AoR 101: John Nalivka on Reducing Cattle Marketing Risks

 

>> Welcome to the Art of Range, a podcast focused on rangelands and the people who manage them. I'm your host, Tip Hudson, range and livestock specialist with Washington State University Extension. The goal of this podcast is education and conservation through conversation. Find us online at artofrange.com. Welcome back to the Art of Range. We're going to talk some more about livestock risk protection insurance with Jack Field. Jack is a rep with CKP Insurance and a licensed dealer for the LRP products. And I'm also joined again today by Clay Worden who was a financial adviser to ag producers working nationwide. My job here is to ask the dumb questions. And I've asked Clay to ask some smart questions. Jack and Clay, welcome back.

>> Thank you for having us, Tip.

>> Appreciate it, Tip. Look forward to being part of it.

>> While we're stillin this series on ranch financial health and in the role of some of these insurance products as a risk management measure then in fact, the LRP insurance which has been around for a while is offered through the USDA Risk Management Agency. And on their information, they call it single peril insurance, which I take to mean it's meant to do one thing which is providing protection against a price crash, in this case in feeder cattle. And I realized that we've talked about LRP a few times on here. And so, this won't be new for many people but there are an awful lot of people who are just becoming aware of LRP maybe because their neighbor had an endorsement on, you know, whatever, 100 head and it worked for them. And it's always -- anytime is a good time to review fundamentals. So, we're going to jump in and just kind of cover some of the -- I'd like to review some of the history of LRP and then we're going to spend most of our time discussing how it works. Jack, it was actually Lindell Hobbs [assumed spelling] a couple of days ago who was visiting with me and this was a revelation to him that there was a product like this. I think he knew somebody here in the valley who had used LRP and it worked and it got his attention. So, that's a pretty significant thing if Lindell is paying attention.

>> Yes, sir. The beauty of the Livestock Risk Protection program, Tip, is that it provides producers of all sizes the same access to high-quality risk protection. And when we talk about risk protection, the single peril that a producer, i.e. the insured would be insuring against is a reduction in price. So, we are purchasing and basically placing a price floor under your feeder calves. To back up a little bit, the Livestock Risk Protection program offers similar protection as to what a producer might see using a put or an option. Only, we don't have to deal with any of the issues like margin calls when we start to dabble in the CME. The Livestock Risk Protection program, each day, USDA will send out a variety of different offerings. And each offering, the shortest endorsement that a producer can purchase when you take out coverage, you are purchasing a specific coverage endorsement, an SCE. I guess to backup first, the very first step any producer would want to do if he or she is interested or an entity is interested in covering and protecting their cattle, they would need to meet with a licensed crop insurance agent and an individual that's licensed to sell livestock policies and fill out an application. Filling out an application does not obligate the individual or the entity to purchase anything. It simply gets them set up and established within the carrier in USDA system. It generally takes one to two days from the time an application is filled out. And it's then keyed in and submitted to the USDA for the tax identification numbers to be validated and cleared. Once that happens, the producer is then eligible to purchase coverage. When we -- so we get through step one and we'll use you as the example, Tip. If you and I will work, you would come to me and said, "Jack, I'm interested in LRP. What do we need to do?" You'd fill out that application. And once I get word back from the carrier that you are cleared and good to go, I'd let you know, "OK, Tip, anytime from now forward, if you see offerings that you're interested in, we can move forward and get you some coverage. Each day --

>> Now, I told you, I'm going to ask some dumb questions.

>> Absolutely.

>> Is the carrier RMA? Or is the carrier your CKP Insurance?

>> The CKP Insurance is an agency. We work -- Hudson Crop is the carrier that we work with. They underwrite Livestock Risk Protection, dairy margin, livestock gross margin products. So, we work with an approved vendor, Hudson Crop Insurance. And there are many other entities out there that are approved from USDA to underwrite these products.CKP Insurance and myself as an agent, we're essentially just working, offering the product to you, the producer on behalf of the carrier.

>> OK.

