MITCHELL, S.D. -- Most grain farmers are well-versed in utilizing crop insurance to protect their financial investment in growing crops as noted by the high percentage of acres covered in South Dakota.
February is a key month in determining price coverage for the upcoming growing season, and March 15 is the deadline for purchasing your policies. For livestock producers, there is an insurance product available which can provide against a decline in prices, but it does not appear to be as widely popular as the crop program. Given the extreme volatility and historically high prices for cattle and hogs, I would encourage producers to explore all available tools to better manage risk.
Livestock Risk Protection has been around for several years and is only available to producers who own the livestock. Once a policy is purchased, it remains in force for the duration of the term selected which is different than using future and/or option contracts that can be bought and sold at any time.
The premiums depend on the futures market prices, and therefore change daily. Much like crop insurance, there are different coverage levels, ranging from 70 to 95 percent of expected ending price. The premiums are established after the Chicago Mercantile Exchange market closes for the day, and those rates are available until the next business day at 9 a.m.
One important fact to consider is these policies only provide protection against an overall drop in market prices. You are not "locking in" the actual selling price of your animals, because the settlement value is based on the weighted average price index as reported by USDA's Agricultural Marketing Service.
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This concept is similar to using the spring and fall prices for determining revenue losses in the crop insurance program. In other words, both livestock and crop insurance policies do not factor in local basis. Not all crop insurance agencies carry this coverage, but they should be able to refer you to an agent who issues these policies, and I think this would be a good risk management tool for producers.
Remember, as in most insurance products, it is in your best interest not to collect an indemnity on the policy, because that means you have incurred a loss. Although cattle prices have witnessed a sharp drop during the last three months, they still remain at relatively lofty levels. Hog prices, on the other hand, have experienced a steady, steep decline since mid-2014.
Editor's note: Meland is a farm business management instructor at the Mitchell (S.D.) Technical Institute.
