ECON 337:
Agricultural Marketing
Lee Schulz
Assistant Professor
lschulz@iastate.edu
515-294-3356
Econ 337, Spring 2013
Chad Hart
Associate Professor
chart@iastate.edu
515-294-9911
Livestock Price Risk Tools
Livestock Futures and Options
Livestock Revenue Insurance
Livestock Revenue Protection (LRP)
Livestock Gross Margin (LGM)
 http://www.rma.usda.gov/livestock/
Factsheets
Premium calculator
 http://www.extension.iastate.edu/agdm/ldcostsreturns.html
Econ 337, Spring 2013
Livestock Risk Protection (LRP)
Price risk insurance coverage for hogs, fed
cattle, feeder cattle, and lamb
Insurance protects against low livestock
prices
70% to 100% guarantees available for
cattle and hogs, based on CME futures
prices
Econ 337, Spring 2013
Livestock Risk Protection
Coverage is available for up to 26 weeks
for hogs and 52 weeks for cattle
Works sort of like a put option
Premiums are subsidized, the government
pays 13% of the premium
Econ 337, Spring 2013
Livestock Risk Protection
Guarantees available are posted at:
http://www3.rma.usda.gov/apps/livestock_reports/
Posted after the CME closes each day
until 9:00 am Central Time the next
working day
Assures that guarantees reflect the most
recent market movements
Econ 337, Spring 2013
LRP Example
Econ 337, Spring 2013
http://www.extension.iastate.edu/agdm/livestock/pdf/b1-50.pdf
LRP vs. Futures/Options
Futures and options have fixed contract
sizes
Hogs: 400 cwt. or about 150 head
Fed cattle: 400 cwt. or about 32 head
Feeder cattle: 500 cwt., 60-100 head
LRP can be purchased for any number of
head or weight
Econ 337, Spring 2013
LRP vs. Futures/Options
Futures hedge or options can be
offset at any time before the
contract expires
LRP can not be offset, once you
buy the coverage, you’re locked
in
Econ 337, Spring 2013
Livestock Gross Margin (LGM)
 Insures a “margin” between revenue and cost
of major inputs for cattle, hogs, and dairy
 Protects against decreases in cattle/hog prices
and/or increases in input costs
 Hogs
 Value of hog – corn and soybean meal costs
 Cattle
 Value of cattle – feeder cattle and corn costs
 We talked about dairy earlier in the semester
Econ 337, Spring 2013
Livestock Gross Margin
Cattle (coverage for up to a year out)
Calves
Yearlings
Hogs (coverage for up to 6 months out)
Farrow to finish
Finishing feeder pig
Finishing SEW pig
Econ 337, Spring 2013
LGM Guarantees for Hogs
 Farrow to Finish
 Gross margin per hogt =
2.6*0.74*Lean Hog Pricet - 12 bu. * Corn Pricet-3
- (138.55 lb./2000 lb.) * SoyMeal Pricet-3
 Finishing
 Gross margin per hogt =
2.6*0.74*Lean Hog Pricet - 9 bu. * Corn Pricet-2
- (82 lb./2000 lb.) * SoyMeal Pricet-2
 SEW
 Gross margin per hogt =
2.6*0.74*Lean Hog Pricet – 9.05 bu. * Corn Pricet-2
- (91 lb./2000 lb.) * SoyMeal Pricet-2
Econ 337, Spring 2013
LGM Guarantees for Cattle
 Yearlings
 Gross margin per headt =
12.5*Live Cattle Pricet – 7.5*Feeder Cattle Pricet-5
- 50 bu. * Corn Pricet-2
 Calves
 Gross margin per headt =
11.5*Live Cattle Pricet – 5.5*Feeder Cattle Pricet-8
- 52 bu. * Corn Pricet-4
Econ 337, Spring 2013
Livestock Gross Margin
Has deductibles, like car or home
insurance
For cattle, deductibles from $0 to $150
per head by $10 increments
For hogs, deductibles from $0 to $20 per
head by $2 increments
Example premiums available at:
http://www.iaii.us/
Econ 337, Spring 2013
LGM-Swine Farrow-to-Finish,
Feb. 2012
April
May
June
July
August
Gross
Margin
$78.74
$93.20
$91.74
$91.59
$90.59
Lean Hog
Price
$89.88
$98.83
$99.57
$99.66
$99.25
Corn Price
$6.05
$6.22
$6.40
$6.42
$6.43
Soybean
Meal Price
$311.70
$322.15
$332.60
$333.85
$335.10
Econ 337, Spring 2013
LGM Example
Say we insure 100 hogs in April and
choose a $2 deductible
Our LGM policy is protecting us against
gross margins below $76.74 per head
When April comes, the insurance
company will compute the actual margin
using the same formula as was used for
the guarantee
Econ 337, Spring 2013
LGM Example
 If the lean hog price fell to $88 per cwt., the
corn price fell $6.00 per bu., and the soybean
meal price stayed at $311.70 per ton, then the
actual gross margin is
 Actual gross margin per hogt =
2.6*0.74*$88 - 12 bu. * $6.00 - (138.55 lb./2000 lb.) * $311.70
= $75.72 per head
 Per head indemnity = $76.74 - $75.72 = $1.02
Econ 337, Spring 2013
LGM Issues
Only available on the last business
Friday of the month
Is a complicated insurance policy
Works like an Asian basket option
Asian = uses a price average
Basket = covers more than one commodity
Like a put on cattle/hogs and calls on feeder
cattle, corn, and soybean meal
Econ 337, Spring 2013
Who can benefit from
LGM/LRP?
Producers who depend on the daily cash
market or a formula related to it.
Producers with low cash reserves.
Smaller producers who do not have the
volume to use futures contracts or put
options.
Producers who prefer insurance to the
futures market. No margin account.
Econ 337, Spring 2013
Some Risks Remain
LRP, LGM do not insure against
production risks
Futures prices and cash index prices
may differ from local cash prices
(basis risk)
Selling weights and dates may differ
from the guarantees
Econ 337, Spring 2013
Class web site:
http://www.econ.iastate.edu/~chart/Classes/econ337/
Spring2013/
Remember, exam due on Tuesday.
Econ 337, Spring 2013