>> Then the carriers are approved through the USDA Risk Management Agency. So, that's kind of how that works. This is part of the Federal Crop Insurance Program. And as a result, there is a premium subsidy. So, basically what that means, there is up to, depending upon the coverage level that a producer selects, a 35% premium subsidy, i.e. rebate that comes out of the Farm Bill.So, depending upon the coverage level that a producer would select, you may realize up to a 35% reduction in the total premium cost based on that Farm Bill match.

>> Got it. So in big picture terms, the government has determined that reducing risk and protecting agricultural finances is a public good that the federal government's willing to spend money on. And so there's -- that's what's providing the subsidy.

>> You are correct, if this is part of the Federal Crop Insurance Program.

>> OK, got it.

>> So --

>> Hey, Jack, maybe I ask you as you step back a little bit on this program. You know, producers have a lot of control over their cost. They have control over, you know, what type of cattle they're going to raise. But what we don't have a lot of cost or a lot of control over is that price. And so at the end of the day, we take this commodity price for whatever it raised. We don't get to take our cost plus a margin and get paid that. So, maybe explain how this kind of protects the farmer in that downside risk.

>> Excellent question, Clay. So, for example, with LRP, the shortest endorsement that a producer can purchase is 13 weeks. They then increase in four week increments. As we look right now that the important thing when I talk with a producer, we want to figure out in time when they would be marketing their product. So, when you're going to be winging or chipping calves off the cow selling yearlings, whenever you're going to be subject to the market and i.e., entering in selling those cattle, we then want to time your endorsement to end as close to that sale date as possible. So, what -- the Livestock Risk Protection program gives you the opportunity.Based off of the Chicago Mercantile future, or excuse me, based off of the CME and the futures offerings that come, you then have the ability to buy insurance on an estimated expected value as to what your cattle will be worth at that date in the future when you're going to market them. So, depending upon what -- as I'm looking right now, for example, you might have some fall covers and you're going to be looking at marketing a 550-pound calf in early to late March. An individual in that case, we would look at a 13-week endorsement. It's set to end on the 16th of March. The expected end value is $2.0306. Then there is a sliding scale of coverage levels. The lowest coverage level that a producer could purchase would be 89.88% which would give a coverage price the insured floor of 182.51. On the other side of the spectrum, the highest coverage a producer could take out would be 99.63%. And that would cover them at 202.31. So, depending upon where a producer felt most comfortable in their insurance, they then have the ability to select a coverage price, i.e. a strike price. So, for example, if you selected that highest coverage of 202.31, what the program works off of, we use the futures to base that expected value. And it is then settled back against the actual cash market through the CME's feeder index. The feeder index is a seven-day rolling average where they take the value of 7 to 900-pound steers, number ones and number twos, at approximately I think there's close to 30 markets that report into the index over the course of the week to come up with a current rolling cash value on what we would consider a yearling steer. The most current feeder index as of the 14th of December and it's -- the index generally will lag one to two days behind the current day just because you've got to get that data gathered in. The most current index on file is 179.50. So, based upon all of the action and the cash transactions occurring through the center portion of the country kind of in in the heart of cattle country, you come up with a seven-day rolling index value of 179.50. So --

>> Per hundred weight.

>> Per hundredweight. Yes, sir.

>> I told you, I'm asking dumb questions.

>> There is no such thing as a dumb question. So, the important part now when we start to talk about LRP, so that feeder index value of 179.50 is that is the basis for settlement. Now, when we talk about LRP, well, you --

>> For the endorsement that ended today.

>> Yes, sir. Yes, sir. So, that would actually be your settlement if you had an ending value on the 14th of December. So, if you had one that ended today on the 16th, we likely won't see that until the 19th or the 20th. Just because of the lag, we're Friday today, got a weekend, it generally takes a day or two for those to pop in.

>> Got it. So, you'd use the reported value for that day when it eventually gets reported.

>> Yes, sir. Correct.

>> OK.

>> So Jack --

>> Yes, Clay?

>> -- I know we're talking about different periods but compare that 179.50 to the 202.31. So,I bought a program --

>> I was just about to do that.

>> OK, excellent.

