RY2026 basic provisions for LRP, DRP and LGM introduce strong protections against subsidy capture. Producers and agents have asked me on numerous occasions what is not subsidy capture, i.e. what is still allowed?

The answer is simple – any strategy where LRP is used for risk management. You can use these two questions to help you evaluate your plans:

1. Would the strategy still make sense if LRP was not subsidized?
2. Would the strategy make sense if markets did not change vs. the day when LRP was purchased?

If your answer is “No” to both questions, what you are contemplating may be a subsidy capture. Let’s consider some typical strategies in light of these questions:

• Selling a call to reduce cost of LRP. This strategy would make sense even if LRP is not subsidized, and does not constitute subsidy capture.
• Selling a put with premium less than 80% of LRP premium, in order to reduce cost of LRP. This strategy would also make sense even if LRP is not subsidized, and does not constitute subsidy capture.
• “Roll up” put spread if markets rally more than 5 days after LRP SCE effective date. This strategy only makes sense if markets change vs. the SCE effective date.
• “Lock the indemnity” put spread if markets substantially drop more than 5 days after SCE effective date. This strategy also only makes sense if markets change vs. the SCE effective date.

The four strategies listed above do not constitute subsidy capture as they are not done for the purpose of arbitraging the subsidy.

Now let’s consider one strategy that is subsidy capture.

• Systematically selling put options with strikes equal or very close to LRP coverage prices, always executed 6 days after the SCE effective date. This strategy formally falls outside the purview of LRP Basic Provisions, Sec. 25 because it is executed 6 days after the SCE effective date. However, subsidy capture is not defined in terms of trading practices, but in terms of purpose. In LRP Basic Provisions, subsidy capture is defined as:

Subsidy Capture – The practice of exploiting the differences between premium owed by you for an SCE and the cost of a privately traded livestock contract such as a put option, for the purpose of your financial gain

Further, in section 3(j):

(j) If you insure any covered livestock under this policy,
you and any person with a substantial beneficial
interest in you are prohibited from offsetting any of the
coverage provided by this policy for the purpose of
subsidy capture, such as through livestock contracts
traded on a commodity exchange. Violation of this
prohibition will result in the application of available
administrative, civil or criminal remedies.

Finally, mandatory certified statements (that will be printed on each endorsement the insured and their agent sign):

Insured’s Statement:

“I certify that I will not offset any insurance provided under this specific
coverage endorsement through livestock contracts traded on commodity
exchanges or with other means for the purpose of subsidy capture, and I
acknowledge that if I violate this certification, I may be subject to
administrative, civil or criminal sanctions.”

Agent’s statement:

“I certify that I have not advised or assisted in any way with the purchase
of any livestock contracts to offset insurance provided under this specific
coverage endorsement for the purpose of subsidy capture, and I
acknowledge that if I violate this certification, I may be subject to
administrative, civil or criminal sanctions.”

Certified statements have the same weight as testifying in court. A person who deliberately lies may be subject to criminal charges, not just slap-on-the-wrist penalties such as denying indemnities on SCEs.