Don’t be alarmed by hike in Calf Price Insurance premiums

While the cost is up, so is risk and coverage levels actually offer 
better value this year, says risk management specialist

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Calf Price Insurance is now being offered for 2015 and producers shouldn’t be alarmed by the premium cost.

“Cattle Price Insurance for the 2015 calf crop may initially appear to be more expensive than last year, but it is actually a better value,” said Bruce Viney, risk management specialist with Alberta Agriculture and Rural Development.

“Producers who are considering price insurance may be somewhat surprised by what appears to be very high premiums for the top coverage levels. However, these new higher premiums for the top coverage levels are simply a reflection of the increased price risk faced by producers in this new higher-price and uncertain marketplace.”

In this new environment, many longtime producers can feel or sense an increased level of risk, said Viney.

“This risk perception is in fact quite true and can be calculated mathematically from actual price data,” he said. “The resulting risk measurement is referred to as ‘volatility.’ For the mathematically inclined, volatility is calculated as ‘the standard deviation of the per cent change in the price around its mean.’ The key point here is that the volatility is based on sound logic, and is not just a number that someone pulls out of the air.”

The changes in premium levels from last year may initially appear to be biased to the high side but they are actually calculated by a proven mathematical formula called the Black-Scholes option pricing model, he said.

“In this calculation, premiums can change very rapidly or exponentially which implies that a doubling of the volatility or risk will result in a greater than doubling of the premiums as a per cent of coverage.”

For example, the top coverage offered on Feb. 3, was $2.50 per cwt, which cost about $48.12 for a 600-pound calf.

Given that the insured value of the calf is $1,500, the premiums are about 3.2 per cent of the coverage,” said Viney.

A lower coverage level of $2.32 per cwt was also offered on Feb. 3 at a cost of $2.96 per cwt or 1.3 per cent of coverage value. This lower coverage level worked out to $17.76 for a 600-pound calf and gave $1,392 per head in coverage.

“It essentially cost an extra $30 per head to buy an extra $108 per head in coverage when moving up to the top level,” said Viney. “Is this worth it to your operation? For some it may be worth it and for others it may not.”

He noted that one year earlier, the top coverage offered to producers was $1.88 per cwt and cost $3.04 per cwt or $18.24 per head.

“This provided $1,128 per head in coverage for a 600-pound calf. This year, that same $18 buys you an extra $264 per head in coverage. So comparing absolute price levels, a dollar spent on insurance this year gives better protective value than last year.”

Producers are encouraged to evaluate all of the coverage levels being offered and determine the best level for their own risk tolerance.

“Regular monitoring of CPIP coverage is also a good strategy since daily changes in exchange rates, futures markets and feed prices all contribute to calf price risk, volatility, and ultimately to the insurance being offered,” said Viney.

For further information on Calf Price Insurance, Alberta producers can contact their local Agriculture Financial Services Corporation offices or call 1-877-899-AFSC (2372).

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