
4:14
And yeah, I mean for feeder cattle, for feeder cattle, it
4:17
settles off the CME feeder Cattle Index.
4:19
And like I said, for fats, it settles off the cash average for
4:21
80 to 95% choice steers so. When does LRP payout?
4:26
LRP pays out when the what we call the actual ending value.
4:30
So instead of just going through and repeating see me feed your
4:33
cattle index and cash average for fats, we actually call that
4:36
the actual ending value. So if your actual ending value
4:39
is lower than your booking price, you will find yourself in
4:42
a claim situation. And although it doesn't settle
4:45
off your cash sale, it is meant to I guess target the you're
4:50
going to target your marketing date.
4:52
So everyone says, you know, how does this help my cash sale?
4:55
Well, the difference in that in the market and your coverage end
4:59
date is going to resort you back to that LRP cash flow.
5:02
Do I have to insure all of my cattle?
5:04
You do not. So that's the great thing about
5:05
LRP, like I've said kind of before, But options obviously
5:09
they're based off of 40,000 LB contracts for fats, 50,000 LB
5:12
contracts for feeders. This is base per head.
5:15
So you could book 1 all the way up to 25,000, anywhere in
5:20
between. It is purely done on a per head
5:23
basis. Is there any upfront?
5:25
Cost, there is no upfront cost. That's another great thing about
5:28
LRP versus the put option and there's no upfront cost to kind
5:31
of help with cash flow. If you're, if you find yourself
5:33
in a claim situation, the premiums going to be backed off
5:36
of that indemnity payment. So again, helping with cash flow
5:39
and kind of making it more feasible for the producer.
5:42
What determines the premium price that you just kind of
5:45
talked about? And then what does LRP actually
5:48
cost if there's no upfront cost? So premiums are based off 4
5:53
major things, volatility, the length you're insuring and then
5:57
the coverage percentage that you choose as well as the value
6:00
you're protecting. So like I always compare it to
6:02
vehicle insurance. If you're insuring a more
6:05
expensive vehicle, a newer vehicle, you know, whatever the,
6:08
the, the situation, you're going to be paying a little bit more
6:12
of a premium in your vehicle insurance, just like you would
6:14
pay a little bit more of a premium in your cattle insurance
6:17
if you're insuring a higher value, if you're going to
6:18
fluctuate day-to-day. So I couldn't give really
6:21
upfront cost of what premiums cost across the board.
6:24
I've had a lot of people ask me, does it vary insurance company
6:28
to insurance company and do the quotes and premiums vary?
6:30
No RMA releases the same set of quotes every trading day.
6:34
So they are going to be the same across the board.
6:36
But that's kind of what deciphers premium price.
6:39
And and then of course, if you're choosing a higher
6:42
coverage, it's going to be a little bit more of a premium.
6:44
But you do have that government subsidy to back off a little bit
6:48
of the expense again where it's kind of trumping a put option
6:51
because you don't have that government subsidy on a put
6:53
option. You do have it on LRP ranges
6:55
from 35 to 55%. So it is going to be a little
6:59
bit cheaper and help it again be more feasible for the producer.
7:02
What determines the coverage price?
7:04
That is going to be determined off of the feeder cattle futures
7:08
and live cattle futures for fats.
7:10
It pretty much is directly correlated with the two.
7:14
I mean if you're booking in a non contract month, I think it
7:17
actually averages between the months around it.
7:20
And if you're booking closer to June, it's going to end June's a
7:23
contract month, you're going to be, it's going to settle well,
7:26
it's going to be booked more closer off of June.
7:29
But like I said, it's more more an average of the two.
7:32
Going back to those percentages we kind of talked about last
7:35
time, the feeder cattle features are off obviously based off a
7:39
yearling steer. So in order to I guess what's
7:42
the word I'm looking for in order to accommodate, I guess
7:45
the price difference between heifers, calves, dairy and born
7:48
calves, all the things they do in percentages.
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So if you were insuring A heifer, A lightweight heifer,
7:54
it's going to ensure 100% of the CME feeder cattle futures.
7:57
If you're ensuring A heavyweight heifer, it's going to ensure 90%
8:00
of the feeder cattle futures. If you're ensuring A heavyweight
8:03
steer, obviously it's going to ensure 100% of futures.