>> OK. So, what -- and what Clay's asking about is let's tie together where I was talking about we've got two different weight classes of cattle. That LRP on the feeder side of things functions with. We've got weight class one which is up to a 599-pound animal, either a steer or a heifer. And you as the insured would get to select your target weight in 100 weights. So, if you wean or market a 550-pound steer, we would insure 5.5 hundredweight. If you have a-- if you wanted to have the biggest calf, if you weaned a 600-pound calf, you could insure a 599 pound or 5.99 hundredweight. The CME feeder index today, that 179.50 would actually be increased to 197.45 to get the value of the lighter calves. And that adjustment, we multiplied the feeder index by 110% to get the value of -- the increased value of the lighter calves. So, weight class one steers, that's up to a 599-pound calf, you take the daily Chicago Mercantile feeder index and multiply that by 1.1 to get your actual value.Now, when we get into weight class two, that 600 to 1000 pounds, you know, most people are going to consider those yearlings and granted those might be a little bit bigger in the actual weight range there.But so your traditional yearling cattle would just be the straight index on steers. On heifer calves, weight class one heifers use the straight feeder index as their settlement value. So, a heifer calf would have a value -- a 550-pound heifer calf would be valued at 179.50. Now, if we were to look at say an 850-pound heifer, we would then take 10% off of the CME feeder index. So, there's a 10% reduction to address the generally reduced value of heifers versus steers. So, an 800-pound heifer based on that 179.50 feeder index would have an end value of 161.55. So, there's a little difference back and forth between weight class one steers, heifers and then weight class two steers and heifers. But USDA and the RMA have done that to try to best mirror what the marketplace and what we as producers encounter when we market these cattle. It's not perfect. And I work with a lot of -- 99% of the customers that I work with are here in the Pacific Northwest. And I hear from many people, "Well, how does this -- you know, that index is not accurate because they, you know, they're $10 or $15 ahead of us in the marketplace, how is this an accurate tool?" What I try to explain to people is even though their market may be different than ours, this is a constant. So, we're not using a West Coast value and a Midwest value on this.The program is set up where we have uniform coverage offerings and the settlement is based off of that CME cash index value. So, we're trying to use established constants and well-known market futures and features to be able to base the expected value and then have that cash settlement tool. The biggest question that I run into and it took me a little while to be able to really wrap my mind around it is we -- for example, if you had an endorsement that ended with a $2 expected value. And the producer sells their calves at their local market or to a feedlot or however and they ended up selling those cattle for 190. Many times, they think, "Well, heck, I had a $10 loss." But if the CME feeder index comes in and for example, this situation where we had the 179.50, the adjustment if it's a weight class one steer would be a 197.45. So, we're only talking about $2.55 worth of loss, not $10. And being able to explain to producers because in many cases, a $2.55 cent loss might not fully cover the premium. As we look right now at the highest premium level, that 99.63% today, that's $3.51 per hundredweight. So, there are situations, I've had it happen on my own endorsements where there is a loss but the loss may not exceed the total insured value. So essentially, what that's telling us and it's generally reflective in the market is that we're seeing that rising tide from cash is going to also be recognized by the individual when they sell their cattle. So, in the event -- and this is one of the tough things because oftentimes when I talk to customers, they feel like unless they get a check back from LRP it didn't work which that isn't always necessary. But everybody I guess, it's nice when you purchase something and it pays back. But if LRP is paying you, that means we've had some -- in a lot of cases, a fairly significant market correction from where you were insured to where it's settled. And that we can see those market swings happen at the drop of a hat. One of the challenges and at times, I have seen this a little bit where there might -- we might not even have anything in the market but it just depends upon when an endorsement might end.An endorsement that ends very close to the holidays in some cases might have -- we might see a dip in the index. There's opportunities in times where it may not be perfect I guess is what I'm trying to explain that we might have some natural pullback or slowdown in the market that does not fully work its way through. Meaning if we have a reduction or the market slows due to a holiday, if you then have an endorsement end on or very nearby a holiday, you might miss some of those changes in the market, if that makes sense. Are you tracking me, Tip?

>> So, Jack, if we --

>> Yeah.

>> Yeah.If we back up to the, you know, the process that a rancher needs to think about on this insurance. So, I delivered cattle on the 15th yesterday.

>>OK.

>> When should have I put insurance on if I wanted to get in this program?

