Latest / CattleUSA Daily / 281: Livestock Risk Protection (LRP) Explained: How to Actually Read the Quotes

Transcript

281: Livestock Risk Protection (LRP) Explained: How to Actually Read the Quotes · CattleUSA Daily

• 0:00
  Today on the podcast we are welcoming Samantha Kozar right
• 0:02
  on once again and she is here to talk about LRP and LRP quotes
• 0:07
  and really break that down for all of you guys as listeners.
• 0:11
  Samantha has been on once before where she gave the full rundown
• 0:14
  on what. LRP is.
• 0:16
  What it isn't and what it means for you and your operations.
• 0:18
  And today we're taking that a little bit further and we're
• 0:21
  really breaking down quotes and what LRP quotes are, what you
• 0:24
  can get quotes on, what you can't get quotes on, and all of
• 0:27
  those nuances in between. Before we hop open today's
• 0:30
  episode with Samantha. If you are watching on any of
• 0:32
  our podcast platforms, make sure you take a second to hit that
• 0:34
  subscribe button. Like this episode, go rate and
• 0:37
  review it. Make sure you're following the
• 0:38
  show, do all of those things and also share it with a friend if
• 0:41
  you found this episode interesting.
• 0:43
  Without further ado, let's go ahead and hear from Samantha.
• 0:49
  Welcome to the Cattle USA Daily podcast, your go to source for
• 0:53
  the latest livestock markets, industry insights and the update
• 0:56
  shaping agriculture today. I'm your host, Lauren Moylan, a
• 1:00
  passionate advocate for agriculture, here to keep you
• 1:02
  informed and connected. Now let's dive into today's
• 1:06
  episode. Samantha, welcome back to the
• 1:14
  podcast. Today we are here to talk a
• 1:17
  little bit more about LRP. What it is.
• 1:20
  And. Quotes and just really dive deep
• 1:24
  into what LRP is and what coverage kind of looks like.
• 1:28
  Would you like to kind of take it away and share with our
• 1:30
  audience who might be unfamiliar with what LRP is or maybe they
• 1:33
  are familiar with what LRP is, they use it themselves and maybe
• 1:36
  just need a little bit of a refresher on what it all is?
• 1:40
  Absolutely, yeah. I'm really excited to be back
• 1:41
  and talking about LRP. Hopefully it didn't bore you
• 1:44
  guys to that the last time, but we're going to really zero in on
• 1:47
  quotes today like Lauren said and just talk about what LRP is,
• 1:50
  how to utilize it and all the things.
• 1:52
  So before I jump into it, I thought it would be really
• 1:56
  beneficial for you guys just to get a quick refresher of like
• 1:59
  insurance terms because like I've said before, I think those
• 2:02
  are what really stumps producers the most.
• 2:05
  LRP is an insurance product. So it's just really important to
• 2:09
  be familiar with those terms so you know what I'm talking about
• 2:11
  when I'm talking about those things.
• 2:13
  So I'll kind of just briefly define them in the simplest way
• 2:16
  that I can. If you're familiar with them or
• 2:18
  don't want to hear this, just skip past like a minute or two.
• 2:20
  First and foremost, you've got indemnity.
• 2:22
  We always talk about being in a claim situation or being in a
• 2:25
  position to receive an indemnity.
• 2:27
  So indemnity is really just a sum of money paid is
• 2:30
  compensation for a loss. You've got claim that's payment
• 2:35
  or compensation for a covered loss.
• 2:37
  I mean, that would be like if you're in a claim situation to
• 2:39
  receive an indemnity payment, that's kind of how that would
• 2:42
  work. But and then premium is the
• 2:45
  price that you pay in exchange for having that coverage.
• 2:48
  So for instance, if the index was lower than what you insured
• 2:51
  at on the LRP coverage end date, you'd be in a claim situation,
• 2:55
  you'd sign a notice of loss and then insurance would pay you an
• 2:58
  indemnity for the difference minus the premium cost.
• 3:01
  So now that that's kind of out of the way for the newcomers,
• 3:04
  let's just quickly recap what LRP is and what it does.
• 3:07
  There will be a lot of picture inserts along the way for
• 3:10
  reference, so just feel free to pause and look at them or
• 3:13
  screenshot them to keep for reference and utilize.
• 3:16
  But first and foremost, LRP is livestock risk protection.
