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In The Cattle Markets

27 May 2010

US - A weekly review of the cattle market by Dillon M. Feuz, Ph.D., Professor, Department of Applied Economics, Utah State University.

LRP Insurance for Feeder Cattle

The cattle market has seen an increase in price volatility in recent years. This increased volatility translates into greater risk and uncertainty for cattle producers. For a risk seeking individual, more volatility means a possibility of receiving higher returns on his cattle. However, for risk adverse individuals, increased volatility is something to be avoided if at all possible.

Caleb Bott, a graduate student at Utah State University recently completed an analysis of how effective LRP insurance was for cattle producers. He simulated returns for a thousand iterations to see how often the insurance paid out and to determine if most producers would prefer the insurance or would prefer to remain in the cash market. The simulation was based on observed prices for the past 20 years to understand the volatility in the market place. LRP premiums were tracked since the inception of the insurance product. To try and make the simulation as real as possible, not only were cattle prices varied but feed costs were also varied in the analysis.

The results of his analysis were very interesting. He found that on average returns to a backgrounding type program were reduced by $6.50 per head if producers consistently purchased the LRP insurance. When the market price was equal or higher than anticipated, returns were reduced about $13 per head, the price of the insurance. However when prices were lower, returns had the potential of being much higher with the insurance. In some of the worst price wrecks, returns with insurance were more than $150 per head higher than if the producer had remained strictly in the cash market.

So, the decision each producer faces is do they prefer a slightly lower return on average so that they can avoid the large losses or would they prefer a higher average return and know that some years are going to be very profitable and some years they are going to incur large losses. It is likely that each producer will evaluate this decision a little differently. If you have a higher debt load on your operation, you may not be able to tolerate large losses and therefore the insurance may look better to you. Conversely, a producer who has sufficient equity may prefer to take the good and the bad in the market and know that in the long run they will make more money without the insurance. The one thing that we would all like to do, but which I am doubtful any of us can do, is to only insure in years when price will decline and not insure when price will be stable or higher.

Economists and those in the insurance business have tried to group people into categories such as risk averse, risk neutral and risk preferring. Most people tend to fall in the risk averse category, but even this category is really a continuum from slightly risk averse to highly risk averse. Bott also did an analysis to determine the types of producers who may prefer the insurance. He found that those cattle producers who were risk preferring or risk neutral definitely would not purchase the insurance. He also found that producers who were only slightly risk averse probably would also not purchase the insurance. However, he found that as a producers risk aversion moved to moderate or highly risk averse, than they would prefer to buy the LRP insurance. Prior studies of agricultural producers have found that most are in the slight to moderate risk avers category.

If you are interested in more information about LRP insurance I would suggest you visit the following web site: http://livestockinsurance.unl.edu/

The Markets

The fed cattle market was lower this past week. Trade took place throughout the week but was limited in the North. Prices were mostly $97 on a live weight basis and were $154-155 on a dressed basis. Choice boxed beef prices were $2 lower this week. The Choice-Select spread increased but remains narrower then the typical level. Feeder cattle prices were generally lower this past week compared to last week’s prices. Montana prices were $3-5 lower depending upon the weight of feeder cattle. Nebraska prices were $4 lower to $1 higher for 750 and 550 pound steers. Oklahoma prices were $3-6 lower for 750 and 550 pound steers compared to last week. Corn prices were a $.13 lower per bushel than last week. Dried Distillers Grain prices were $2.30 per ton higher and wet distillers grains were priced a little lower in Nebraska for the week.

Data Source: USDA AMS Market News
Week of
5/21/10
Week of
05/14/10
Week of
05/22/09
5-Area Fed Steer all grades, live weight, $/cwt $97.03 $99.88 $85.09
all grades, dressed weight, $/cwt $154.69 $162.12 $136.17
Boxed Beef Choice Price, 600-900 lb., $/cwt $168.19 $170.52 $147.03
Choice-Select Spread, $/cwt $5.30 $4.22 $5.12
700-800 lb. Feeder Steer Price Montana 3-market average, $/cwt $117.25 $120.20 $99.11
Nebraska 7-market average, $/cwt $115.20 $119.69 $102.70
Oklahoma 8-market average, $/cwt $113.90 $116.68 $101.13
500-600 lb. Feeder Steer Price Montana 3-market average, $/cwt $130.37 $135.04 $111.05
Nebraska 7-market average, $/cwt $135.98 $134.83 $119.45
Oklahoma 8-market average, $/cwt $126.48 $132.23 $117.21
Feed Grains Corn, Omaha, NE, $/bu (Thursday) $3.45 $3.58 $4.07
DDGS Price, Nebraska, $/ton $114.30 $112.00 $145.75
WDGS Price, Nebraska, $/ton $35.90 $36.20 $53.25

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