; Price Risk Management for Cattle Feeders: What is the Potential of LRP? | Conferences | AgRisk Library


Conference Name Price Risk Management for Cattle Feeders: What is the Potential of LRP?

James Hilker


Fed cattle price volatility although always significant, has been at record levels over the last three years. RMA / USDA facilitated the introduction of LRP, a price insurance instrument, to be used in the management of net revenue risk. Following initial pilot testing, LRP has become available in a number of additional states including Michigan and Ohio. The poster describes the LRP presentation at the four state (Illinois, Michigan, Ohio, Ontario) Professional Cattle Feeder’s Short Course workshops in February 2005.

The presentation and discussion focused on assessing the potential of LRP in transferring price risk. The approach focused on assessing the size of the Five Area verses Michigan farm price basis variation, farm price variation, and the relative size of basis to farm price variation. One of the points of reference was sales materials, made available by insurance providers. Sometimes the materials did not discuss basis risk – a key issue in the decision of whether an option on an index contract will transfer significant risk. A second point of departure was the development of practical procedures to assess basis and market price risk. This included working with farmers to assemble a data base, for different types of cattle and feeding programs to establish basis risk by relating this information to publicly available price series for the Eastern Corn Belt. Third, drawing on educational programming on GRP, an approach was developed to describe risk transfer under different circumstances.