8:06
If you're ensuring A lightweight steer actually ensures 110% of
8:10
futures and then unborn calves ensure 105% of futures.
8:14
So it is based off feeder cattle futures, but it's also done in
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those percentages to accommodate different weight ranges,
8:22
different sexes and all the different things.
8:24
Feeder or excuse me, live cattle futures, they're going to be
8:27
based purely off live cattle futures that the quotes are
8:31
going to be purely based off live cattle futures.
8:33
There's no percentage. It's just the same across the
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board. Why do LRP quotes change daily?
8:37
That's again has to do with the futures board.
8:40
Obviously the futures board is changing daily and because
8:43
quotes are based off of futures that is why.
8:46
But the quotes also change daily.
8:48
Can I ensure unborn calves? You can.
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So that's another poll to LRP. Obviously with productions that
8:54
is not an option. Productions of futures, that's
8:57
not even an option. So that is really nice because
9:00
you know, if you think the market's going to fall off
9:02
before your calf even hits the ground, you can lock in
9:05
protection on them before the calf does hit the ground.
9:07
I mean, you've got, I've said before, you've got plenty of
9:10
risk and cattle even before they are born, so why not insure
9:13
them? Perfect.
9:14
What weight does LRP cover? LRP covers all the way from 100
9:18
lbs on the low end to 1600 lbs on the high end.
9:22
For feeder cattle, your options are lightweight heifers,
9:25
heavyweight Evers, same for the sears, lightweight sears,
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heavyweight steers, and then unborn.
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The lightweight steers are going to range from 100 to 599 lbs.
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The heavyweight sears will range from 600 to 1000 lbs and then
9:38
fats are obviously 1000 to 1600 lbs.
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And then same with the heifers, they go on the same weight
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ranges. How is the price calculated if
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I'm selling calves or heifers so.
9:49
Again, kind of going back to those percentages, it is all
9:51
based off of the futures board, but in order to accommodate the
9:55
different sexes and the different heifers, steers to
9:59
calves, it is done in a percentage of feeder cattle
10:02
futures. What happens if the market drops
10:04
before I sell? So if the market drops before
10:07
you sell, that is where LRP kind of does its job.
10:11
Like I said, you want to tailor your LRP policy kind of towards
10:14
your marketing date. So if if it drops before you
10:17
sell and it drops below that coverage price again, that's
10:19
where LRP comes in and it resorts you back to that LRP
10:22
cash floor and indemnity will pay you out the difference minus
10:25
the premium cost. And that's where LRP really does
10:29
its job, does what it's supposed to, to protect producers.
10:32
Is LRP just like trading futures?
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It is very similar to a same strike put option, but it is not
10:39
the same as futures. Futures there is the brokerage
10:42
fees and margin calls and upfront costs and all these
10:44
different things. LRP is none of that.
10:46
There's no brokerage fees, there's no margin margin calls,
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there's no upfront costs. So you don't have to have Amy
10:52
from our office call and say, hey, you have to pay in this
10:55
much in your margin account and all these different things.
10:57
It's very easy. Very upfront futures and options
11:01
trading can be very risky and very, I guess, unpredictable.
11:06
So LRP is kind of just the easier and the more feasible
11:10
option. What happens if I sell my cattle
11:12
early? If you can sell your cattle
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early, like I said with feeder cattle and fed cattle, you well
11:18
for fed cattle, you have a 60 day window on either side of
11:20
your coverage end date to sell. For feeder cattle, you can sell
11:23
your cattle anytime after the coverage end date, but you have
11:26
60 days before the coverage end date where you can sell.
11:29
So that gives people used to be 30, but they upped it to 60.
11:32
That gives people the flexibility to where you're in a
11:34
drought, you can't really afford to feed these cattle any longer.
11:36
You maybe have to sell a month early.
11:38
It just has that flexibility factor where you can sell them
11:42
early if you need to. That 60 days, I mean two months,
11:45
that's a long window of flexibility.
11:47
So that's a really nice thing about LRP.
11:50
What if my cattle weigh more or less than expected?
11:53
So I think on one of my podcasts I said that it was going to
11:57
prorate you one way or the other.
11:59
It actually only prorates you if you don't reach the minimum of
12:04
the weight class you're insuring.
