Cattle feeders take most advantage of AFSC price insurance program

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Feeders have been ready participants of Alberta Financial Services Corporation’s (AFSC) livestock price insurance program, with more than two-thirds of the 500 to 600 eligible feedlots signed up so far.

Uptake has been slower on the calf program that started a year and a half ago and the hog program launched a year ago, says Merle Jacobson, AFSC’s vice-president of risk management.

“We saw a significant increase in the number of producers purchasing price insurance on their calves and feeder cattle over the last six months. Uptake on the calf side is still low, but our numbers are what we expected and hoped for in the first full year,” Jacobson said in an interview.

“We’re trying to educate producers on the importance and value of this kind of protection. Understanding is growing, and with increasing understanding, a lot more producers are interested in buying in.”

AFSC arrives at a coverage level by analyzing the futures market and the U.S./Canadian exchange rate to calculate the estimated future market value.

While some producers might wonder why price insurance is necessary in a good market, Jacobson says it suits all price scenarios. Because price insurance does not lock a producer into a contract, those who purchase insurance win regardless of how the market moves. They are insulated from any decline, but can still benefit from price increases.

“Cattle prices are high right now. But, the question is, what are they going to be doing six months from now? When that time comes and producers market their animals and the price they get is less, that’s what they’re covered for,” Jacobson said.

“If market prices are rock bottom, buying price insurance allows a producer to cover off with certainty a level of their costs. But, if market prices are high, they’re able to cover off with certainty a level of their profitability.,”

This year may be an example of a year that price insurance proves especially beneficial for producers. As calves start to go to market into the fall, it will become increasingly clear how the drought in the U.S. and the resulting high price of feed will impact the market.

“While the fall marketing of calves hasn’t happened yet, there’s some speculation that the high prices predicted in the spring won’t hold through in the fall because of the high price of feed,” says Jacobson. “If the market price drops, producers who have price insurance will be protected.”

Other options for hogs

On the pork side, producer uptake on price insurance remains very low. “Our hog program has had very little interest, which is based on a combination of a suffering industry, and the fact that they have other products available through direct contracting with the plant, (as well as) some products that the Western Hog Exchange put together,” Jacobson said.

“We’re very patient. When you move into these types of products, it takes a long time for producers to evaluate and get on board.”

Jacobson said price insurance allows livestock producers to plan for the future in a way they’ve never been able to before. “Having certainty allows a producer to leverage cash flow. I truly believe it’ll change how producers operate over time. It has the potential to really affect how the entire industry operates.”

To date, Alberta is the only province that offers livestock price insurance. However, Jacobson sees value in bringing neighbouring provinces under Alberta’s umbrella.

“I think there is a real opportunity for this to become a widespread product across the western provinces. The more producers buy in, the more we can spread the risk and the less the administrative costs will be.”

Jacobson also sees potential for protecting feeders price increases.

“We see opportunities for the whole value chain. Again, the more diverse you are, the more pooling of the risk, which means the lower the premium you can end up charging,” he said.”

However, Jacobson says AFSC’s priority right now is to make sure the existing tools are providing the coverage producers want.

“We’re working really closely with all the beef groups here in Alberta to make sure our assumptions and methodologies are in fact what the marketplace wants.”

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