In the spring of 2015, 1,018 calf price insurance policies were purchased in Saskatchewan through the Western Livestock Price Insurance Program (WLPIP). This resulted in approximately 120,000 calves or 15 per cent of the provincial marketable calf crop being covered through the program. The total coverage provided was $186 million.
At the time the coverage was purchased markets were at record highs. Producers were locking in price insurance protection from $226 per hundred weight (CWT) to $286 per CWT. Some producers selected higher coverage levels for a higher premium, while others selected lower coverage levels at a lower premium cost. Producers were evaluating the market, their risk protection needs and finding the right fit for their operation with the price insurance options.
In September and October the cattle market came off from its record highs earlier in the year. This decline in prices put producers, who had purchased the calf price insurance into a claim position. During October, November and December producers who had purchased calf price insurance in the spring were receiving benefits as the market prices were lower than the prices the producers purchased coverage on. WLPIP provided over $4 million in benefits to Saskatchewan producers who purchased calf price insurance in the spring.
Example:
On May 28, 2015, a producer had 100 calves they planned on marketing in mid-October each weighing an average of 600 pounds.
Insured weight = (number of head X expected sale weight) / 100
= (100 calves X 600 pounds) / 100
= 600 cwt
The premium table on May 28, 2015 offered insurance coverage for mid-October at $282/cwt or $2.82 per pound. The coverage cost $2.80/cwt.
Premium Cost = 600 X $2.80
= $1,680.00.00
The producer has a floor price of $2.82 per pound. In October, during the final four weeks of the policy, the producer reviews the settlement prices.
- Week 1 of claim window – September 28, 2015 – Settlement Price – 294.54 (above coverage)
- Week 2 of claim window – October 5, 2015 – Settlement Price – 280.82 (below coverage)
- Week 3 of claim window – October 12, 2015 – Settlement Price - $269.83 (below coverage and can make a claim)
- Week 4 of claim window – October 19, 2015 – Settlement Price - $274.98 (below coverage and claim automatically settles)
During the second and third week of the claim window the producer could have submitted a claim for a portion or all of their insured weight. In week four, if the producer had any of the insured weight remaining it would have automatically settled. For this example the producer let the claim automatically settle in the final week for all of the insured weight:
Claim = (Insured Weight X Selected Coverage Price) - (Insured weight X Settlement Price)
= (600 X $282.00) - (600 X $274.98)
= $169,200.00- $164,988.00
= $4,212.00
This producer would have automatically received a payment from WLPIP for $4,212.00
Where do your settlement values come from?
When a producer purchases price insurance for their cattle they have a forecasted price based on a number of factors including the futures market, currency exchange and basis. The producer also selects the time frame for when their insurance will provide coverage, which is anywhere from 12 to 36 weeks. Claims are made during the final four weeks of the insurance policy. Producers compare their insured price to the settlement price offered by the program. If the settlement price is lower the producer is in a benefit position.
This settlement price is based on the actual sales data from Western Canadian auction marts. Depending on the area the policy was purchased for, either Saskatchewan/Manitoba or Alberta, the settlement price reflects the market sales in those regions. WLPIP accesses market data from 42 auction marts across the western provinces including the internet auctions of TEAM and DLMS. This data provides a true reflection of the current prices producers are receiving for their livestock. This is the most comprehensive collection of cattle market data in Western Canada.
WLPIP is on sound financial footing. The claims producers had this past fall did not exceed the premium collected during the two years the program has been operating. WLPIP has been designed to be actuarially sound; over time claims will equal premiums collected. If claims should surpass the premium collected, there is deficit backing from the federal government and reinsurance is a part of the program to cover sizable payments.
What’s Next?
The opportunity to purchase price insurance for feeder cattle, fed cattle or hogs is available year-round. Calf price insurance has a deadline to purchase, as it is designed to protect against price declines on calves born in the spring and marketed in the fall. Calf price insurance became available for purchase on February 2, 2016. The deadline to purchase calf price insurance is May 31, 2016.
Price insurance is purchased through an online process. If a producer does not have an online account and is interested in purchasing calf price insurance before the May 31 deadline, they need to contact their local Crop Insurance office to start the application process. SCIC can also provide more information on how livestock price insurance works, the sign-up process and how to purchase policies.
Source - saskcropinsurance.com