12:05
So that's that's my mistake. So you only the requirement by
12:09
RMA, by USDA is that you have to meet the minimum of the weight
12:13
class that you booked in. So if you booked feeder cattle
12:16
600 to in the 600 to 1000 LB weight class, as long as you hit
12:21
that £600, you're good. If they come in weighing 550, it
12:25
is going to prorate you back. I mean, it's not a big deal.
12:28
It's pretty much booking kind of the same quotes.
12:32
It's just going to prorate you back to that coverage price in
12:35
that weight category. So yeah, like I said, it's OK if
12:38
they come in weighing more or even less than maybe what you
12:41
booked out, but they just can't weigh less than your weight
12:45
category. Can I buy LRP multiple times
12:48
during the year? You can, you just can't buy it
12:50
multiple time, multiple LRP policies on the same set of
12:54
cattle. So we see this a lot with, you
12:56
know, feed lots and different things that are buying and
12:59
selling a lot of cattle. They put multiple, multiple
13:01
policies on a year and that is completely OK as long as you
13:04
don't put the same policy on the same set of cattle.
13:06
So it is really nice. I think the only stipulation is
13:10
that obviously you cannot book more than 25,000 head per year
13:14
per producer, but you can book up to I think it's 12,000 head
13:18
per policy, per endorsement. How far out can I insure cattle
13:23
and how close out can I insure cattle?
13:25
You can insure cattle all the way out to 52 weeks.
13:28
So basically a year out and you can insure cattle.
13:33
The closest you can insure cattle is 13, 13 weeks out, like
13:36
I said, that 60 day window. And then of course you can sell
13:39
anytime after for feeders, but that window gives you a lot of
13:42
flexibility. So even though you're insuring
13:44
13 weeks out, if you have to sell a little bit early that's
13:46
OK. But just keep in mind basically
13:49
what it's going to do is settle on the actual ending value on
13:52
your coverage end date. So if you have cattle booked out
13:55
to, you know, August 15th or whatever and you end up selling
13:59
them August 1st and August 15th is your coverage end date.
14:02
It's going to settle off the CME Feeder Cattle Index or the cat
14:06
weighted cash average of fats on that August 15th.
14:09
Is there a limit to how many cattle I can insure?
14:11
1000 head I believe is the limit per producer per year and 12,000
14:16
head is the limit per endorsement.
14:19
What days can you book LRP? LRP is pretty much available
14:22
every trading day unless this were limit up or limit down
14:25
because there's outside factors throwing off the market.
14:28
Otherwise. LRP is pretty much available
14:30
every trading day. Every trading day.
14:32
So if holidays are thrown in there or different things are at
14:36
play and the feeder kettle board isn't open or the live kettle
14:38
board isn't open, then LRP will not be available.
14:41
I had a guy asked me the other day if LRP is not available
14:45
because we're limit up on the futures board or limit down on
14:47
the futures board, when does it open back up?
14:49
It'll open back up the next day. LRPOV will be available the next
14:53
day so long as we're not limit up or limit down on the future
14:56
sport again. What happens if the market goes
14:58
up after I buy coverage and what happens if it goes lower?
15:01
If the market goes up after you buy coverage, that's a little
15:05
bit of a tricky question and that's my bad.
15:07
But if the market goes up after you cover, you could still find
15:10
yourself in a situation where you're either going to be in a
15:13
claim situation or not in a claim situation just because it
15:16
kind of depends where the market settles on your coverage end
15:18
date. If the cover on the coverage end
15:20
date, the market is lower and then you will find yourself in a
15:25
claim situation and you will get paid out.
15:27
So that just kind of goes hand in hand.
15:28
But if the market goes higher and the market is higher on your
15:31
coverage end date, the actual ending value is higher than your
15:34
booking price, then you the nice thing about LRP is that you can
15:37
fully take advantage of the higher market.
15:40
And at least you had that floor in place in case the market went
15:43
the other direction. You were fully protected on the
15:45
bottom end, but at least you're you are able to take advantage
15:48
of that higher market. You pay your premium and take
15:50
full advantage of that and sell your kettle at a higher cash
15:53
price. So it's kind of a win win either
15:55
way. What coverage level should I
15:56
choose? So coverage, there is multiple
15:59
coverage levels available. Typically we don't recommend
16:03
going below the around the 98% coverage level or at least I
16:07
don't. My thing is a lot of people
16:09
don't want to pay as more of an expensive premium.