>> Well, the shortest window would have been 13 weeks ago. So, if you're thinking -- and what I recommend to all of my customers is that if you're a cow-calf producer, once you start calving, I've got a lot of people that will then they're starting to get cattle that hit the ground and then they really start to look. If you're going to be buying stockers and putting them together, you have to have -- you have to own the cattle in order to insure them. So, we can't go out and speculate on this. At the end of every endorsement, if there is a loss, the RMA requires proof of livestock. They've updated the claim forms to where it used to be.You'd get a claim form.You sign your name. And you would submit a bill of sales at times or a brand inspection.They process the receipt back to your payment and no questions were asked. Now, RMA has stepped things up a little bit. And they've got -- at the end of the claim, there'll be three boxes that the producer will need to look at.One that you sold all of your livestock or that you sold part of the livestock and retain some and you have to list the number that you retained. Or that all of your livestock were of a marketable weight but you did not sell any.You then have to provide proof of livestock that can be done through the easiest thing is a bill of sale or the brand inspection if you're in a brand state. It might be a herd inventory. If you utilize a herd inventory, it would have to be signed off by a third party like a veterinarian or a nutritionist. They just want to make sure that the cattle that are being insured, number one, exist and that you have ownership of them. Because again LRP is not a speculatory tool, it's a tool for producers just like you and me, Clay, that have cattle and are trying to protect ourselves from that downside risk in the market.

>> So, if 13 weeks is the shortest period, what would be the longest period?

>> So, the longest period, a lot of times we'll see it go out 47 weeks. I've seen them go close to a year.The longest -- the amount of length depends on the amount of market volatility and the volume. So, I would say the 13, 17, 21, 26 weeks, for the most part, those are just about there every time. I have seen in the last couple years, there will be times when there -- if there is extreme volatility in the market where there may be no offerings or there might be only just a very scant amount. So, if we're in a fairly stable market with pretty good volume, I would say that for the most part, you could probably plan on seeing something go out 43 weeks and maybe 47. So, it does give a producer quite a bit of time to look out -- right now, you could be looking out as far as November 9th on weight class one steers and both steers and heifers and weight class one and two. And the nice thing as we look at that, just to look out on weight class one, if we went out 47 weeks and you wanted to insure an animal at its highest value, you would have a coverage price of 224.27. That would have a total cost of $71 per head.That 35% premium subsidy comes in. And $25 would come off in the form of Farm Bill premium subsidies leaving your total per head premium of $46. That works out to $7.68 per hundredweight. So, as you start to look at that, that's -- you are talking about, you know, a fairly substantial premium. However, if you do a little bit of math and you're thinking about how that works back in your budget, you're effectively talking about a CME index value of 216.59 or less and you are going to be netting proceeds back to you. 216.59 would be your breakeven if you're per hundredweightto back that $7.68 off of your 224.27 coverage price.

>> So, let's just talk about that a minute just kind of in the layman's terms.

>> Yes.

>> So, I've decided I want to do this program.Just like you said, I'm basically locking in or guaranteeing myself 224.27.

>> Yes.

>> And in order to receive that full amount and cover my premium, the actual CME, not the sales price that I have for my cattle but the actual CME in that --

>> Index.

>> -- is going to be November.Index. If it was at or below 216.59, I would in essence have gotten 224 for those calves sold?

>> Yes, sir. Yes, sir. So, to back up, any index value less than -- so, if you're locked in at 224.27, ifyou have an index value of 224.26, there would be a one penny indemnity per hundredweight. So, any index value less than your coverage price, you begin to receive payment.But it would take an index value of 216.59 to fully cover that $7.68 cent per hundredweight premium.

>> Sure. So, let's follow this example for a little bit. And so, from rancher's economic results, let's say he actually sells his cattle for 220.

>> Yup.

>> But the CME at that time, let's just say it's 219. So, you'd have a $5, you know, shortfall from what your contract was. So, if I'm understanding you right, you would get back a portion of that $46 you paid in.

>> Yes, sir, you are correct. So, if we're 227 or 224.27 and the index value ended up at a flat 219, you would see a $5.27 cent loss. Now, we would need to then take a look at your total premium. And at that highest level, your premium was $7.68. So, you would still have and if we're talking about a 599-pound calf, you would still have a premium due of $14.44per head.