• 3:20
  It is an insurance product, but it works like a government
• 3:23
  subsidized put option if you were trading futures and
• 3:25
  options. So lots of similarities to a put
• 3:28
  option. And LRPLRP is typically about 25
• 3:32
  to 30% cheaper, which is why it's more it tends to be more
• 3:37
  attractive to the producer. It's designed to make it more
• 3:39
  affordable, more feasible. There's extra subsidies
• 3:43
  available for the 1st 10 years if you're a beginning farmer and
• 3:46
  rancher. So those of you that are just
• 3:48
  starting off, I mean keep that in mind.
• 3:50
  It's already so hard to get your starting out agriculture with
• 3:53
  prices and input costs and all these different pressure points.
• 3:55
  So utilize that to your advantage compared to a put
• 3:59
  option. LRP is booked per head.
• 4:01
  It's not on 40 to 50,000 LB contracts like a put option.
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  So lots of flexibility. There's no margin calls, no
• 4:08
  brokerage fees, there's not even any upfront cost.
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  Your premium comes due at the coverage end date and then you
• 4:14
  actually have 60 days, a 60 day grace period to pay it to
• 4:17
  follow. So you get the bill in the mail,
• 4:19
  you've got 60 days to pay it. LRP also protects you from
• 4:22
  downside risk, downside market risk.
• 4:25
  You protect your bottom line without sacrificing the upside.
• 4:28
  So if the market goes higher, you take full advantage of that
• 4:32
  by benefiting from a higher cash sale goes lower, you're redeemed
• 4:36
  back to that LRP floor. So pretty simple, awesome
• 4:40
  product coverage is available for unborn calves up to 599 lbs,
• 4:46
  feeder cattle between 100 to 1000 lbs, and then fed cattle
• 4:50
  1000 to 1600 lbs. It's also available for dairy
• 4:53
  calves and swine. So if you're interested in
• 4:55
  learning more about that, definitely reach out.
• 4:58
  I won't dive too deep into that today.
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  Also, LRP, there's no cash sale required on unborns or feeder
• 5:05
  cattle. Just keep in mind LRP insures
• 5:07
  against downside market risks. So you can sell up to 60 days
• 5:11
  before your coverage end date and anytime after.
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  For fats, there is a cash sale required, but you can sell them
• 5:17
  anywhere from 60 days before or 60 days after, so after that
• 5:21
  coverage end date. So again, lots of flexibility
• 5:24
  there. Just keep in mind if you don't
• 5:26
  actually sell on the coverage end date, your policy will still
• 5:29
  settle on the coverage end date. So, so not the day that you sold
• 5:33
  LRP is also is booked off LRP quotes.
• 5:36
  They are released every trading day by RMA.
• 5:39
  Just for reference, RMA stands for Risk Management Agency and
• 5:43
  that's actually a USDA entity. So quotes are released by RMA
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  every trading day by typically by 4:30 PM and are only
• 5:51
  available to book on until 825 the next morning, tailored to
• 5:55
  when the futures board opens back up that trading day.
• 5:58
  So we send those quotes out again, we send those quotes out
• 6:00
  on our laughter in livestock commentary.
• 6:02
  You can get on that through the Cattle USA drive.
• 6:05
  So if you're interested, you know, sign up with a good
• 6:07
  e-mail, it'll go right to your inbox.
• 6:09
  There's a very insightful market commentary that we put in there
• 6:13
  with that. So pretty good stuff.
• 6:16
  And yeah, just to close out of that, I mean, again, LR PS
• 6:19
  market insurance, it doesn't, it doesn't settle against the cash
• 6:23
  price you got at the sale barn. It insures against drops in the
• 6:26
  cattle market. So that's just a quick little
• 6:29
  LRP refresher for you guys. Like I said, there's going to be
• 6:32
  a lot of screenshots and inserts throughout the way.
• 6:34
  So feel free to pause and look at those for reference or
• 6:38
  screenshot them so you have them if you need them.
• 6:41
  Yes, I love. It Samantha, well, you want to
• 6:43
  dive right into quotes and that kind of what we're looking at as
• 6:47
  far as that goes. Yeah, absolutely.
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  So now that we got the basics out of the way, I really just
• 6:52
  want to lock in, focus on LRP quotes.
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  A lot of people, I mean you book LRP quotes off the futures
• 6:58
  board. So a lot of people are like, why
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  do we even have quotes? But they also go a lot more in
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  depth and they show the different coverage time frames,
• 7:06
  whether it's a contract month or not a contract month.
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  They show coverage price premiums, coverage levels, so
• 7:13
  all the things. But I just want you guys to get
• 7:15
  a good visual of what those look like and a strong understanding
• 7:18
  of justice, how they work all together.
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  O I'll start with what I would call the baseline, excuse me,
• 7:24
  the baseline quotes, which is yearling steers.
