“Adverse selection” is one of those big phrases that gets thrown around a lot when insurance is discussed. An extreme example I like to use is “buying home insurance only once you see smoke coming from the attic”.

In managing livestock insurance with daily sales frequency, there is a healthy tension between trying to make the program better for the farmers, while ensuring that the program integrity is not compromised, leading to excessive losses for the insurance providers. Over the last few years, we have implemented a number of politically difficult reforms designed to improve actuarial soundness and prevent adverse selection:

There are two new changes for RY2027. First, Dairy Revenue Protection sales will end at 9:00 AM CT the following calendar day, rather than earlier of the Sunday or the next business day. See more on that change in our earlier blog post.

In addition, we are expanding the set of USDA reports which impact offers of LRP-Fed Cattle, LRP-Feeder Cattle and LGM-Cattle. Going forward, no such sales will be allowed on days when USDA NASS publishes Cattle report, colloquially referred to as Cattle Inventory. This report is described as:

This biannual report contains the inventory numbers and values of all cattle and calves, number of operations and size group estimates by class and state, as well as for the entire United States. Also included are statistics on cattle on feed and grazing on small grain pasture, as well as calf crop data.

LRP and LGM offers are typically released between 2:00 and 2:30PM CT, and prices and rates are based on daily futures and options settlement data released at around 1:15PM CT. Cattle Inventory report is released at 2:00 PM CT. Therefore, CME futures and options prices for the day will only reflect industry expectations regarding the inventory numbers. If the inventory is reported to be substantially higher than expected, producers will rationally expect the markets to open lower the following day, providing the incentive to buy LRP or LGM coverage at stale, upward-biased prices. In the extreme, the endorsements they purchase that afternoon may be “in the money” (i.e. expected to pay out indemnity) as early as 8:30AM the following morning, when the CME markets reopen.

Over the last ten years, futures prices have tended to be more volatile in the aftermath of the Cattle Inventory report than on a typical trade date:

This suggests that the threat of adverse selection on Cattle Inventory report dates is not merely theoretical. These reports do indeed ‘move’ the markets.

The FCIC Board voted to approve our request to suspend LGM and LRP sales on Cattle Inventory report dates starting with RY2027. The next Cattle Inventory report will be published on July 24, 2026 – but the sales of LRP-Fed Cattle and LRP-Feeder Cattle would have been suspended anyway on that day as that is also the day when monthly Cattle on Feed report will be published.