econ 337: agricultural marketing

Econ 337, Spring 2012

ECON 337:Agricultural Marketing

Chad HartAssistant [email protected]


Livestock Price Risk ToolsLivestock Futures and Options

Livestock Revenue InsuranceLivestock Revenue Protection (LRP)Livestock Gross Margin (LGM)http://www.rma.usda.gov/livestock/

FactsheetsPremium calculator

http://www.extension.iastate.edu/agdm/ldcostsreturns.html


Livestock Risk Protection (LRP)Price risk insurance coverage for hogs, fed

cattle, feeder cattle, and lamb

Insurance protects against low livestock prices

70% to 100% guarantees available for cattle and hogs, based on CME futures prices


Livestock Risk ProtectionCoverage is available for up to 26 weeks for

hogs and 52 weeks for cattle

Works sort of like a put option

Premiums are subsidized, the government pays 13% of the premium


Livestock Risk ProtectionGuarantees available are posted at:

http://www3.rma.usda.gov/apps/livestock_reports/

Posted after the CME closes each day until 9:00 am Central Time the next working day

Assures that guarantees reflect the most recent market movements


LRP Example

http://www.extension.iastate.edu/agdm/livestock/pdf/b1-50.pdf


LRP vs. Futures/OptionsFutures and options have fixed contract

sizesHogs: 400 cwt. or about 150 headFed cattle: 400 cwt. or about 32 headFeeder cattle: 500 cwt., 60-100 head

LRP can be purchased for any number of head or weight


LRP vs. Futures/Options

Futures hedge or options can be offset at any time before the contract expires

LRP can not be offset, once you buy the coverage, you’re locked in


Livestock Gross Margin (LGM) Insures a “margin” between revenue and cost

of major inputs for cattle, hogs, and dairy Protects against decreases in cattle/hog prices

and/or increases in input costs Hogs

Value of hog – corn and soybean meal costs

CattleValue of cattle – feeder cattle and corn costs

We’ll talk about dairy later in the semester


Livestock Gross MarginCattle (coverage for up to a year out)

CalvesYearlings

Hogs (coverage for up to 6 months out)Farrow to finishFinishing feeder pigFinishing SEW pig


LGM Guarantees for Hogs Farrow to Finish Gross margin per hogt =

2.6*0.74*Lean Hog Pricet - 12 bu. * Corn Pricet-3

- (138.55 lb./2000 lb.) * SoyMeal Pricet-3

Finishing Gross margin per hogt =

2.6*0.74*Lean Hog Pricet - 9 bu. * Corn Pricet-2

- (82 lb./2000 lb.) * SoyMeal Pricet-2

SEW Gross margin per hogt =

2.6*0.74*Lean Hog Pricet – 9.05 bu. * Corn Pricet-2

- (91 lb./2000 lb.) * SoyMeal Pricet-2


LGM Guarantees for Cattle Yearlings

Gross margin per headt = 12.5*Live Cattle Pricet – 7.5*Feeder Cattle Pricet-5

- 50 bu. * Corn Pricet-2

Calves

Gross margin per headt = 11.5*Live Cattle Pricet – 5.5*Feeder Cattle Pricet-8

- 52 bu. * Corn Pricet-4


Livestock Gross MarginHas deductibles, like car or home

insuranceFor cattle, deductibles from $0 to $150

per head by $10 incrementsFor hogs, deductibles from $0 to $20 per

head by $2 increments


LGM-Swine Farrow-to-Finish, Feb. 2012

April May June July August

Gross Margin

$78.74 $93.20 $91.74 $91.59 $90.59

Lean Hog Price

$89.88 $98.83 $99.57 $99.66 $99.25

Corn Price $6.05 $6.22 $6.40 $6.42 $6.43

Soybean Meal Price

$311.70 $322.15 $332.60 $333.85 $335.10


LGM ExampleSay we insure 100 hogs in April and

choose a $2 deductibleOur LGM policy is protecting us against

gross margins below $76.74 per headWhen April comes, the insurance

company will compute the actual margin using the same formula as was used for the guarantee


LGM Example If the lean hog price fell to $88 per cwt., the

corn price fell $6.00 per bu., and the soybean meal price stayed at $311.70 per ton, then the actual gross margin is

Actual gross margin per hogt =

2.6*0.74*$88 - 12 bu. * $6.00 - (138.55 lb./2000 lb.) * $311.70

= $75.72 per head

Per head indemnity = $76.74 - $75.72 = $1.02


LGM IssuesOnly available on the last business

Friday of the monthIs a complicated insurance policyWorks like an Asian basket option

Asian = uses a price averageBasket = covers more than one commodityLike a put on cattle/hogs and calls on feeder

cattle, corn, and soybean meal


Who can benefit from LGM/LRP?

Producers who depend on the daily cash market or a formula related to it.

Producers with low cash reserves.Smaller producers who do not have the

volume to use futures contracts or put options.

Producers who prefer insurance to the futures market. No margin account.


Some Risks RemainLRP, LGM do not insure against

production risksFutures prices and cash index prices

may differ from local cash prices (basis risk)

Selling weights and dates may differ from the guarantees


Class web site:http://www.econ.iastate.edu/~chart/Classes/econ337/Spring2012/

Have a great weekend!

econ 337: agricultural marketing

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