Progress on the Livestock Risk Protection Plan
March 31, 2005
By Ron Daines
March/April 2005 -- When the sheep industry asked producers what they considered to be their most critical need, their response: price volatility.
Indeed, prices fluctuations for lamb have been fairly severe, with sharp peaks and valleys between 1997 and 2004, said Idaho sheep producer Margaret Soulen Hinson.
To smooth the ripples, Soulen Hinson said, the industry has spent the last year crafting the "Livestock Risk Protection Plan." It presented the plan to the Federal Crop Insurance Commission for review and approval in mid January.
Soulen Hinson explained the key elements of the plan:
- protect against price declines;
- support all segments of the U.S. sheep industry, large and small;
- limit government exposure for covering the risk;
- forecast prices based on an econometric model, which Soulen Hinson said, makes it a little more difficult, but is required because there is no futures market for lamb;
- pay based on the Agricultural Marketing Service national cash price; and
- is producer friendly.
She explained that the pricing model predicts future lamb prices using a combination of current lamb prices, pelt value, slaughter numbers, average live weight and seasonal prices.
"The model works pretty darn well," said Soulen Hinson. "You don't hit the peaks and valleys, but that's to be expected."
While she said the model predicts about as well as the cattle futures market and better than hog futures, reviewers of Livestock Risk Protection have raised some concerns about the accuracy of the price forecasting model.
"We have confidence in the model," said Soulen Hinson, "but we agree with the need for periodic recalibration of the model with the latest data."
After laying out the plan before the Federal Crop Insurance Commission (FCIC), members came back with these recommendations to the industry:
- define the length of the contract;
- set triggers to suspend the program, if needed (for example, if something were to affect the sheep industry like BSE-affected the cattle industry) as well as triggers to restart the program;
- set the level of the premium. Soulen Hinson said the industry has asked for a 50-percent subsidy, but it doesn't expect to get that much;
- define the sales period;
- address shadow pricing to avoid program manipulation; and
- reduce the scale of the program from the 19 states originally planned to a small pilot program.
She said the states to be included in the pilot project are still being selected.
The industry had 45 days to respond to the FCIC for comments.
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