Livestock Risk Protection (LRP) calculator: floor price and premium
Coverage price, net premium after subsidy, and the effective floor.
LRP coverage helper
LRP coverage helper
Livestock Risk Protection: floor price + premium.
Coverage $175.75/cwt · net premium $57.98/head · total $5,798
What price floor does an LRP policy actually give me after the premium?
Livestock Risk Protection is a USDA subsidised insurance product that sets a floor under a price rather than a futures position. It pays if the ending index falls below the coverage price, and it costs a premium whether it pays or not.
The number that matters is not the coverage price but the coverage price less the premium, because that is what the policy is actually worth at the bottom. The subsidy is what makes the gap between the two narrow.
Worked example
- Expected price
- $185 per cwt
- Coverage
- 95%
- Premium rate
- 3.5%
- Subsidy
- 35%
- Weight
- 14.5 cwt per head
- Head
- 100
- Coverage price: $185 × 95% = $175.75 per cwt
- Insured value: $175.75 × 14.5 cwt = $2,548.38 per head
- Gross premium: $2,548.38 × 3.5% = $89.19 per head
- Net premium after subsidy: $89.19 × (1 − 35%) = $57.98 per head
- Premium per cwt: $57.98 ÷ 14.5 = $4.00
- Effective floor: $175.75 − $4.00 = $171.75 per cwt
The policy covers $175.75 but costs $4.00 per hundredweight to hold, so the worst case is $171.75. Across 100 head the premium is $5,798.
How it works
The coverage price is a percentage of an expected ending value published by USDA, not a price chosen freely. Higher coverage costs a higher premium, so raising the coverage level does not raise the effective floor one for one.
The subsidy is the reason this compares favourably with buying a put outright. It scales with the coverage level, and it is deducted before the producer pays rather than reimbursed afterwards. A policy that looks expensive gross can be reasonable net.
LRP settles against a national or regional index rather than against the price actually received, so it does not eliminate basis risk. It sets a floor under the market, not under the cheque. The floor is also per hundredweight, so an animal that finishes heavier than the insured weight has the extra pounds uncovered.
The premium is a sunk cost. If prices rise, the policy expires worthless and the animals are sold at the higher price less the premium already paid. That is the trade: the floor costs something in every outcome where it is not needed.
floor = (expected price × coverage %) − [(expected price × coverage % × weight × premium rate × (1 − subsidy)) ÷ weight]Effective floor by coverage level
Expected price $185, 14.5 cwt, 3.5% premium rate, 35% subsidy. Higher coverage raises the floor but costs more to hold.
| Coverage | Coverage price | Net premium/head | Effective floor |
|---|---|---|---|
| 80% | $148.00 | $48.82 | $144.63 |
| 85% | $157.25 | $51.87 | $153.67 |
| 90% | $166.50 | $54.92 | $162.71 |
| 95% | $175.75 | $57.98 | $171.75 |
| 100% | $185.00 | $61.03 | $180.79 |
Common questions
Does LRP protect my basis?
No. It settles against a published index, so it protects against a fall in the broad market. What an animal actually brings locally can still differ from the index, and that difference is not covered.
What happens if prices go up?
The policy expires without paying and the animals are sold into the higher market. The premium is still owed, so the realised price is the market less the premium. That is the cost of having had the floor.
Is LRP better than buying a put?
They do similar jobs by different means. LRP is subsidised and sold in flexible head counts, which suits smaller lots; a put is not subsidised but is tradeable and can be exited before expiry. Which fits depends on the operation, and it is a question for a broker or crop insurance agent rather than a calculator.
Where do the real premium rates come from?
USDA publishes them daily by coverage level and endorsement length, and they move with market volatility. The rate here is an input so a scenario can be run; an actual quote comes from a crop insurance agent.
Related
This tool is designed to help plan your overall portfolio and is not trading advice. You should carefully consider your portfolio, risk tolerance, and other metrics; Consult with your broker prior to making trading decisions