16:12
Maybe they want to have coverage in place, but it's not
16:15
necessarily that they want to have coverage in place because
16:17
the markets going to go down, but just to have it in place in
16:19
case it does. And that's a lot of what we
16:21
find. So a lot of times people will
16:23
opt for that lower coverage level and that lower premium
16:26
cost and just to have that protection in place.
16:28
But a lot of people also want to ensure the Max value of their
16:31
cattle that they can. So I mean, I won't, I won't
16:35
necessarily stray people away if they want to ensure 90%, but I
16:39
typically don't recommend going below the 98% because if you do
16:42
find yourself in a claim situation, it's a lot harder to
16:47
actually see a positive payout once you back the premium cost
16:50
off of that. Can I insure cattle I don't
16:53
physically own yet? You can't.
16:55
So you do have to have an insurable interest in the cattle
16:58
in order to insure them. Why do LRP quotes change daily?
17:03
LRP quotes change daily because the future sports changing daily
17:07
so and they are figured out often the quotes are based off
17:11
of future sports so that is why they're changing daily.
17:14
Why would somebody use LRP instead of a put option?
17:16
LRP is just a little bit more attractive.
17:18
It offers a lot of flexibility in terms of your booking on a
17:21
per head basis. You're not booking those 40 to
17:23
50,000 LB contracts. There is no upfront cost.
17:28
So that helps a lot with cash flow.
17:30
And there also is a that subsidy making it about 25 to 30%
17:34
cheaper than a put option. You've got that 35 to 55%
17:37
subsidy. So it is is a little bit more
17:39
feasible for the producer and that is why it tends to be the
17:43
more attractive product. Like I said, LRP in layman's
17:45
terms is very, very similar to the same Strike put auction,
17:48
except you have all those different things that kind of
17:51
sets it apart, makes it more feasible, makes it more cheaper
17:54
and a lot more flexible as well. Can I have multiple policies and
17:58
insure cattle in different weight groups?
18:00
You can have multiple policies and insure them in whatever
18:03
weight group you want to, as long as you don't have multiple
18:05
policies on the same cabs. How do I translate 100 weight to
18:09
head? To translate 100 weight per
18:10
head, a lot of people want to do this because it's just a lot
18:13
easier to kind of figure out financially where you need to be
18:17
in. The quotes are based per 100
18:18
weight. So say you have a premium cost
18:20
that's $10.98 a hundred and you're booking cattle that are
18:25
£800. You're going to take that 1098 *
18:27
8 because it has to be in the same unit.
18:29
So you're not going to take it times 800, you're going to take
18:32
1098 * 8. Same thing with coverage price
18:35
and that's how you would translate that.
18:37
How do I know how far out to ensure?
18:39
Typically, you want to tailor your LRP policy to when you're
18:43
planning to market your cattle. Again, that's not to say that
18:46
you have to sell your cattle on the coverage end date because it
18:50
is going to settle off of the actual ending value, not your
18:54
cash price. So it ensures market drops.
18:57
So ideally you want to tailor it to your marketing end date,
19:01
especially you do that for cash flow reasons, just because if
19:04
you find yourself in a position where you're going to have to
19:06
pay the premium, you also have the sale of your cattle to kind
19:09
of offset that. But like I said, the market goes
19:12
down and you don't want to sell your cattle when the market's
19:15
down and you, you know, you maybe have a hunch it's going to
19:17
go back up in a few weeks. You've got rumors, all these
19:20
different things and volatility throwing the futures off.
19:23
Maybe you hold those cattle back another few weeks, another month
19:26
and you get that that payment from LRP for the coverage and
19:31
for the ending value falling below your coverage price and
19:34
you kind of wait out for a higher cash sale.
19:36
Can I use LRP every year? You can use LRP every year.
19:40
A lot of people make it a very routine part, part of their
19:43
marketing plan. And I think that's very smart to
19:45
do. I mean, a lot of people want to
19:47
ride out the highs and I totally get that.
