Subscribe to Our Newsletters
National Hog Farmer is the source for hog production, management and market news
October 30, 2023
Many in the livestock sector have been espousing the benefits of government-sponsored insurance programs over the past several years, and for good reason. Livestock Risk Protection is an insurance product designed to protect against a decline in market price. Livestock Gross Margin for Swine provides protection against the loss of gross margin of swine (market value of livestock minus feed costs).
Both programs have been in existence since 2003 but modifications to the program (highlighted here, here and here) have increased their usage over the past several years. Today, they serve as an important tool in many producers’ risk management arsenal.
The USDA’s Risk Management Agency defines crop years for livestock insurance products as the 12-month period, beginning on July 1 and ending on the following June 30. During the most recently completed crop year, which ended June 30, 2023, more than 14 million pigs were protected with LGM and more than 22 million head of swine were protected with LRP.
Figure 1. Livestock Insurance Participation
The use cases for the programs are relatively straightforward as they are customizable and generally cost effective. LGM is offered once per week and LRP is offered nearly every day.
A primary use case for LRP has been reducing basis risk faced by livestock producers. For example, LRP-Swine settles to the Lean Hog Index. The CME Group offers eight futures contracts per calendar year, seven of which are primarily used by market participants. As such, there are gaps in the year during which there are approximately 60 days between futures expiration dates (mid-December through mid-February, for example). Since LRP settles against the LHI as opposed to futures prices, this makes LRP particularly beneficial when this gap in futures contracts coincides with seasonally weak basis levels, such as the end of the year for hog producers. LRP could also significantly reduce basis risk for animals based off the LHI or if the price discovery for the pigs is very similar.
For these reasons, these tools have become a great supplement to more traditional tools such cash contracts and exchange-traded derivatives such as futures and options for many producers.
In a surprise twist last month, Congress avoided a government shutdown on Oct. 1, by passing a continuing resolution to fund federal agencies through Nov. 17. During shutdowns, many federal employees are told not to report for work.
Since Congress introduced the modern budget process in 1976, there have been 20 “funding gaps” but only four “true” shutdowns where operations were affected for more than one business day. The first two occurred during the Clinton Administration. The third was a 16-day shutdown in 2013. The fourth shutdown occurred in late 2018 and early 2019 and although it lasted 35 days, many government programs continued in what was referred to as a “partial shutdown”. Each federal agency develops its own shutdown plan following guidance released in previous shutdowns and coordinated by the Office of Management and Budget.
While the federal government performs many important functions for the livestock sector, chief among them is Livestock Mandatory Reporting. LMR provides market information regarding livestock sales to packers and the subsequent sale of meat products.
The 2013 shutdown discontinued the publication of this data and the lack of LMR news ultimately led to the suspension of key pricing indices used to settle exchange-traded derivatives to help offset risk. The 2018-19 partial shutdown deemed LMR as an essential activity and data continued to be disseminated, lessening the detrimental impact of the shutdown on livestock producers. The Secretary of Agriculture has the authority to determine which programs continue and which programs cease to operate should funding lapse.
USDA Market News was specifically cited in USDA’s Contingency Plan last month to cease operation if the government were to experience another shutdown this fall. If this came to fruition, it would have been problematic.
NPPC and other trade associations in Washington were on top of the issue and requested Secretary Vilsack to deem LMR essential due to the importance of having timely and accurate market news available to all livestock market participants. While the request appeared to fall on deaf ears, it is nice to know the industry has allies working on the livestock sector’s behalf.
Market News staff provide tremendous value to the livestock world and in recent years, the importance of LMR data has only intensified as the uptake of insurance programs that rely on these data has increased. LRP-Swine settles to the same series used to settle the lean hog futures at the CME, based upon the AMS National Daily Direct Prior Day Slaughtered Swine report. The RMA rulebook states for insurance coverages where the “…end date is a Saturday, Sunday, a non-report day due to a Federal holiday, or if there is no reported information for whatever reason, then the calculation [for actual end value] will be based on the two report days just prior to the end date.” This is troublesome if LMR ceases operations in a shutdown.
As we have witnessed in the hog sector over the years, markets can and do change in a relatively short period of time. In the event of a government shutdown and the disruption of market data from AMS, it stands to reason the actual end value for insurance coverages would be based upon the last two report days prior to the end date.
In the event of a prolonged Federal shutdown, and in the absence of these market reports, severe economic hardship could have catastrophic consequences for livestock producers. This is especially true as we head into a period of the year when lean hog prices seasonally tend to trend lower, as you can see below. If cash markets fall during a shutdown, the price protection producers thought they had in place through tools such as LRP may not truly and accurately indemnify them for the actual deterioration in the cash market.
Figure 2. February Lean Hog 10-Year Seasonal
The purpose of risk management is to align tools to offset the actual risk faced by producers. Failure to allow for LRP to settle to actual cash values at the time animals are sold and instead settle against a cash price published days or even weeks beforehand is burdensome and potentially costly for farmers.
The best-case scenario would involve USDA updating their contingency plan to allow for USDA Market News to continue the important work they do on behalf of market stakeholders, thus allowing a relatively uninterrupted flow of information and commerce. This is not unprecedented and was the exact course of action taken during the 35-day shutdown in 2018-19.
In the event USDA determines LMR should cease to operate in a shutdown, it is critically important to retroactively backfill the data to allow farmers to be indemnified based upon the true end value at the end of their coverage periods. Hog farmers (and cattle producers, for that matter) across the country should not unduly suffer because of Congressional inaction largely out of their control. We will be sending a letter to Secretary Vilsack respectfully requesting USDA take an approach like the last partial shutdown that allows for equal access to this timely, trustworthy and important data for all market participants.
If you are also concerned about the possibility of losing access to an important and timely component of the insurance settlement process, contact your Representative and Senators and let them know to pass your concerns on to USDA. It is not too late for modifications to be made to the USDA Contingency Plan.
While it may be an uphill battle, if we all work together we know there is still time for Secretary Vilsack to do what is right and exempt Market News staff from furlough in the event of a government shutdown.
Trading futures and options carries a risk of loss. Past performance is not indicative of future results. Insurance coverage cannot be bound or changed via phone or email. CIH is an equal opportunity employer and provider.
You May Also Like
Current Conditions for
Enter a zip code to see the weather conditions for a different location.
Chinn honored with Missouri Pork Chairman’s AwardFeb 25, 2024
Labor Dept. seeks injunction against meat plant janitorial companyFeb 25, 2024
This Week in Agribusiness, Feb. 24, 2024Feb 24, 2024
International consumer key to future of US pork industryFeb 23, 2024