Federal insurance subsidies can, in theory, be “captured” when a publicly supported policy mimics a product already available in private markets. A new study by Yifei Zhang, Andrew Keller, Shawn Arita, and Sandro Steinbach examines whether that concern applies to Livestock Risk Protection (LRP), a USDA-supported program that insures livestock producers against price declines using contracts that look much like put options traded on the Chicago Mercantile Exchange (CME).
The researchers analyze LRP endorsement records alongside matched CME options data spanning 2020 through 2025. They find a striking pattern: purchases of LRP coverage are not evenly distributed over time. Instead, endorsements tend to bunch around CME option expiration dates—most noticeably for feeder cattle and lean hogs. That clustering matters because, at least superficially, it could be consistent with attempts to exploit differences between subsidized LRP premiums and market-based option pricing.
But timing alone is not proof of subsidy capture. A key limitation is that the data do not reveal producers’ full derivatives positions. Without observing whether a producer also trades CME options, one cannot infer strategy from endorsement dates. To move beyond circumstantial evidence, the authors construct simulated returns for combined LRP-and-CME strategies using actual contract terms and observed option prices, then stress-test those strategies under realistic trading constraints.
Those constraints—often ignored in back-of-the-envelope comparisons—include bid-ask spreads in options markets, margin requirements, and the cost of financing positions. Incorporating these frictions, the authors report that the subsidy does create an observable “wedge” at the time LRP is purchased: the subsidized premium can appear cheap relative to a comparable exchange-traded option. However, converting that wedge into economically meaningful profits proves difficult.
Across commodities, simulated realized gains from pairing LRP with CME positions are generally small and highly dependent on market conditions. The best results appear in low-volatility periods when realized price variability ends up below what option markets had implied at purchase. Even then, the paper finds an important tradeoff: strategies designed to monetize the apparent premium advantage tend to materially worsen downside outcomes compared with simply holding LRP insurance on its own. In other words, the combined positions can erode the protection LRP is intended to provide, leaving producers exposed when prices move against them.
The authors also look for signs that market regimes or policy changes might explain the endorsement clustering. The bunching around expiration dates persists across different volatility environments, and it remains after revisions to the LRP Handbook in 2025. That persistence, they argue, weakens the case that the timing patterns reflect opportunistic, widespread subsidy capture. Instead, the clustering may be driven by more mundane forces, such as how LRP contract terms align with CME option calendars and routine hedging habits among producers and intermediaries.
The research was supported by the U.S. Department of Agriculture’s Office of the Chief Economist under Cooperative Agreement 58-0111-24-002. The authors credit feedback from participants at the Fall 2025 NBER workshop on Risk and Risk Management in the Agricultural Economy, discussant Alan Ker, and attendees at the Spring 2026 Iowa State University Economics Seminar. They note that the conclusions are their own and do not necessarily represent the views of affiliated institutions, funding agencies, or the National Bureau of Economic Research.