19:49
I mean, we've went 10 years without being profitable in
19:52
ranching. I mean, a lot of people think
19:53
because we're in the highs of the market, we're rolling in
19:56
cash. And that's absolutely not the
19:57
case. I mean, a lot of a lot of people
19:59
needed this jump. In order to pay off debt, in
20:02
order to kind of pay off some of that interest in order to offset
20:07
all those, those rising costs over the last 10 years and all
20:11
those input costs and different things.
20:12
But that isn't the case. I mean, people would be very
20:14
surprised by how much money goes back into the operation.
20:17
It's itself. So it's just one of those deals
20:20
where it's very important to put that in here marketing plan.
20:23
Like I said, these high costs are honestly the ones that
20:27
associate the most risk, so it's just definitely something you
20:32
want to protect. Is the LRP application me
20:34
booking coverage? It is not.
20:37
So this is something that kind of confuses people, I guess a
20:40
lot of people. When people think insurance, I
20:43
think people's mind instantly goes to like vehicle insurance,
20:46
car insurance, crop insurance. When you're booking crop
20:49
insurance, the application basically is your policy with
20:52
LRP. The application has to be in and
20:54
approved by RMA prior to booking.
20:56
You can book the same day that you put the application in.
20:59
It's just if for any reason there was a discrepancy on the
21:02
application, your application gets knocked back, we have to
21:05
fix something, we have to redo it, we have to resubmit it, then
21:08
your policy is not effective. So we always just urge to people
21:11
to get that application in ahead of time, get approved by our
21:14
May. If you have an application in
21:15
and you don't ever end up booking LRP, that's completely
21:19
fine. You have an LRP application in
21:21
and you end up booking LRP two, 3-4 months down the road, that's
21:25
fine too. There's no time constraint with
21:28
that. It just gives you the ability to
21:30
book in and if you want to. What do I need to send in to get
21:34
an LRP application in? It's pretty simple.
21:36
So basically we just need some basic producer information,
21:40
name, address, are you insuring feeder cattle or fat cattle
21:44
phone number, e-mail so that I can send it out to you via
21:48
document sign because it is going to be an electronic
21:50
signature that we get from you state and county that the cattle
21:53
are located in. If I, I come across a lot of
21:56
times people are right there on the county line, so they're not
21:59
exactly sure which one to use. Typically it's whichever 1
22:02
they're in most. It's like rule of thumb, but
22:04
we'll put both on the application just in case.
22:06
Both counties, If you're operating as an individual, we
22:10
just need your Social Security number and then spouse, if
22:13
applicable, will need her name and Social Security number as
22:17
well. If you're operating under an LLC
22:19
or a corporation, we'll need the EIN number of the LLC and the
22:22
corporation and then we'll need all the information of anybody
22:26
with a 10% or more interest in those cattle.
22:29
So address, phone number, social, all those things.
22:32
And then of course, if you want anybody to have the authority to
22:34
sign on your behalf in terms of policy, application, all those
22:38
things, we'll need their information as well.
22:40
But other than that, I mean it's just really a really simple
22:44
process. Awesome.
22:45
Well, those are all the questions that I have for you
22:48
today. This was a lot of fun to kind of
22:51
sit back and I feel like I got educated a little bit more on
22:54
LRP as someone who hears about it every single week.
22:57
I still learned something new today, so I hope that everyone
23:00
and listening was able to do the same thing as well.
23:02
Samantha, any closing thoughts or anything else?
23:05
As always, we'll have all of Samantha's information linked
23:08
down in the show notes where you can get a hold of Samantha or
23:11
another member on our insurance team to kind of talk to them
23:14
about what works best for you. But any other closing thoughts
23:16
before we wrap it up? If you guys have any questions,
23:19
give me a call. I'd be happy to have a
23:20
conversation with you guys about risk management.
23:23
I mean, that's such an important strategy to use these days.
23:25
Like I said, a lot of times these hard markets are there's a
23:27
lot more risk associated with them.
23:29
So if there's profit on the table, lock it in, get that
23:32
floor in place and give me a call.
23:34
Perfect. Well, Samantha, as always, thank
23:36
you for your time. To all of you listeners, thanks
23:38
for listening to another episode of the Cattle USA Daily Podcast.
23:42
We will see you all next time on another one.
23:44
Have a good one y'all.