• 7:27
  So then we'll look at everything kind of around that, but just
• 7:31
  keep in mind these are going to be quotes for Friday, February
• 7:34
  27th when I kind of put all this together.
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  So they're not current to book off of for when this will be
• 7:39
  posted, but just good to look out for reference.
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  So First off, we've got yearling or heavyweight steers.
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  Like I said, they're the baseline quotes.
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  The futures board actually sets the coverage price and then the
• 7:51
  CME index is what the policy settles off of.
• 7:55
  And those are both based off yearling steers.
• 7:57
  So that's why these are the baseline quotes because LRP is
• 8:01
  offered for every different stage in the life cycle of a
• 8:04
  beef animal. All these quotes, they're going
• 8:06
  to be valued at different prices.
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  All these different sexes, the different heffer steers, you
• 8:12
  know, all the things, the different weights, they're all
• 8:14
  going to be valued at different prices than a yearling steer.
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  RMA doesn't have a better way to value that price difference
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  between calves, heffers, you know, etcetera.
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  So every weight class and sex is figured off a percentage of the
• 8:27
  yearling quotes. So I'll put an insert kind of of
• 8:31
  the percentages that those go off of.
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  So I don't really talk your ear off, but again, you can look at
• 8:36
  that, keep it for reference. So if we zoom into 13 week
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  coverage for yearling steers at the top is going to be the end
• 8:46
  date. That's what we refer to when I
• 8:49
  say that your policy will settle off the index on your coverage
• 8:53
  end date. That's that's where we're
• 8:54
  pulling that from. So in this situation, it'd be
• 8:57
  that May 29th, 2020, sixth and date.
• 9:00
  So again, if you sold your feeder cattle up to, you know,
• 9:03
  60 days before that coverage and date or anytime after, that's
• 9:09
  fine, but your policy will still set off the CME feeder Cattle
• 9:12
  Index on May 29th. So the left column shows the
• 9:17
  different coverage percentages available.
• 9:19
  You can insure anywhere from 85 to 100% of the baseline coverage
• 9:24
  price. We typically don't recommend
• 9:26
  going below 98% coverage level just because you're just less
• 9:31
  likely to find yourself in a claim situation when we also
• 9:35
  have to back out that premium. So just looking out for you guys
• 9:38
  there. The middle column is coverage
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  prices available with the different coverage levels in
• 9:44
  place. And then the left column is the
• 9:46
  premium cost or in other words, that's what it's going to cost
• 9:49
  you to put the protection on. So the reason it's actually
• 9:53
  referred to on the quotes as producer premium is because that
• 9:56
  is the cost with the government subsidy.
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  If you were to book a policy today on that policy, it shows,
• 10:02
  it actually shows 2 premiums, it shows a total premium and then a
• 10:05
  producer premium. Your cost would be the cheaper
• 10:08
  of the two, which would be the producer premium.
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  The total is actually the cost without the subsidy.
• 10:13
  So keep that in mind. If you were to be looking at a
• 10:15
  coverage endorsement, everything's done per
• 10:17
  hundredweight. So if you want to convert that
• 10:20
  premium base per head, you would have to do that.
• 10:22
  So keep in mind it's done per hundredweight and that typically
• 10:25
  sums producers the most because they think it's done per head.
• 10:28
  If you wanted to convert that from per hundredweight to per
• 10:31
  head, would so say you have an 800 LB steer at the top level 13
• 10:36
  weeks out at that 34722 coverage price, you would take that
• 10:41
  $10.59, you would take that premium times 8.
• 10:46
  The reason we're doing it times 8 and not 800 for £800, it's
• 10:49
  because we have to keep those in the same unit.
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  So if you take that premium, 1059 * 8, that equals about
• 10:57
  $84.72 a head. So, yeah, I mean, if that
• 11:01
  premium seems expensive to you, it's just keep in mind, I mean,
• 11:04
  one, it is your better bet in terms of price protection.
• 11:07
  You've got that that extra subsidy.
• 11:09
  So it's about 25 to 30% cheaper than a put.
• 11:12
  And then the premiums, I mean, you got to keep in mind the
• 11:14
  premiums are based off mostly three things.
• 11:16
  You've got market volatility, the value of what you're
• 11:19
  insuring and the length of time you're protecting it.
• 11:22
  So if volatility is high and value is really high, you're
• 11:25
  going to pay a little bit more of a premium.
• 11:27
  But again, just like house and trenches, like vehicle
• 11:30
  insurance, the higher the value, the higher the cost it is to
• 11:32
  protect it. The lower the value.
• 11:34
  Vice versa, the lower the cost it is to protect it.
