Formerly called the Western Livestock Price Insurance Program, it is now just called Livestock Price Insurance and has a revamped website. Despite the name change, the program is only for producers in Western Canada.

Last year, 360,000 calves, 209,000 feeder cattle, and 232,000 fed cattle (along with 9,300 hogs) were insured and producers received about $122 million in payouts. But the program was criticized by the Canadian Cattlemen’s Association at the start of the pandemic as premiums soared.

The “sky-high premiums” made the program unaffordable, especially for young producers who most need it, said the CCA, which is lobbying for a national program cost shared by government.

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With the recent market volatility, Alberta Beef Producers is strongly encouraging its members to consider purchasing insurance to protect prices in the fall. Producers should be monitoring premiums and coverage levels for both calf and feeder insurance, it said.

However, Agriculture Financial Services Corp. notes the extension gives producers just nine extra purchasing days, as available coverage options are published only on Tuesdays, Wednesdays and Thursdays.

For more info, go to wlpip.ca.

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On average, 2019 crop insurance premium rates are nine per cent lower than last year, AFSC said in a news release. It noted premium rates also dropped eight per cent in 2018. However, premiums vary according to the actual loss experience for the type of crop and claims experience in the risk area.

The provincial crop insurer also urged producers to think about “changing risks” as they consider their insurance coverage, particularly moisture conditions.

“Conditions have been drier than normal for most lands south of the Yellowhead Highway, down to the U.S. border, and across the north half of the Peace Region,” Ralph Wright, head of the provincial agrometeorology unit said in the release. “The driest areas extend from about Red Deer south with most areas experiencing at least one-in-12-year lows, with several areas within this zone dipping below one-in-25-year lows.

“Across the northern Peace Region, two-year precipitation deficits range from less than one-in-six-year lows to less than one-in-12-year lows. It’s important to note that historically, wet and dry spells begin and end abruptly. Both long- and short-term trend reversals can be sudden and are very difficult to predict.”

However, AFSC said, average premiums are being reduced because “growing conditions have generally been good for the past several years.”

This year’s Spring Price Endorsement will again include the 10 per cent deductible introduced last year.

“The incorporation of the deductible led to a 25 per cent decline in premium rates for protection on within-year commodity price declines of more than 10 per cent,” the news release stated. “Hail insurance premiums are also decreasing in many areas in 2019, due to lower claims experience in the past two years.”

The calf portion of the Western Livestock Price Insurance Program, which is available until May 30, also has “significantly lower premiums” this year. For example, premium rates on the last day of February this year (depending on the length of coverage desired) were between 20 and 40 per cent lower than the same day a year earlier.

“These rates are subject to change responding to market variability as the sales season continues,” the news release stated.

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Under the Advance Payments Program, producers can receive up to $400,000 in advances with the interest on the first $100,000 paid by the government. Advances can be obtained on calves, feeders, fed animals, and breeding stock intended for sale using the animals as the primary form of security, with a program as a secondary form of security. Prior to the 2016 program year, cattle producers could only use AgriStability as the secondary form of security. With this change, producers can now choose between AgriStability or WLPIP as secondary security. The new option is being implemented on a trial basis for the 2016 program year.

To learn more or to request a cash advance, cattle producers in Alberta should contact the Western Cash Advance Program at 780-674-2622.

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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.

The post Drilling down into the livestock price insurance program appeared first on Alberta Farmer Express.

Producers should know their costs to determine how much coverage they need.

Here’s a basic example of how it works:

In April, a cow-calf producer plans to sell 600-pound calves in September. The forward expected price is $1.88 per pound and the producer wants to lock in 95 per cent of that price — $1.78 per pound. The premium for this price level is $0.03 per pound, so if the producer has 100 calves expected to weigh 600 pounds each, the total premium cost would be $1,800.

In September, the feeder cattle index for the region for the 550- to 650-weight category falls to $1.68 per pound. The producer would receive $0.10 per pound or $6,000. (If the price is higher than $1.78, then there is no payout.)

• Drilling down into the livestock price insurance program

Experienced marketers may find an outright short futures position more advantageous because it provides more of a correlated hedge for 100 per cent coverage. However, with WLPIP, there are no margin calls after paying the initial premium. When a producer has a short position on a futures contract, there will be margin calls if the market continues to go up.

Another strategy is to buy put options on feeder cattle and sell out-of-the-money call options. This is essentially equivalent to a short position on the futures market but the margin calls are only necessary if the futures move above the strike price of the out-of-the-money call option.

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