Higher Guarantees, Lower Rates for Livestock Gross Margin Policy

Chad Hart, Center for Agricultural and Rural Development (CARD), (515) 294-9911
Sandy Clarke, CARD Communications, (515) 294-6257

January 14, 2003

AMES, Iowa – Quotes just released for spring Livestock Gross Margin (LGM) insurance should make the product more appealing to pork producers, says an Iowa State University agricultural economist.

Chad Hart with the ISU Center for Agricultural and Rural Development (CARD) said the new LGM rates for the six-month period beginning Jan. 31 signal a more positive outlook on U.S. futures and options markets for Iowa hog producers.

Hart, Bruce Babcock, and Dermot Hayes, agricultural economists who conduct research on risk management policy at CARD, helped develop the LGM policy. The program provides Iowa pork producers with an insurance option that bundles hog prices and feed costs when determining a potential market loss.

The Federal Crop Insurance Corporation of the U.S. Department of Agriculture backs the LGM insurance policy. LGM insurance offers Iowa pork producers a tool to insure against a loss in revenue. Under the policy, an indemnity is paid if the actual gross margin between pork prices and feed prices during the month the hog is sold is less than the margin guarantee.

Hart said gross margin guarantees for the spring are much higher than for the fall sign-up period and premium rates per animal are lower. The new rates allow Iowa pork producers to lock in a guarantee of approximately $75 for every slaughter hog bound for the market between Feb. 1 and July 31 at a cost of about $5.50 per animal. This compares with a guarantee of $50 at a cost of $5.80 for the preceding period.

Guarantees and premium rates vary with the number of hogs insured and the timing of the sales. Lower guarantees and premium rates are possible.

"LGM uses average futures prices for hogs, corn and soybean meal to set the insurable gross margins," said Hart. "The average hog futures prices are significantly higher for the spring period than they were during the fall. The higher gross margins, combined with the ability to tailor price protection for any size of operation, should make LGM insurance appealing to Iowa hog producers."

LGM insurance is available from authorized crop insurance agents. More information about the policy is available at http://www.rma.usda.gov/policies/2003LGM.html.