Put price protection is often passed up by cow-calf producers due to the high costs of at-the-money (at the futures price) put protection. But spring saw more favorable option premiums, Diersen says. “Before, it would cost $6-$7/cwt. for an at-the-money put, but that’s been much lower this spring.”
In early June, the $150 October at-the-money put had a cost premium of about $4/cwt. That would provide an options floor price of $146, in the event of a big price drop. The anticipated basis of $10-$15 in the fall would keep prices at $155 or above. “Buying put options reduces the risk of prices moving lower, but not the risk of basis narrowing,” Diersen says.
Livestock Risk Protection
Murphy says LRP can provide sound downside risk for the rancher. There are both LRP plans for feeder cattle and fed cattle. Feeder cattle policies insure all feeder cattle weighing up to 900 lb., even heifers and Brahma and dairy breeds. RMA says no more than 1,000 calves can be insured at one time, and a producer is limited to 2,000 cattle in a single year.
A fixed-percentage price adjustment factor is used to adjust the expected ending values and coverage price from standard-weight, beef-breed feeder cattle for various combinations of lightweight heifers or nonbeef breeds.
“With the volatility we see in the market, I’m a real fan of LRP,” Diersen says. “It’s good for a calf crop because you can insure any number of head. It automatically builds in a 10% basis adjustment for beef steer calves.”
Cost of LRP is similar to the cost of put options. Cost will depend on the range of coverage, between 70% and 100%.
After completing the LRP policy application, producers select a coverage price (RMA subsidizes all quoted premiums at a rate of 13%), endorsement length, and the specific number of head and expected target weight of cattle to be sold, says Stan Bevers, Texas A&M AgriLife Extension livestock marketing specialist.
“The coverage price is a percentage of the expected ending value,” Bevers says. “These values and the associated rates are based on the current day’s closing futures prices, volume and volatility, and they correspond to different endorsement lengths.”
Endorsement lengths are in increments of about 30 days, and can range from 13-52 weeks. Bevers says they’re seldom available for more than 34 weeks into the future. If, at the ending date of coverage, the actual end value has dropped below the selected coverage price, the producer can file an indemnity claim within 60 days.