Price Insurance Helps Livestock Producers Sleep Better At Night

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Today s high cattle and hog prices won t last forever, yet surprisingly few producers are taking advantage of Agricultural Financial Services Corporation (AFSC) s livestock price insurance programs, which are designed to protect hog and cattle producers from dropping prices.

While it might seem backwards to buy price insurance when prices are high, it actually makes good business sense, says Ryder Lee, manager of federal-provincial relations for the Canadian Cattlemen s Association.

With prices where they re at, the risk (from not having insurance) is almost higher, says Lee. When prices are in the dumps, how much dumpier are they going to get? But, if they re high and you can buy coverage at a pretty reasonable rate to make sure you keep making money, you re ahead of the game.

Given the price of premiums is adjusted to reflect the latest market situation, waiting to purchase insurance until after the market falls will cost you.

In this day and age, any change in the market is pretty much instantaneous around the world, says Bill Hoar, AFSC s livestock price insurance co-ordinator.

The next day when we rate again, our coverage levels will be indicative of the new reality. Anyone who has already purchased, had a strategy in place to manage this price risk.

AFSC s price insurance program offers protection from declines in calf, feeder cattle, fed cattle and hog prices. Premiums depend on the level of coverage a producer chooses, which ranges from break-even to varying levels of margin protection. Unlike a forward pricing contract, these programs provide a guaranteed base price, but allow producers to benefit from any upward movement in the market.

More than two-thirds of the 500 to 600 eligible feedlots and farms that finish cattle are already subscribed to the price insurance program.

Unfamiliar

However, uptake of the calf program launched last winter, and hog program launched in mid-July this year, are not yet seeing good uptake, says Hoar. Part of the problem is that cow-calf producers haven t had access to price insurance in the past, so are unfamiliar with how the program works and how it can be of individual benefit.

First and foremost, producers need to understand the programs are producer focused, market driven, and developed based on input from Alberta producers and producer associations (Alberta Pork, Western Hog Exchange or Alberta Beef Producers).

What we heard from producers is that they didn t want to rely on ad hoc programs and handouts. They want to manage their own futures, says Hoar.

So although the Alberta government and the Alberta Livestock and Meat Agency helped finance the research and development of the programs, producer premiums now fund 85 per cent of their operation.

AFS C plans to continue adjusting and improving the programs based on ongoing producer input, and that may soon include additional coverage levels and the option for producers to roll contracts forward into subsequent time periods.

To date, only Alberta producers have access to livestock price insurance. However, both Saskatchewan and Manitoba have expressed interest in creating similar, made-in-their-own-backyard price insurance products.

From CCA s standing, we d like to see a national program, says Lee.

Until other provinces build their own programs, Alberta will enjoy an advantage, says Lee.

By virtue of it only being in Alberta right now, the price insurance has the potential of being market distorting, because it has the potential to drive some market into Alberta, he says.

It s not that it adds more money to the market, but it helps producers in this province manage risk. If you can manage to run more confidently under that kind of program, you re more likely to want to operate here rather than elsewhere.

Risk tolerance is closely tied to individual circumstances, he says.

Each individual needs to calculate what is the risk to their ability to continue farming in the event of a catastrophic drop in livestock price, says Lee.

If they re highly leveraged with banks and debt, certainly they need to pay very close attention to how they re managing price, says Lee. If they have a million bucks in the bank, they probably don t need our program.

But then again, maybe they do.

I used to sell herbicide to grain farmers, says Lee. I talked to a lot of guys who sold $5 crop because $9.50 crop was going to hit $10.

Price insurance gives you the ability to protect yourself from a down when you re at a high. Guys need to figure out if it is something they want to spend a few bucks on so that they can hopefully sleep a little better at night.

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