Real Subsidy, Imagined Harvest: Timing, Frictions, and the Myth of Livestock Risk Protection Arbitrage

Yifei Zhang, Andrew Keller, Shawn Arita and Sandro Steinbach

No 387609, ARPC Working Paper from North Dakota State University

Abstract: This paper examines whether premium subsidies in the USDA’s Livestock Risk Protection (LRP) program create opportunities for “subsidy harvesting,” whereby producers pair subsidized insurance coverage with offsetting exchange-traded put options to capture risk-free gains. Combining county-level LRP endorsements with contract-level CME options data from 2011-2025, we find clustering of endorsements around option expiration weeks and show that the potential harvest value turns positive after the 2020 subsidy expansion. Yet, a friction-aware Monte Carlo simulation calibrated to livestock futures and program mechanics (bid-ask and commissions, SPAN margin financing, basis/index rules, and audit penalties) delivers negative expected returns across livestock categories, coverage levels, and producer types. Even under a zero-friction scenario, the returns remain negative, reflecting actuarially fair LRP pricing and option risk premia. Reconciling these findings, we argue that observed clustering may be attributed to institutional timing rather than arbitrage or insurer hedging. This implies that the subsidy is real, but the alleged “subsidy harvest” is not a profitable endeavor.

Keywords: Agricultural Finance; Livestock Production/Industries (search for similar items in EconPapers)
Date: 2026-01-08
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Persistent link: https://EconPapers.repec.org/RePEc:ags:arpcwo:387609

DOI: 10.22004/ag.econ.387609

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