• 11:37
  So that's why you'll see a lot of times that premiums are
• 11:41
  cheaper when the value of a calf is a lot cheaper.
• 11:43
  They're also a lot cheaper the closer you book.
• 11:45
  Length of coverage has a lot to do with that.
• 11:48
  The premium 13 weeks out is going to be cheaper than booking
• 11:52
  that animal 52 weeks out. Quotes are broken down by weight
• 11:57
  class and sex. Like I mentioned before, there's
• 11:59
  unborn ones, lightweight steers, heavyweight steers, lightweight
• 12:02
  heifers, heavyweight heifers, and then you've got fats.
• 12:05
  Fats are kind of their own deal. We're going to talk a lot about
• 12:08
  value percentages. Like I mentioned before, fats
• 12:11
  don't fall into that category, just the feeders.
• 12:13
  So we just looked at the quotes for the heavyweight steers.
• 12:17
  Now here are the quotes for the lightweight steers.
• 12:19
  Remember that I said the heavyweight steers are baseline
• 12:22
  quotes. Everything's done on a
• 12:23
  percentage of that. So if you look at those side by
• 12:25
  side, the lightweight steers actually ensure 110 percent of
• 12:30
  the heavyweight steers. So you've got that 34722 at the
• 12:36
  yearling steer, 100%, three 4722 * 110%, it equals that 38194.
• 12:44
  Keep in mind when that policy settles, your policy will also
• 12:47
  settle on 110% of the index as well.
• 12:50
  So if you're trying to figure out if you're in a claim
• 12:52
  situation, you're in a position where you're going to get paid
• 12:54
  by insurance, that's how you're going to do that.
• 12:57
  Again, if the index is lower than your booking price, you're
• 12:59
  going to same situation, you receive a payment for the
• 13:02
  difference, it redeems you back to that LRP cash floor.
• 13:05
  So a lot of people are saying, well, how does this affect my
• 13:08
  cash sale? Well, one, if the markets lower
• 13:10
  and you have to pay a premium, you're benefiting from a higher
• 13:12
  cash sale. 2, if the markets lower on your coverage end date,
• 13:16
  you're going to be resorted back to that cash floor.
• 13:20
  Next is the lightweight heifers. They ensure 100% of the index,
• 13:25
  these are the heavyweight efforts, they insured 90% and
• 13:28
  then the unborns they insure 105%.
• 13:32
  Again, just kind of inserting those so you can see what those
• 13:35
  look like. And then lastly, you've got fed
• 13:37
  cattle and they're again their own deal, no percentages,
• 13:41
  they're just based off 1000 to 1600 lbs fat steers.
• 13:45
  So OK, so now kind of to just do a quick example of a situation
• 13:51
  where one would find themselves in the position of a claim or in
• 13:55
  other words, a loss. So keep in mind everything's
• 13:58
  done per hundredweight again unless we convert it.
• 14:02
  So if you would say book 60 head at 37798 per hundred on 800 LB
• 14:08
  steers with a premium of $10.79 a hundred.
• 14:12
  First off, most people want to convert that per head.
• 14:15
  It's a lot easier to understand, get an idea what your budget is,
• 14:18
  what you can afford, what you want to lock in.
• 14:20
  So if you take that 1079 * 8 again, that 8 is going to
• 14:24
  represent £800, just got to be in the same unit.
• 14:27
  So you take that 1079 * 8, that equals $86.32 a head in premium
• 14:35
  cost. Take that times 60 head.
• 14:38
  That's that 5179.20. So 5000 dollars, 120 cents.
• 14:44
  OK, keep that in mind because we're going to come back to that
• 14:47
  here in a second. So now say the index is 347 on
• 14:51
  your coverage end date. Because the index was lower on
• 14:54
  your coverage end date than your coverage price, insurance is
• 14:57
  going to pay you the difference between your coverage price and
• 15:00
  the index minus the premium cost.
• 15:02
  So again, let's do some quick math.
• 15:04
  You've got three 7798 -, 347. That equals $30.98 a hundred.
• 15:11
  That's the difference. You're going to take that
• 15:14
  multiplied by the weight you insured at that £800, but again,
• 15:18
  got to keep it in the same unit. So you're doing 30.98 * 8 and
• 15:24
  that's 24784 per head, $247.84 per head.
• 15:29
  So you figure that's on 60 head, going to take that times 60.
• 15:33
  That's $14,870.40 total coverage.
• 15:40
  So that's going to be your gross indemnity.
