Pilot Revenue Insurance Programs Evaluated

Iowa State University (ISU) Extension experts evaluated two livestock revenue insurance programs being pilot tested in Iowa during 2002.

The team evaluated the impact of Livestock Risk Protection (LRP) and Livestock Gross Margin (LGM). The two programs were launched in July 2002 to offer alternatives to market risk management.

LRP protects producers from price dips by providing a specified price floor. LGM is designed to protect producers from both declining hog prices and rising feed prices.

Gary May, William Edwards and John Lawrence, ISU agricultural economists, analyzed LRP and LGM policies and results covering hogs marketed between August 2002 and January 2003. They compared the value of the insurance programs with similar price risk management strategies using options on futures prices.

"Producers did not appear to collect indemnity payments from either insurance product, suggesting prices turned out as well as expected at the beginning of the insurance period," reports May. "Indemnities under LGM accrued during the August-September price crash, but were eliminated as prices rallied later in the year. LRP coverage was not yet available in August and September," he says.

The analysts concluded:

• Insurance premiums were substantially lower than the premiums in the comparative options strategies.
• LRP offered a higher return to risk management than its corresponding option strategy. The combined put/call option strategy offered a higher return to risk management than LGM; and
• None of the products offered a positive net return to risk management or a profitable price during the insurance period.

The entire report is available at:

www.econ.iastate.edu/outreach/agriculture/livestock/LivestockInsurance.pdf.