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Department of Agricultural Economics

Ifft Releases Series on Price Risk Management Strategies for Cow-Calf Producers

Jennifer IfftFarmers and ranchers face risk each day. Finding strategies to mitigate risk is necessary to be successful.  Dr. Jennifer Ifft, associate professor of agricultural economics, recently released a nine-part series and historic performance decision aid about price risk management considerations and strategies for cow-calf producers.

Cow-calf producers with limited experience hedging, and producers who are interested in learning more about Livestock Risk Protection (LRP), including cow-calf producers with hedging experience and stockers and feedlot operators, will find helpful insights in the series.

“In today’s volatile commodity markets, price risk management is as important as ever. Cow-calf producers historically have had limited options for formal price risk management. Livestock Risk Protection (LRP) is a livestock insurance product that has been available for two decades, but recent policy changes make it more affordable to producers. LRP makes payments when national prices drop below the producer-selected coverage price,” Ifft said.

The purpose of this series was twofold: (1) to help cow-calf producers assess whether LRP might be a good fit for their operation or if they want to learn more, and (2) increase awareness of key policy characteristics and decisions for producers that are interested in LRP. Given that cow-calf producers, especially small and midsize operations, may have limited experience with hedging, which LRP is similar to, this series was designed to provide a gradual introduction to LRP.  

“The series begins with key price risk management concepts and practices before presenting policy details. The series concludes with a discussion of how LRP would have performed historically for Kansas cow-calf producers,” she said.

Ifft says there are three main take aways from the series, “LRP is very similar to a put option but is more affordable and small-producer friendly. A producer can enroll anywhere from 1 to 6,000 head of cattle (feeder or fed) in a single policy (endorsement) and premiums are not due until the end of the coverage period (usually after cattle would be sold).”  Another takeaway is that, “LRP is designed to replace the income that is lost due to unexpected price declines. The producer must select a coverage price, or the level to which prices must drop for an LRP payout to be triggered.” Her final takeaway is, “Like other Federal crop and livestock insurance products, LRP is designed so the producer comes out ahead in the long run. In other words, producers are more likely than not to receive more in payouts than they pay in premiums in the long run.  The key phrase here is the long run: several years can pass without a payout. Having a long-term perspective and understanding how LRP works as insurance against price declines can help producer decide whether LRP is a good choice for their operation.”

The series of articles can be found at https://www.agmanager.info/crop-insurance/livestock-insurance-papers-and-information/price-risk-management-cow-calf-producers.