>> OK. So, if we at the marketplace got 220 is what we were just estimating. So, it'd be less than $14. It would be the same as selling those calves for 206 in that example.

>> Let's see. So you -- yes, correct.

>> Excellent. So, as you can tell I'm a bean counter and the math is kind of hard to follow.

>> It is.

>> So, how do we helpthese ranchers look at these programs and make an educated decision on whether or not it's the right time to enter in, the right amount of head to enter in? And I think I would say this program's been a little bit underused and I think that's because it's misunderstood or under-understood.

>> I think you are absolutely correct. WhatI have tried to do to better -- to try to help better tie things together, every day I'll send out a blanket email to everyone that has expressed interest in LRP to me over the years. I put together an offering of what a 599-pound steer and heifer would have, an 800-pound heifer. And then I've had I think a 750 and a 925-pound steer. I also provide the most current CMA feeder index. I've talked to everybody. I feel like they understand and know the settlement mechanism. So, if they've got the index value and they see the offerings, they're able to do a little bit of cowboy math and say, "Well, boy, if I have one that ended today," or, "This is where we are, this is where we're expected to be." And a lot of times, I think peopleare somewhat apprehensive because they're looking at something that they've only heard terrible things about what happens to people when they get upside down on margin calls and challenges associated with the futures. The nice thing about this is we get the best of both worlds.We have the benefit of the futures markets and all of those outside fund dollars that are helping to increase the value of those contracts as our estimate for a settlement as to what those values will be in the future. And then we're using the true cash, the people that are actually sitting in the bleachers, buying those cattle, we have the actual cash real dollars for the settlement. So, we've given producers the ability to use what might be a slightly elevated tool for establishing the value. And we're using the real greenback dollars that are spent on those cattle to settle them. As long as producers will look and understand that we have the futures as our tool for establishing an end value and the index is the settlement. Once they understand that even though I'm selling my cattle, though it's not directly related to this, but the argument definitely could be made. I'm looking at the index on the 14th of December. If you had a producer that sold cattle in Billings, Montana that also had an LRP endorsement, those billings, billings was one of the markets that reported. So, there are some markets that are somewhat close to us on the West Coast. But I think it's important that producers think about what's -- you know, if you see an offering and you're looking out thinking about the future that you're going to market your cattle in October or November for example. If $2 and I'm looking here in October $2.24 -- 223.96 sounds appealing, you might dabble a little bit. The nice thing about it is you can do a single head endorsement. I've purchased endorsements on my own calves as small as five head. You can -- we can go up to 6000 head on a single endorsement. So, this is -- with the rules and the opportunities, this is a tool that can fit the smallest and the largest producer and provide them an equal amount of coverage and protection.

>> And when you talk about the end date sales date, let's assume we have a weather event in two weeks or let's say I'm a month late in delivering, again which would be an exaggerated example. But does that create a problem for this program?

>> No. So, there is no requirement that the producer sell their livestock by the end date of their endorsement. USDA has recently made a change, it wasn't this year, it was last year where you could market your cattle up to 60 days before the end of the endorsement and still retain your coverage. And that was done to try to help and address a weather-related issue, whether it's drought or fire or flood. But to help producers that might have something covered, if you have some type of, you name it, phenomenon that comes through that all of a sudden we've had to sell the cattle because we're up against any one of these issues, you would still be able to retain your coverage.You wouldn't be able to have settlement until the end of your endorsement but if something happened and you needed to market cattle before the end of it, you still could. And you'd want to kind of count and make sure you don't do it 61 days because if you sold 61 days, you would void your policy and have to pay your premium. But as long as you're within 60 days of the end date, you can market those cattle or you could retain them. And at the end of the endorsement, if there is a loss, you would check that third box that you've retained all cattle that they were of marketable weight. And you would need to provide some type of proof of livestock. If you were a cow-calf producer that might be moving back and forth to pastures, if you had a brand inspection slip, if you had some type of inventory sheet. I've worked with some producers, we used -- we're able to use some Redbooks. I have other producers that work with consulting veterinarians and their vets ran a herd inventory. I had another producer that we took the Redbooks and then his vet signed off on it. She had just been out doing some palpation work.They're very flexible. But we just need to make sure that we can validate that in the event that you don't market the cattle which there's nothing wrong with that, but in the event that you don't market the cattle, we need to validate that you have the cattle.

