Marketing livestock is hardly straight-forward and only through hindsight do we actually know whether the pricing decision made (or didn’t make) on a particular day was good, bad or ugly. The Western Livestock Price Insurance Program (WLPIP) has helped elevate some of risk of marketing cattle into what is often a volatile and uncertain market.
In the last two years WLPIP has provided $12 million to Saskatchewan cattle producers. In particular, producers who purchased calf price insurance in 2015 and 2016 received payments when the market declined from the spring to the fall. In 2015, calf price insurance claims totaled $5.1 million and in 2016, producers accessed over $6 million in calf price insurance claims.
Predicting where the cattle market will be in the fall is a fool’s game. The last two years have proven even the most experienced livestock marketers don’t know how the market is going to unfold. Between the futures and cash markets, supply and demand and currency and grain prices, it’s no wonder the many moving parts of livestock pricing make marketing an emotional and financial roller-coaster. WLPIP provides an effective option to protect against the unpredictability of the cattle market.
Deciding when to buy insurance
Know your breakeven price.
Remember that you can’t manage what you don’t measure. Calculating an accurate “measurement” of your cost per pound of calf, feeder or fat animal sold is vital in knowing how many dollars you will need in return, and what you can expect for profit/loss based on current market expectations. Comparing your break-even to current WLPIP coverage can help to determine the cost-benefit of potentially using the program and will make your action plan more objective. It’s easier to make decisions when there’s a reason behind them.
Cover fixed costs.
Unfortunately, WLPIP doesn’t always offer coverage that will ensure a desired profit-level, or even in some cases, a break-even. As a Plan B, it may be wise to know how much money per pound you would need to cover direct costs or service your debts and keep you in a positive cash-flow situation. Not only can this help you sleep at night, it can also improve relationships with financial institutions. It may also help in deciding whether to purchase top-level coverage or lower coverage with a cheaper premium.
Protect against a ‘disaster’.
When looking at various options on a premium table, WLPIP offers a range of coverage levels, with the lower levels being offered at a significantly reduced premium amount from top coverage. In the event of a market disaster, such as a border closure where prices take a drastic fall, such coverage may still prove to be effective in managing your bottom line.
Compare price forecasts.
Having an idea of where you think the market is headed can help you evaluate whether the timing is right to take action (will WLIP coverage go higher? Will premiums get cheaper?). Since WLPIP coverage fluctuates with current market conditions, monitoring the program frequently can ensure you don’t miss out on a desirable index and will give you an idea of when WLPIP coverage levels may have peaked. Remember though, that the Canadian/US exchange rate also impacts coverage.
Have a plan!
Risk tolerance is specific to your operation so for some a risk management plan is hard and fast with rules. Others may have a couple of figures written on a napkin. The point is that the events that occur when a market seems unshakable are those that the industry will talk about for months or even years. Generally speaking, there was a point before each market shake-up where action could have been taken. No one plans to fail, they just fail to plan.
Bottom line is that it is critical for a producer to, at the very minimum, know their cost of production and a break-even price that they need to receive. So as you start to get your books in order for the upcoming tax season, sharpen your pencil and figure out your costs.
Purchasing a WLPIP Policy for 2017
WLPIP is a market-driven program that provides livestock producers with the option of purchasing protection against an unpredictable downward move in the average local cash market. For a premium, producers can purchase an insured index, or floor price, for cattle approximately 3 to 9 months out into the future. As the policy enters its final four weeks, cattle producers have the flexibility of submitting a claim. Settlement is based on an index of the current local cash price – compiled using weekly sales data from Canfax and auction yards across western Canada. If the settlement index is lower than the price insured for, the difference will be paid to the producer.
Know your targets
Half of the risk-management battle is knowing the price at which you wish to establish that protection. Having a target for the coverage you want to purchase can make your decisions easier and faster. This way, you can take a quick glance at the daily premium and carry on with your day.
Set a reminder for yourself
Coverage is available for purchase Tuesday, Wednesday and Thursday from 2 p.m. to 5:30 p.m. MST. Set a reminder through your email, an alarm on your phone, or even write on a sticky note to help you to remember to look at the premium tables. You can also sign up to receive daily emails when the premium and coverage information is released.
May 31, 2017, is the last day price protection can be purchased for spring born calves that are traditionally marketed in the fall. Price insurance for the feeder cattle, finished cattle and hogs can be purchased year-round.
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.