By: William Thompson, Reid Redden and David Anderson
USDA’s Risk Management Agency (RMA) reintroduced its federally subsidized Livestock Risk Protection-Lamb (LRP-Lamb) insurance in May of 2015. This program was originally made available to lamb producers in September of 2007. In February of 2014 sales of LRP-Lamb were temporarily suspended while RMA revised the program. The LRP-Lamb insurance program is now available to lamb producers in 28 states (see Figure 1) to insure against unexpected declines in Lamb market prices.
While the LRP-Lamb program’s price protection is centered around slaughter lamb prices, the program covers both lambs that are sold directly off pasture or finished in a feedlot. Policies may be purchased weekly (on Monday only, 10:00 a.m. through 7:00 p.m. CST). Premium rates, coverage prices, and actual ending values are posted online weekly.
The LRP-Lamb insurance contract does not guarantee the producer a cash price, but insures against a decline in national slaughter lamb prices below an established coverage price. USDA-RMA uses prices established each Friday in the Agricultural Marketing Service (AMS) National Weekly Slaughter Sheep report to predict the expected price of lambs 13, 26, and 39 weeks in the future. If at the end date of coverage, actual ending values based upon the weekly average prices for “Formula Live Lambs” are less than the selected coverage price, producers will have 60 days to file an indemnity claim. Coverage is purchased on a specific number of head, with a target weight per head identified by the producer.
It is crucial for producers to understand that the ending value of the LRP-Lamb contract is not the cash price received when the lambs are sold. The actual ending values are based upon the weekly average prices using the “calculated Formula Live Price,” as reported by the AMS.
How LRP-Lamb Works
A producer must submit an LRP policy application through an authorized crop or livestock insurance vendor. Insurance vendors must have completed an RMA training program to become an authorized vendor. The application process establishes a producer’s eligibility by documenting his or her substantial beneficial interest in the sheep. A producer with a partial interest in a group of lambs may independently insure his or her portion. After completing the policy application, producers select a coverage price and endorsement length that meets their risk management objectives. Table 1 lists several key RMA and AMS Web sites where data necessary to evaluate your LRP options can be found.
LRP coverage does not begin until a Specific Coverage Endorsement (SCE) is submitted and accepted by RMA. The submission of the SCE to the RMA is done online after the application has been accepted. The SCE specifies the elected coverage price, specific number of head covered, expected selling weight of the animals, and the length of coverage. Once the SCE is accepted, the insurance policy is in place and a premium is due. If at the end date of coverage, the Actual End Value has dropped below the selected coverage price, the producer can claim an indemnity. The indemnity is paid whether or not the lambs were sold by the ending date of coverage. However, selling the lambs more than 30 days before the end of the coverage terminates the policy unless the insurance provider has specifically approved the sale. Lambs seized, quarantined, destroyed or not salable because of death or disease are still covered by the policy if written notice of the circumstances is provided within 72 hours.
Endorsement lengths should be selected based on normal flock management practices and rates. For instance, the 13-week endorsement is best suited for producers that plan to market lambs in 3 months or 13 weeks. This plan could be purchased just after lambing for producers that market a light slaughter or feeder lamb. Also, 13-week endorsement could be purchased on lambs that are near weaning and the producer plans to retain ownership in a backgrounding or finishing program. At the end of the endorsement period, lambs do not have to be sold. If the market is right, a producer might see the need to put the lambs on a new SCE for an additional 13 weeks at a new weight range. The 26-week and 39-week endorsement provides ranchers with options based on different management practices both on the ranch and within a feedlot setting. This program is not designed, nor should be used in a manner that alters normal management practices. For instance, lambs in the feedlot that will be ready for market in 3 months should not be put on a 26 or 39 week endorsement plan that requires them to be fed beyond ideal market weights. LRP-Lamb premiums and subsidy levels rates increase as the endorsement length increases. (See Table 2)
Coverage levels range from 80 to 95 percent of expected end value. The cost of this price insurance decreases sharply for each five percent drop in coverage level. Producers that want the most coverage normally purchase the 95 percent coverage; however, the 95 percent coverage is also the most expensive option. Producers should decide on coverage level based on their goals to protect themselves against small or large drops in the market.