>> So, as I'm thinking about this from an economic standpoint, this really looks like it's a program that mitigates the significant downside. So, let's say you do have a flood or a drought. And we saw a lot of that this year. And you have to liquidate or sell.Likely the price is depressed because of that situation. And you could in fact get an indemnity on this program. Conversely, it's not limiting the upside. If within 60 days of the contract date, the price spikes or goes through the roof, I could still sell and capture that upside if I so chose.

>> You're absolutely correct. Where I really saw this and my eyes were blasted wide open was the middle of March this spring. So, if we roll back nine months, almost nine months close to the day, I had a customer that had endorsements on weight class two steers and heifers that were set to in right around the 14th or 15th of March. And leading up to that, we had been talking fairly regularly. And looking in February, the market had been just ticking right up there. And we were -- the conversations we had, it looked like they were going to need to pay their premium meaning the index values had exceeded their coverage price. So, they were prepared,OK, we're going to need to write a premium. And I think the premiums were probably close to $8 or $9,000 between the two endorsements. We get to the end date and Vladimir Putin had invaded Ukraine. The markets went into absolute chaos. And we saw an absolute implosion on those index values, enormous losses on steers and heifers. That individual, they ended up receiving indemnity payments on both steers and heifers. The program works.It's one that I assure you, you can sleep at night with this. You know exactly what it's going to cost you.You can plug this into your budget. You know for a fact I want to have a set dollar of insurance. You can tie that right in there.You can sit down at the kitchen table with the family or with the banker and say, "Here's our operating budget.We've got this much for feed, fuel, pasture labor, rent, expenses.We've got our risk mitigation, you know, our insurance expenses." And however, you know, you break that out, you've got the -- your health insurance, the ranch policies, the auto, the etcetera.You've got your price protection nailed down.You know you can look right down to the dollar how you have it. You've got the flexibility.You producers are not required to purchase the highest level of coverage. There is a lot of flexibility. I've worked with some stocker operators where we might look at this. And for example if we look out in November or October, you pick a date, I've worked with producers where they don't necessarily have to look at that highest level of coverage on a yearling. They might say, "Well, my breakeven is somewhere$7 or $8 behind this."They can generate -- you might save $10 to $14 per head by simply stepping your coverage level back just to protect a breakeven. The important thing to remember when moving back in coverage, yes, it gets cheaper but you also have to see that much more of a market reduction before you would see an indemnity payment. And for a lot of producers, the way they determine if LRP works is if they get a check. And that's one of the challenges that I think we all have is trying to explain that getting a check on LRP doesn't necessarily -- that's not necessarily a good thing. I mean, I'm glad that people have it, that they have the coverage and they receive an indemnity. But even if they have to pay a premium, they're going to -- the rising tide was catch and the market will hopefully offset the premium that they pay.It's really not different I think.

>> And I know it's not a one for one but -- go ahead, Clay.

>> Tip, the important part that I heard that Jack just said was really understanding your cost. You know, as we've talked about in some of those previous podcasts that if a producer really understands their cost structure, this really does give them a tool to potentially use to mitigate some downside, some significant downside risks as we have seen in recent years.

>> So, Clay, for example, what -- the cattle that you just marketed, what weight class were those?

>>550.

>>So, you're in weight class one. So, for example and since you know costs very well, what we need to do, we need to look back here. If we were having this conversation back in July, on the 19th of July for example, the 21-week endorsement would have ended on the 13th of December. And if at that time, Clay, a few would have said, "I'm interested.Let's lock in coverage." At the highest coverage level, you would have been able to cover yourself at 204.46. That would have had a total cost of $53 per head minus a $19 premium subsidy would give you a total cost on a 550-pound steer of $34. That's a $6.18 cent per hundredweight premium. So now, we've got tool 204.46. We were 12/13/22. I'm going to pull up the CME feeder index. And we'll just run a quick scenario of what would have happened if we would have paid premium or not. The CME feeder index on the 13th of December was 179.46. So again, that is for a weight class one, or excuse me, the weight class two steer so we take 179.46. We multiply it by 1.1. We would get an index value of 197.41. We just said that we could have covered those steers at 204.46. We're going to minus our index ending value of 197.41.You would have had a $7.05 cent loss. We have that premium of $6.18 per hundredweight which gives you an 87 cent net loss. So, $4.79 per head to you in your pocket times the number of head that you marketed or insured.

