Insurance Against Price Drops Is Available

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Alberta farmers are facing a lot of uncertainty as they prepare to seed their crops in the coming weeks amid a global recession.

“The game has changed completely from this time last year,” says Charlie Pearson, provincial crop analyst with Alberta Agriculture. “The collapse of world financial markets is affecting everything, including agriculture here in Alberta. The credit crunch is making it tougher for grain buyers to finance shipments of grain from farms to world markets. And grain prices have plunged more than 30 per cent from record highs last summer. Input costs such as fertilizer have fallen, but not far enough, creating a potential cost-price squeeze that is adding more risk and worry as producers struggle to budget for a profit this year,” says Pearson.

Where crop and input prices may end up between now and harvest is impossible to predict. “The best guess is that grain prices will fall a bit lower,” says Pearson. “While no major drops or increases in price are anticipated, there is no absolute certainty for what lies ahead.”

“The challenge for farmers is to avoid getting bogged down in all the negativity. We can’t control the world economy. All we can do is accept that we’re in risky times, and then get down to the business of managing that risk and focus on being profitable,” says Pearson.

“I think there’s room for cautious optimism. After all, $9 per bushel for canola is still pretty decent compared to the $6 per bushel often seen over the last 10 years. Of course, Mother Nature will have to cooperate. Weather is always the biggest risk when it comes to farming,” says Pearson.

Manage your risk

Pearson advises producers to consider locking in some profit margins this spring by signing forward contracts that offer locked-in prices for grain delivered in the fall.

“It’s also important to look at ways of managing risk like crop insurance,” says Pearson. “Each producer has to assess the risk that’s out there this year and decide whether they can handle it themselves – or if they’d sleep better by offsetting some of that risk with insurance.”

“With so much uncertainty around grain prices, many producers are paying attention to a crop insurance option called the Spring Price Endorsement (SPE). It protects against price drops of 10 to 50 per cent between the spring and fall,” says Chris Dyck, senior manager of insurance operations for Agriculture Financial Services Corporation (AFSC).

“The SPE is based on a spring insurance price set for each crop in January. We’ve seen a lot of volatility since then, and producers are realizing the price on many crops won’t have to drop much further to trigger an SPE payment this fall. Barley has already dropped so low, it would trigger a payment unless the price rebounds by the fall.”

If crop prices bounce back and climb 10 to 50 per cent above the spring price by fall, a built-in feature called the Variable Price Benefit automatically insures producers at those higher prices if their crops fail. “That’s especially important if you’re forward contracting because if you don’t get a crop, you may still have to honour those contracts at the higher fall price,” says Dyck.

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