LRP-Lamb policies insure lambs weighing between 50 and 150 pounds by the ending date of coverage. These lambs must also be of an age that qualifies for the Agricultural Marketing Service grade standard definition of live lambs. As with all LRP products that are available to livestock producers, the LRP-Lamb premiums are subsidized by USDA. When LRP-Lamb policies were reintroduced in May 2015 subsidy levels were based on endorsement length. Table 2 lists all of the contract specifics for LRP-Lamb policies.
Working through an example may be the best way to illustrate the calculations of coverage, net producer premiums, and indemnities.
Example 1: LRP-Lamb for a West Texas Ewe/Lamb Producer
In early May, a West Texas ewe/lamb producer is buying LRP-Lamb coverage on lambs he just finished lambing and he is planning to market in the fall as slaughter lambs. This producer runs 1,500 ewes and typically sends a 95 percent lamb crop to the feedlot each year. This rancher weans his lambs in August and moves the lambs to a commercial feedlot in the Concho Valley. He expects his lambs to weigh 120 pounds when marketed in November. Coverage will be purchased on all of the lambs sent to the feedlot. This producer has no partners and owns 100 percent of the ewes and lambs. This rancher will use actuarial data from the RMA on May 4, 2015 which is shown in Table 3.
Insured Value and Premium Calculations
Assume that on the end date of coverage (November 2, 2015 in our example) the actual end value or “Formula Live Lamb” price dropped to $119.50 per hundredweight. Since this is less that the selected coverage price of $122.927 per hundredweight, an indemnity of $3.427 per hundredweight ($122.927 – $119.5 = $3.427) is due. The Indemnity is calculated using the same head number and target weight data used to calculate insured value and premiums.
- Indemnity = Number of Head multiplied by the Target Weight (live weight in cwt.) multiplied by the Coverage Price less Actual Ending Value multiplied by the Ownership Share.
In this example the producer would file for an indemnity of $5,860 or $4.11 per lamb. The net return per lamb for the coverage in this instance would be $2.52 per lamb ($4.11 – $1.59 = $2.52)
Other LRP-Lamb Uses
LRP-Lamb utilizes an expected (Expected End Value) or a calculated slaughter lamb price (Actual Ending Value) in all LRP calculations. This program targets traditional slaughter lambs that average 140 pounds live weight. Lamb producers that sell feeder lambs or who sell their lambs into non-traditional market channels likely market lighter lambs at higher per hundredweight prices than traditional lambs. Despite these differences, producers selling younger and/ or lighter lambs can use LRP-Lamb on the premise that prices for the lighter lambs will move somewhat consistently with slaughter lamb prices.
Other LRP-Lamb Considerations
One of the issues with LRP-Lamb has been weeks when the policy is not offered. Policies are available on Mondays based on the previous Friday’s Formula Live Price. Policies are not available if the date used in determining coverage prices or rates is a federal holiday, if the RMA website or their premium calculators are not operational, or if sales are halted by the FCIC.
Coverage is not available if any of the required data for establishing coverage prices or rates is not available.
LRP-Lamb was only offered eight of the 52 weeks in 2016 because required data for establishing coverage prices and rates was not available. USDA’s Agricultural Marketing Service does not report the lamb prices from producer owned cooperative packing plants. AMS has defined producer’s lambs that might be delivered and slaughtered by a producer owned cooperative as being “packer owned” lambs and, therefore not reportable. Often, the few remaining lamb sales are also not reported due to confidentiality issues. As a result of these issues, LRP-Lamb was frequently not available as a risk management tool to lamb producers.
LRP-Lamb is the only nationally recognized price risk management tool available to US sheep producers. This federally subsidized program provides a tool that any sheep producer can use to help protect themselves from drops in the lamb market. This is not an insurance program for actual lamb sales but rather a drop in the national lamb industry. LRP-Lamb provides insurance plans based on 13-, 26-, and 39-week expected lamb values. Producers should contact an authorized livestock insurance agent to purchase a LRP-Lamb insurance plan.
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