Timing, Trading Frictions, and the Limits of Subsidy Capture in Livestock Risk Protection

Premium subsidies in the USDA’s Livestock Risk Protection (LRP) program may create incentives for subsidy capture, in which producers combine subsidized coverage with exchange-traded positions designed to retain part of the subsidy. Using county-level LRP endorsement data and matched CME options data from 2020 to 2025, we observe clustering of endorsements around CME option expiration dates. In the absence of observed offsetting CME trades at the producer level, this pattern is suggestive of strategic timing but not direct evidence of subsidy capture. To determine whether this pattern reflects economically meaningful subsidy-capture opportunities, we simulate returns to combined LRP and CME positions under realized market conditions and realistic trading frictions. We find that the premium wedge between LRP and comparable private-market instruments is observable ex ante, while simulated net gains are commodity- and volatility regime-specific, arising only in low volatility-ratio cases. Even in the favorable cases, the combined strategy carries substantial downside risk. At 100 percent coverage in the low-volatility regime, average net returns are –$0.18/cwt for feeder cattle, –$0.04/cwt for live cattle, and $0.09/cwt for lean hogs, while the worst 5 percent outcomes are –$29.82/cwt, –$21.77/cwt, and –$18.63/cwt, respectively.