Editor’s note: One of the producer questions for the April 28 edition — on the Western Livestock Price Insurance Program — took some additional investigation by reporter Alexis Kienlen.
Vermilion cattle producer Sean McGrath asked, “I understand the risks that WLPIP is covering — futures price, basis, and exchange rate — but what goes into the formula used to calculate that risk?”
The program’s coverage levels start with a combination of forward prices for both cattle and the Canadian dollar on the Chicago Mercantile Exchange futures exchange said Brenda Hagen, Alberta WLPIP co-ordinator.
“Those two combined then makes it forward looking in Canadian price,” said Hagen.
The Agricultural Financial Services Corporation, which runs the program in Alberta, then reduces that price by deducting the historical basis.
“That gives us a top level of coverage, and from there, we offer 95 per cent of the forward-looking determination,” Hagen said.
In other words, by using futures, a currency forecast and historical basis (adjusted for Alberta), the program comes up with a price at a given point in time and offers to cover 95 per cent of that price for a premium. The further out in time, the higher the premium. Producers can get a lower premium by insuring less than 95 per cent of the forecast — but the odds of a payout also decline because prices would have to fall considerably more.
- More from the Alberta Farmer Express: An example of calf insurance
It’s all about minimizing risk in case there is a dramatic plunge in prices, while not limiting the upside, said Hagen.
“In a bullish market, there’s still a chance that you’ll have a better market to sell into, but you’re really just minimizing downside.”
And with cattle prices up about 20 per cent this year, the risk of a sharp price drop is higher — especially for feedlots and backgrounders that have bought high-priced calves and feeder cattle, said Brian Perillat, a senior Alberta cattle market analyst with Canfax.
“Those producers have more money on the table than ever before,” Perillat said in a press release. “And with the increased market volatility that often comes with high prices, producers could easily lose a lot more money a lot faster if they’re not using tools like price insurance.”
Tight cattle supplies, a weak Canadian dollar, and low feed costs are all positive for prices, but things can change quickly, he added.
“For example, the Canadian dollar can be extremely volatile and negatively impact cattle prices,” said Perillat. “Or if there’s a drought or some other weather concern that results in a small U.S. grain crop, that could reduce cattle prices this year.”
The program is closely tied to the futures on the Chicago Mercantile Exchange, and coverage can only be purchased after the market has closed for the day. (Purchase hours are Tuesday, Wednesday and Thursday from 2 to 5:30 p.m.)
While the feeder and fed cattle programs offer 36 weeks of coverage, calf contracts are more seasonal and linked to the high fall volumes at auction markets. Calf contracts are sold from February until the end of May, for settlements in September through December.
“There’s not a hard number to tie to that, but it’s seasonally based,” said Hagen.
WLPIP, which also offers coverage for hogs, was given a new name this year (replacing CPIP for cattle and HPIP for hogs) after the four-year-old program was expanded to B.C., Saskatchewan, and Manitoba.
Whether it’s a good deal depends on a producer’s situation and risk tolerance, say experts.
“It has its place for some people, but it can be expensive,” said Les Smith, president of Gateway Livestock Marketing Services. “Managing your risk is very individual.”
“There’s a lot of value in it and I would encourage people to look at it and lock in,” said Fred Hays, policy analyst with Alberta Beef Producers. “It really does depend on the year and what the market is doing.
“If there is a drop in price, you’re going to at least have a base to drop to, and then you’re protected that far.”
Still, Hays urges producers to watch the markets to determine an optimal time for buying. But cow-calf producers don’t have much time left — the last day for buying coverage this year is May 29.