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A Comparison of the Effectiveness of Using Futures, Options, or LRP Insurance to Manage Risk for Cow-calf Producers

Summary

Historically most cow-calf producers have not used the CME Feeder Cattle futures or options to hedge the sale price of their calves. In 2002 the USDA-Risk Management Agency (USDA-RMA) introduced Livestock Risk Protection (LRP) insurance for feeder cattle. This insurance product is very similar to purchasing a Put Option. However, producers can insure as few as one head if they desire and up to 2,000 head; thus overcoming the size of contract issue with the CME feeder cattle contract.