Between the pandemic and drought, the livestock industry is in an especially trying season of unpredictability. With so many unknowns at play, insurance programs for pasture, rangeland and forage (PRF) and livestock risk protection (LRP) can be helpful for mitigating future pitfalls.
Alex Anaya, insurance advisor for Ag Risk Advisors, explains more about these policies and their range of benefits.
Protect your land
PRF insurance offers protection against forage loss from lack of precipitation on land used for grazing or haying. Growers with perennial or haying ground qualify for the program, and it can help with increased feed costs, destocking, depopulating or other losses that occur because of prolonged dry periods. The program is centered around the National Oceanic and Atmospheric Administration (NOAA) Climate Prediction Center’s rainfall index, established in 1948, which uses data from hundreds of certified rain stations across the country.
“The rainfall index uses a 74-year average,” Anaya says. “It’s a grid structure, and they’re able to break the country down into squares that are fifteen by fifteen miles on average. By utilizing the historic daily average rainfall, we determine in a 60-day period what your average rainfall is and what your actual rainfall is.”
Rainfall information comes into play when determining indemnity payments. Based on the grid structure, producers with a PRF policy can choose a coverage level that suits them best. Coverage can go as low as 70% or as high as 90%, which means you can insure anywhere from 70% to 90% of your average rainfall. Any rainfall lower than 70% triggers an indemnity payment.
Anaya explains, “For example, you have to receive at least 0.89 inches or less if you’re insured for an inch. You have to be lower than 90% of your average moisture to trigger a payout.”
With drought conditions being severe through much of cattle country, PRF insurance is a great option for producers to hedge against Mother Nature.
Producers select time intervals for when they believe they’re at the most risk for dry periods, with the help of their insurance agency.
“The PRF program is broken into 60-day intervals across a whole year. There are very few guidelines for the program, but you have to be insured for a minimum of two of these intervals. You can also be insured for a maximum of six,” Anaya says.
Combined with the index’s historic rainfall data, Ag Risk Advisors uses a proprietary software that analyzes each interval across a period of years. This technology simulates hundreds of thousands of different scenarios and finds the best interval for producers to select coverage.
At the end of the day, Anaya believes anyone with perennial hay or pasture ground will benefit from PRF insurance. Since PRF policies are subsidized by the USDA, he often works with ranchers who perceive the policy as a handout.
“Ranchers pride themselves on building a legacy. They hear about these programs and it’s a big turn-off, but they’re not a handout by any means.”
Read more about PRF insurance from USDA’s website here. You can also learn about the insurance option through Ag Risk Advisor’s website here.
Protect your livestock
LRP insurance was created to safeguard against volatile cattle market prices. It grants producers the ability to “lock in” a floor price for their cattle, no matter the market prices in the future.
“The initial lock-in price is based on the CME cattle futures price. If you want to hedge at all, you’re doing it based on the CME board,” Anaya says. “On a specific date that a producer chooses, if the market index price is lower than the CME feeder cattle futures, it will trigger an indemnity payment for the difference.”
Cattle producers can select a minimum contract of 13 weeks, up to a maximum 52 weeks. The program is based on a per-head basis. Producers may choose coverage prices from 70% to 100% of their expected ending value. There is even price protection on unborn calves, or how many head are expected to be born on an operation.
Anaya says, “This is very beneficial. If a producer expects to have 200 head of calves born, they can determine and set a floor price on that 200.”
LRP is especially helpful in times of drought. As Anaya explains, the market becomes more volatile as more calves are sold quickly. “With LRP insurance, you can secure a high price for your calves when the market is high, and if it tanks, you’ll receive an indemnity payment for the difference.”
Producers can opt for price protection for calves, steers or heifers, all of which are divided into two weight categories.
“Whether you’re a feeder or cow-calf operation, or if you have livestock at all, you should consider an LRP policy,” Anaya says. “It’s plan B. You can have it and never use it, or you’ll use it all the time. But it’s smart to have.”
Visit USDA’s fact sheet on LRP insurance for feeder cattle here, or for fed cattle here. You can also learn more about the insurance option through Ag Risk Advisor’s website here.
AgRisk Advisors provide risk management solutions for food and fiber producers.