Timing the Purchase of Livestock Risk Protection Insurance for Feeder Cattle

Livestock Risk Protection Insurance (LRP) is a risk management tool available to cattle producers protecting against price declines. It can be used to establish a price floor much like a put option. The primary difference between put options and LRP is LRP can be purchased for as few as one animal while put options are based on 50,000 pound contracts. Thus, LRP can be utilized by cattle producers of any size. LRP is generally offered five times a week with insurance termination dates ranging from 13 to 52 weeks and coverage levels from 70 to 100 percent. The objective of this research is to determine how far in advance feeder cattle producers should purchase LRP to maximize their expected price received given an expected cattle marketing month. Daily LRP offerings were obtained for 600 to 900 pound feeder cattle in Tennessee from 2007 through 2014. Expected price received is defined as the CME Feeder Cattle Index price plus the indemnity payment less the LRP premium. Data were subjected to a mixed model to determine differences in the expected price received for different coverage periods given an expected cattle marketing month.