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

Publicly subsidized insurance programs can create incentives for subsidy capture when insured products closely resemble privately traded financial instruments. Livestock Risk Protection (LRP) is one such case because it provides price insurance through a contract that closely resembles an exchange-traded put option. Using LRP endorsement records and matched CME options data for 2020-2025, we document that endorsement activity clusters around CME option expiration dates, especially for feeder cattle and lean hogs. Because producer-level derivatives positions are unobserved, however, timing patterns alone cannot identify subsidy capture. We therefore simulate returns to combined LRP-CME strategies using observed contract terms, option prices, and trading frictions, including bid-ask spreads, margin requirements, and financing costs. We find that the subsidy-created premium wedge is observable at purchase, but realized gains are small, commodity-specific, and concentrated in low-volatility environments where realized volatility falls below implied volatility. Even in those favorable cases, combined strategies substantially worsen downside outcomes relative to holding LRP alone. Additional evidence shows that clustering persists across volatility regimes and after the 2025 revisions to the LRP Handbook, suggesting that observed timing patterns may reflect contract alignment and routine hedging practices rather than widespread economically meaningful subsidy capture.