>> Yeah. So, in that case, we would have got a check. Instead of paying a premium, we would have got 4.79 per head.

>> Yes, sir. And you would have had, on your expense side of things, you would have had a total premium expenditure that you get to expense on your -- and depending upon how you and your accountant do it but you would have a $34 per head insurance expense. You're going to be taxed on the $4.79 net payment per head. That's federal crop insurance so you'd get a 10.99 at the end of the year times the number of head.But in that situation, you would havemade money. However, as we're looking at this, Clay, you might have looked at that and said, "I know my cost of production and $34 is a little more than what I want to spend."The 21-week, you could go at the top level of 204.46. The lowest coverage was 184.66. So, 202.26, $2, 197.86, 195.66, 193.46 or 191.26. So any of those, you could have selected coverage. And at the 197 -- so basically from -- the top four offerings, you would have still ended up with a loss that would have--

>> Resulted in indemnity --

>> -- just about covered. Yes.

>> -- to cover your limit.

>>Yeah. And the piece that we want listeners to understand, it really didn't matter what I sold those cattle for.

>> Correct.

>> That's really a moot point in that.

>> Yes.

>>But it does come in to their profit-loss statement because they would have, you know, gross proceeds plus that $4.79. So, I think running through that example was at least helpful for me. I know that was more relevant to me but hopefully, listeners are understanding that by getting together with somebody that understands this program, they can run some what-if scenarios that can help them make a decision.

>>And it's -- the biggest thing that I run into and people ask me is, "Well, when should I do this?" And that's the one where I don't have a crystal ball but in my mind, I look at and watch those index values. And once you see an index value that is at a high enough point where you say, "Well, boy, that would -- I wouldn't mind -- I would take that if I was going to sell my cattle." That's essentially how and where a lot of people, when they finally decide to pull the trigger and take out an endorsement, they look at those expected end values and are basically saying, "Would I sell my cattle for that amount?"

>> Yeah, that's excellent.

>> And when you get to the point in time where if we're looking at December and you said, "Well, yes, I just sold my cattle for 204," then you would want to take out an endorsement.You might look at it and say, "That's $34 a head.The budget is tight." I'd sell them for $2. You could take out coverage for $2.06. You'd have a premium of $26 a head versus $34 a head. So basically, when a producer wants to determine, "Is this the right tool for me," I tried to have them basically look at the coverage price and ask yourself, "Would you sell your cattle for that amount?" And if you're willing to sell your cattle for that amount, then we'll look over to see what that total premium expenditure is. If that number is something that you're comfortable with, then this is the right tool. If those numbers aren't matching, then we can wait. We wait another day and see what the market does. The nice thing is, is once you fill out the application -- I have several customers that have had applications on file for multiple years that have never taken out an endorsement. There's nothing wrong with that at all. There's no obligation to buy anything. Once you get an application approved, it just gives you the ability to do so if you feel like that's the right move for you and your business.

>> So, is it a fair way to make that decision?Using that example, you just had a 204.46. And you indicated that it was about $6.18 premium for each animal.

>> Yup.

>> So, that would tell me that as long as I'm happy selling those calves for 198.28, then this is a no-brainer for me.

>> Correct.

>> But I think it's been very helpful to kind of run through some examples, talk about this program. And, you know, Tip and I have talked off and on, on these programs that are available to the ranching community but just not maybe well understood. And I think you've done a good job of really helping us understand this program.

