Hedge coverage and LRP

Definition

Hedge coverage is the share of an inventory whose price is protected against a fall in the market. For a lender it decides how much of a cattle line is advanced at the hedged rate and how much at the lower unhedged rate (see eligible collateral).

Protection can come from four instruments:

Short futures: selling Live Cattle (LE) or Feeder Cattle (GF) futures locks in the futures price; basis risk remains (see futures and basis).
Long put options: the right to sell futures at a strike price. They set a price floor while keeping upside, for the cost of the premium.
Livestock Risk Protection (LRP): USDA Risk Management Agency insurance that pays if a price index falls below the chosen coverage price at the end date of the endorsement. It works like a put but is bought per head, in smaller sizes than a futures contract, with a federal premium subsidy.
Forward contracts: a cash contract with a packer or buyer that fixes price (or futures plus a fixed basis) for a delivery window.

Protected head converts each instrument to head. Hedged head is protected head capped at the inventory actually on hand; protection beyond the inventory is speculation, not coverage. Value is split between the hedged and unhedged lines pro rata by head.

Head per futures contract depends on the contract size and the weight assumed for the cattle at the contract month.

Milk: Dairy Revenue Protection

For milk revenue rather than cattle, the matching USDA RMA product is Dairy Revenue Protection (DRP), which insures quarterly milk revenue against declines in futures-based prices or yield. It is a separate program from LRP and is not normally used to classify cattle as hedged. See also Dairy Margin Coverage, a USDA FSA margin program.

Formula

Plain text:

head per contract   = contract size (lb) / assumed weight per head (lb)
protected head      = net short futures × head per contract
                      + long puts × head per contract
                      + LRP-insured head (endorsements not yet expired)
                      + forward-contracted head
hedged head         = min(protected head, inventory head)
coverage %          = hedged head / inventory head × 100
hedged value        = class value × hedged head / inventory head
unhedged value      = class value − hedged value

LaTeX:

h_c = \frac{S_c}{W}, \qquad H_{\text{prot}} = n_{\text{fut}} h_c + n_{\text{put}} h_c + H_{\text{LRP}} + H_{\text{fwd}}

H = \min\!\left(H_{\text{prot}},\, N\right), \qquad V_{\text{hedged}} = V \frac{H}{N}

Worked head-per-contract examples. The contract sizes are CME specs (as of November 2026); the weights are illustrative assumptions:

Live Cattle: 40,000 lb ÷ 1,400 lb out-weight ≈ 28.6 head per contract.
Feeder Cattle: 50,000 lb ÷ 800 lb ≈ 62.5 head per contract.

The right weight is the expected weight of the lot at the contract month, not a fixed figure. Take it from the lot’s projections or close-out history.

How to pull it in DC305

DC305 is not the source for hedge positions. Use:

Futures and options: the broker’s month-end statement (net position by contract month, strikes and premiums for options).
LRP: the crop insurance agent’s endorsement list: head, coverage price, end date, class and weight.
Forward contracts: the signed contracts with head, weight, price or basis and delivery window.

DC305 (or the feedlot’s lot statements) supplies the inventory head the coverage is capped at; see dairy cattle inventory classes and feeder cattle mark-to-market.

Typical range

Herd context: US fed and feeder cattle (including dairy and beef-on-dairy cattle) financed on operating lines; terms vary by lender.

LRP terms for the 2026 crop year (FCIC-20010 handbook; RMA, May 2026):

LRP endorsement length: 13, 17, 21, 26, 30, 34, 39, 43, 47 or 52 weeks for feeder and fed cattle. Cull cow endorsements were 13 weeks, extended to up to 52 weeks for the 2027 crop year.
LRP coverage level: 75% to 100% of the expected ending value.
LRP feeder cattle weight categories: 1.0–5.99 cwt and 6.0–10.0 cwt (under 600 lb and 600–1,000 lb), for steers, heifers, predominantly Brahman and predominantly dairy types. Unborn feeder cattle (target 1.0–5.99 cwt) and unborn calves (0.6–0.99 cwt, sold within two weeks of birth, including beef-on-dairy crosses) can also be insured. Unborn fed cattle cannot. A 6.0–9.0 cwt unborn type is added for 2027.
LRP head limits: 12,000 head per endorsement and 25,000 head per crop year for feeder cattle, and the same for fed cattle.
LRP premium subsidy: higher at lower coverage levels; the handbook’s worked examples use 35%.
Lender coverage requirement: some lenders require a minimum coverage % for cattle on feed, or only advance the higher rate on hedged head.

Common mistakes

Counting protection above inventory as coverage. Cap at head on hand.
Using gross instead of net futures. Long futures offset shorts.
Counting expired LRP endorsements or options past expiration.
Wrong head per contract: dividing by in-weight instead of the expected weight at the contract month.
Mismatched contract months: a hedge that ends months before the cattle finish leaves the later months uncovered.
Blending hedged and unhedged into one line at an average rate.
Treating DRP or DMC as cattle coverage. They protect milk revenue or margin, not cattle inventory value.