Beef Producer Preferences and Purchase Decisions for Livestock Price Insurance

Article excerpt

Personal interviews were conducted with beef cattle producers in Louisiana to determine their preferences and purchase decisions for livestock price insurance. Conjoint analysis was utilized to determine the importance of selected attributes of insurance policies for these producers. The characteristics of producers who prefer given attributes were also identified. Producers rated products given four economic situations to evaluate. A two-limit tobit model was used to estimate the part worth utility values for each attribute. Univariate probit models were estimated to evaluate the influence of producer characteristics on purchase decisions.

Key Words: conjoint, livestock price insurance, ordered probit, two-limit tobit

JEL Classifications: C25, D81, Q12, Q13, Q16

Beef producers are exposed to substantial price risk resulting from changes in factors including but not limited to beef imports, food safety issues, domestic meat supplies, and domestic demand. Cash-forward pricing and futures and options contracts are the primary tools avail- able for managing price risk associated with livestock production. These tools are not, however, widely used by beef cattle producers. A 1998 study by USDA-APHIS found that forward pricing strategies were used by only about 1.5% of U.S. beef cattle producers. Cash-forward pricing, such as video auctions, is used by a limited number of producers, but requires uniformity among calves, extensive records, and substantial coordination to be conducted successfully. Use of futures and options requires extensive knowledge of com- modity markets, and many producers are not comfortable with this strategy.

The U.S. Congress appropriated funds to develop Livestock Price Insurance (LPI) as part of the Agricultural Risk Protection Act of 2000, with the goal of reducing livestock producers' exposure to price risk. In December 2002, a pilot program for feeder cattle was approved for states primarily in the Midwest. In 2005, approximately 3,300 livestock policies were sold, covering nearly 780,000 head of cattle. By July 2007, the program had been expanded by 17 states located in the Pacific, Southwestern, and Southeastern United States to include a total of 37 states (including the state in which the present study was conducted, Louisiana) (USDA-Risk Management Agency). Existing LPI products represent combinations of distinct attributes. The premium price, coverage level, and policy length are attributes that are commonly offered at different levels for most insurance policies. Attributes used to make up LPI products will ultimately determine the level of producer participation and the overall success of the program.

The primary goals of this study are to: (1) determine the importance of LPI product attributes among cow-calf producers and (2) determine the types of producers who will purchase and the economic situations under which they are most likely to purchase LPI. Determining the relative importance of LPI attributes and identifying the characteristics of producers who prefer certain attributes provides insight to policy makers and private insurers for the development of new LPI products.

The hypothetical LPI product evaluated in this study sets a price guarantee based upon the beef cattle futures price. Producers can guarantee a price at or below the futures price at a given point in time. To purchase LPI, producers pay a premium that is calculated based upon the deductible or coverage level the producer prefers (the higher the deductible, the lower the premium). The deductible is subtracted from the quoted futures price to establish the guaranteed price for the producer. For example, if a futures price of $90/cwt were quoted and a producer selected a $5/cwt deductible, he or she would have an $85/cwt price guarantee. The producer would pay the premium associated with a $5/cwt deductible. The associated indemnity payment would be based on the USDA Market News average price for that class of livestock at the end of the policy term. …