>>And I've got a-- if people are interested, I use Hudson Crop.They can go to eharvest.hudsoncrop.com /policyext/ lrpestimator. And it willpop up the LRP estimator tool, the same one that I jump into every day to put offerings together for my clients. And you can run any variety of scenarios. You select an effective date. You can look at the most current date or you can go back in time as far back -- it will take you back to the beginning of the reinsurance year which is on the livestock policies, July 1st in 2023. If you wanted to look back to see what it would look like in April or May, you'd want to then look into the 2022 reinsurance year. But producers can go back as far as they would like, select the effective date meaning the date that they would want to see what those values were.They then would select their state.Their commodity would be feeder cattle and then the type meaning if it's going to be a steer calf weighing up to 599 pounds or a heifer calf up to 599, those are going to be weight class one. If it's going to be more of what we might consider a yearling, a 600 to 1,000-pound steer or heifer, they would look at weight class two steers or heifers. And we offer the same product for producers that would like to retain ownership and feed their cattle out with fed cattle.They can protect up to a 1,600-pound animal.That product is settled against the five-area weekly average. So, we've got the same level of coverage and offerings for producers regardless of someone that might have 10 head or 2,500 head. We all have the same --there isn't any benefit to size or scale. Every producer has the exact same coverage and opportunities afforded to all of them regardless of the state they're operating in or their, you know, their operational size. Any of the things that we often when we talk about marketing and our business and some of those different dynamics where we feel like we get somewhat siloed because I'm over here or I do this, I calve in. A lot of that has been leveled. And we've got a very -- LRP has done a good job of creating a level tool and a level field for all producers.

>> Yeah,that's excellent. I think wintertime seems like it'd be a good time when people have these things fresh in their minds to go back and review some of these hypotheticals looking at previous date points to see how it would have worked.

>> Yes.

>> And that was a pretty good starting point for figuring out whether or not you're going to want to use it in the coming year. Because so many of these things are -- yeah, if you -- I pulled up the CME feeder index history over the past year and it definitely moves quite a bit.

>> Yes, yes.There's a lot of movement in the index. And this does the -- this is the best -- I think this is the best tool we have to give producers like Clay and myself or bigger and smaller producers an even field, even access to price to downward price risk in the marketplace. And if -- and there are situations where LRP may not be a value to a producer.Meaning if you have an agreement, if you've already -- if you've contracted your calves already for next year, you don't need to worry about LRP because you don't have any price risk. I've talked to other people that might be in the process of trying to put a contract together that don't know if they are or aren't. I mean, it can work but there very well could be situations where it might not work meaning the other thing is, is if a producer is going to market their cattle less than 13 weeks, you know, within 60 days, they may be marketing their cattle sooner than we would be able to cover them. Meaning if you're not going to hold those cattle up to 60 days within the end of an endorsement, there isn't any benefit. I couldn't honestly say this would be a good tool for you.For example, Clay, if you're going to ship your cattle January 15th, I couldn't honestly tell you, "Well, let's sell you a policy that ends or gives you coverage through the middle of March." That just doesn't work for you.

>> Well, I think that was a really good summary. I'm saying that because I almost understand now that we've talked about this three or four times on the podcast, Jack. So, that might be a good place to leave listeners.

>> I think that's great. And the biggest thing and I think you hit the nail on the head, Tip, is now is a really good time for people to do -- to play what-if, you know.Get the check stub from settlement when you sold your cattle and then jump onto the Hudson Crop estimator and go back, you know, 13, 21, 36 weeks, go back to when you either were buying and putting those yearlings together, go back to calving time and start to run some what-if scenarios. The other really nice thing about this is that you've got such flexibility in head counts that we don't have to do it all today. You could -- you might think, "Well, boy, this looks good but this market, it feels like all the fundamentals and what John's going to talk about as we look to the future, where things are."You know, you look at cattle on feed. We can read all the reports and summaries out there.Now might be a good time to ensure, it might not. That's where everybody's going to have to look at their own numbers and see where they are. But this is a tool that I hope more people will find a way to use or at least be interested in looking into because it can definitely help take out some of the high points and the low points.

>>Excellent. And we will put that estimator link in the show notes. And we'll be doing an episode with John Dlivkum [assumed spelling], market analyst anda little bit later, a testimonial from somebody who's been using LRP and has found it to be a useful risk management tool for them and kind of go through the ins and outs of that. Jack, thank you for your time again today.And, Clay,thanks for asking some smart questions.

>> You got it.

>>Thank you both.

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