They will offer livestock producers great flexibility and benefits than other products, says Peter W. Griffin, president of Applied Analytics Group Inc., who spoke at the annual USDA Agricultural Outlook Forum at Arlington, Va. And the new insurance products "have been thoroughly reviewed and well-regulated through the traditional Federal Crop Insurance regulations and institutions, insuring producers fairness and value."
With a strong regulatory structure in place, the market is ready for "even more livestock-related products," he says.
New Livestock Risk Protection (LRP) and Livestock Gross Margin (LGM) insurance programs, launched in July 2002, will likely become "base products" for the next year or two, Griffin says, with the main developments coming in terms of expansion into new commodities and geographical areas. There has already been an expansion of LRP into feeder cattle and fed cattle.
Potential exceeds funding
"The potential for livestock insurance products is larger than the current legislative funding allows," he notes, "but the timeframe for reaching the program’s limits is uncertain. What is certain is that new livestock insurance products are currently being developed and will be submitted to the Risk Management Agency for approval.
"The success of this developing industry will depend as much on developments in the regulation of these products as on the number of products that are developed."
The market for livestock insurance products could ultimately be limited by current government regulation," Griffin says, but while the market is developing, the products have yet to approach funding milestones set by Congress.
"New livestock price and revenue products, such as LRP-Fed Cattle and LRP-Feeder Cattle, have been approved and are being made final. Others will be submitted to the RMA this year for approval."
By the end of 2003, he says, there will likely be at least 16 state/livestock program combinations for livestock price and revenue products.
"The long-term outlook for the livestock insurance market may depend on research projects currently under way. One that has generated tremendous interest in the U.S. and abroad addresses foreign animal diseases for livestock."
The Animal Plant Health Inspection Service (APHIS) is assessing potential for livestock insurance as a risk management tool to work in conjunction with its quarantine and depopulation policies.
"The goal is a more comprehensive program that would combine regulatory indemnification programs with private insurance to protect animal and aquaculture industries from business losses," Griffin says.
Historically, he notes, livestock has accounted for at least 50 percent of the receipts in U.S. agriculture. "But to look at the USDA crop insurance program, you wouldn’t know that livestock was any part of the agricultural community." Livestock insurance was specifically prohibited from being offered in the government program.
The Agricultural Risk Protection Act (ARPA) of 2000 "changed the landscape" for agricultural insurance, Griffin says, by allowing livestock to come under the auspices of the Risk Management Agency.
"RMA gained some responsibility and control over the market’s growth, but the development of livestock products now follows an accepted regulatory structure that protects producers’ interests. The outlook for this new, emerging market is brighter as a result."
In the past, he says, livestock producers indirectly benefited from the RMA program through yield-based programs that covered production risks of their inputs. Other programs were of value to livestock producers who grew their own grains.
Benefit from programs
"The livestock industry has also benefited from programs that support the production of feed grains, since it uses approximately 80 percent of the corn and over 90 percent of the soybean meal produced, as well as 20 percent of the wheat, 55 percent of the sorghum, 65 percent of the barley, and 75 percent of the oats."
There are also yield-based products specific to livestock producers, such as forage production, forage seeding, and rangeland.
ARPA directed RMA to offer livestock products dealing specifically with risk. "The legislative changes occurred after 1998, when it was obvious that livestock producers weren’t managing their price risk," Griffin says.
Estimates are that significantly less than 20 percent of swine and cattle producers use futures or options and "it’s clear that small to medium producers are less likely to do so than large producers. And though many producers have packer contracts, few of those with contracts have true price risk protection."
The new livestock insurance products have received "tremendous support" from producers, producer groups, and politicians, he says, with requests for expansion to new states and development of new products.
"Regulations are developing with this market," Griffin says, "but we can already say that the current guidelines at RMA have yielded tremendous benefits by safeguarding producers’ interests, sanctioning developed products, and instilling confidence into this new market."