• 15:43
  Now if the total producer premium is that $5179.20 that we
• 15:48
  talked about earlier, we're going to back that off of your
• 15:52
  gross indemnity. So you take that $14,870.40,
• 15:57
  take away that $5179.20, your net indemnity would be 9000
• 16:03
  dollars, $909,691.21. Now if you wanted to figure that
• 16:09
  per head, obviously take that divided by 60 head, that's about
• 16:12
  $161.52 a head. So there, I mean that's money in
• 16:16
  your pocket. It's going to help you from the
• 16:19
  difference of the market and the index on your coverage end date
• 16:23
  because it went lower and you know if it goes higher again,
• 16:26
  you're going to benefit from that higher cash sale.
• 16:28
  So it was good to have that coverage in place just to
• 16:30
  protect yourself if things went S because we've seen a lot of
• 16:33
  times in this market where things unpredictably went South
• 16:37
  and they went South in a hurry. So it's pretty simple once you
• 16:40
  get the hang of it. I mean, like I said, feel free
• 16:42
  to screenshot that for reference, any of our inserts
• 16:47
  for reference. But if any of this stuff is over
• 16:49
  your head, I mean, it might just take a while to click.
• 16:52
  It did for me when I first started selling LRP and teaching
• 16:55
  LRP. So it's just one of those times
• 16:58
  where you know you're going to learn by doing it over and over
• 17:01
  again. But our agents are also very
• 17:03
  experienced, so definitely utilize that.
• 17:05
  And a big thing is you don't have to understand everything,
• 17:08
  think about LRP to use it. That's kind of where we as
• 17:10
  livestock agents come in. You know, we're there every step
• 17:14
  of the way to lean on and look to as a resource.
• 17:17
  We aren't just some nobodies giving it a go, you know, just
• 17:21
  giving you advice and shooting in the dark.
• 17:23
  I mean, we have operations of our own.
• 17:25
  We understand the risk. We have a lot of risk ourselves.
• 17:28
  So it's really, really easy to put ourselves in your shoes
• 17:31
  because frankly, we're kind of in the same shoes.
• 17:34
  So keep that in mind. Absolutely.
• 17:38
  And I want to say too that it took me a hot minute to
• 17:41
  understand LRP and what it all meant and truly the impact that
• 17:46
  it has on operations and the insurance and outs of it and
• 17:49
  what. Coverage really means what you
• 17:51
  can cover, what you can't cover, and I.
• 17:53
  Still don't know? All of it, guys, but that is why
• 17:56
  we have people. Like Samantha, who I can just
• 17:59
  give a call to and she can explain it all to me.
• 18:02
  And I'm finally to a point where I feel like I can explain it to
• 18:05
  other people in a sense, but I still follow up all of my
• 18:08
  sentences with, and you should get a hold of a member of our
• 18:11
  team to discuss it further because I'm not the person.
• 18:14
  And that's the thing about it is you have to remember that this
• 18:17
  is an insurance product and you are not going to school for
• 18:21
  years or for months to figure out how to have all of the in
• 18:25
  and outs of insurance and what that means and what it doesn't.
• 18:28
  As far as livestock and agriculture goes, Samantha over
• 18:31
  there has done all the training, knows all of the things.
• 18:33
  So definitely give her a call or another livestock agent on our
• 18:37
  team a call and they can explain everything because there is
• 18:41
  still a lot that goes right over my head on everything as far as
• 18:45
  that's concerned. But it is still so extremely
• 18:50
  like by it is so extremely valuable for us as livestock
• 18:55
  producers to know what it is and to find ways that we can
• 18:59
  implement it in our operations. Yeah, for sure.
• 19:02
  Don't be afraid to give us a call.
• 19:04
  We'll run through some numbers. We'll kind of talk a little bit
• 19:06
  about it, ask questions. Like I said, there's no stupid
• 19:10
  question, and if there is, I definitely asked Adam or Dan it
• 19:13
  when I first started. So no shame whatsoever.
• 19:17
  Absolutely. I could not agree more.
• 19:19
  Well, Samantha, is there anything else we need to head?
• 19:21
  On before we wrap it up today. I think that's it.
• 19:24
  Awesome. Well, as always, thank you for
• 19:25
  your time To all of our listeners out there, make sure
• 19:27
  you check out the show notes down below and that is going to
• 19:29
  have all of the information where you can get a hold of a
• 19:31
  member of our team. Get those?
• 19:33
  Updated. Quotes for you and what that
• 19:35
  means for your operation. What?
• 19:36
  Works what doesn't? And you can really talk to
• 19:38
  someone. On.
• 19:40
  Figuring out the best fit for your operation and your way of
• 19:44
  running cattle. Samantha, thank you for your
• 19:46
  time and to all of our listeners.
• 19:47
  We will see you all next time. Have a good one.