Disclaimer: This web page is designed to aid farmers with their marketing and risk management decisions. The risk of loss in trading futures, options, forward contracts, and hedge-to-arrive can be substantial and no warranty is given or implied by the author or any other party. Each farmer must consider whether such marketing strategies are appropriate for his or her situation. This web page does not represent the views of Kansas State University. 
Disclosure:  Dr. Barnaby’s research was the basis for the privately developed Crop Revenue Coverage.

Dear Art,

Recently read your comments about LRP and LGM. Just a comment from us, we are not sure how many companies are going to be willing to write LRP (Livestock Risk Protection) and LGM (Livestock Gross Margin) at their own risk unless changes are made to the policy. No reinsurance, no subsidy and no A&O (Administrative and Operating subsidy), according to the RMA website.

Insurance Company Executive

Dear Executive,

When one first reads the press release and other documents on the RMA WEB site, it might be easy to reach that conclusion. This is mostly a legal issue that is tied to the contract cancellation date.

Pulling of the reinsurance was a way to get around the legal requirement that implementation of insurance policy changes must be completed prior to the contract change date. There was not enough time to make these Board required underwriting changes to LRP and LGM before the contract change date, April 30, 2004. Therefore, if RMA had not moved to withdraw the reinsurance, RMA could not have made contract changes until next year’s contract change date, April 30, 2005. The earliest restart date would have been July 1, 2005. Because RMA withdrew the reinsurance they will be able to restart LRP and LGM this year.

So this is good news for livestock producers that want to buy LRP. This change will allow the LRP and LGM contracts to be offered this year, 2004.

Once LRP and LGM are reintroduced with the new underwriting rules, it is expected RMA will offer these products with reinsurance, subsidy, and A&O. Some are guessing July, but in the RMA press release they are saying “fall”.

The press release does state companies could sell LRP at their own risk now. If companies want reinsurance, farmer premium subsidy, and A&O they will need to wait until the product is released by RMA, this summer or fall.

If there is no reinsurance then the answer is zero companies will write LRP. If there is no subsidy or A&O, then Livestock producers will not want to buy LRP or LGM because of the premium costs. Therefore, there will be no LRP or LGM sales until RMA makes the contract changes and reintroduces these products with subsidies.

Additional language will be added to the LGM policy prohibiting the insured (livestock producer) from having offsetting positions on any board of trade. This language is already in the LRP contract.

As previously stated, there are conditions when livestock producers following these rules will put themselves into a speculative position. If they make the necessary moves on the Board to remain in a hedge position they may violate the underwriting rules in LRP or LGM.

For example, if producers sell their cattle 30 days before the LRP expires, they are in a speculative position because they no longer hold the cash position. If these producers had bought puts they could liquidate their puts at the same time they sell the cash asset, i.e. their cattle. If they have an LRP that expires in 30 days, they could maintain the hedge position by taking the long position on futures, buying calls, or writing puts. The economic effect caused by these Board positions is to “liquidate” the LRP that expires in 30 days on the same day as they made their cash cattle sale.

It is really unclear how the USDA will check futures trades to determine if an LRP insured livestock producer has violated the underwriting rule prohibiting the insured (livestock producer) from having an “offsetting position on any board of trade”. This underwriting rule does nothing to change underwriting gains/loses on the LRP but does limit its usefulness to livestock producers. Unless the livestock producer has LRP coverage on all of their cattle, it is also unclear how these rules on board positions would apply to the uninsured cattle. Also it is unclear why a livestock producer would be prevented from opening a speculative trading account and assuming any futures position (speculative futures accounts require larger margins than hedge accounts).

Contract Cancellation Notice. What this means for current LRP insured livestock producers is they will receive a contract cancellation notice from their insurance company. If these livestock producers want to buy the new LRP when it is reintroduced, they will have to file for a new policy with their insurance agent. So there is a little more “paper work” but otherwise the cancellation notice will have little impact on insured livestock producers.

Current LRP and LGM contracts held by livestock producers will remain in force and producers will collect any indemnity payments that result from declining prices. Current markets suggest little chance there will be any indemnities paid on LPR feeder cattle contracts but RMA\insurance companies will retain the premium.

ART

[1]Prepared by G. A. (Art) Barnaby, Jr., Professor, Department of Agricultural Economics, K-State Research and Extension, Kansas State University, Manhattan, KS 66506, April 16, 2004, Phone 785-532-1515, e-mail – abarnaby@agecon.ksu.edu.