Beef: Alberta moves to bring in voluntary price insurance program

Monday, May 4, 2009

The program will use 'puts' and 'calls' to allow producers to lock in a minimum return for cattle they are feeding

by DON STONEMAN

Beef producers can buy futures protection against fluctuations in cattle prices and in currency, but locking in the basis – the difference between prices in Canada and the United States – is a different story, for now at least. 

Alberta Agriculture is hoping to change that by introducing a program which covers the differences in cattle pricing basis. Details of the Cattle Price Insurance Programare scheduled to be announced in mid-summer in Canada's largest beef-producing province and Ontario is watching closely. Cattle prices in Eastern Canada are already often lower than in the West. Gord Hardy, president of the Ontario Cattlemen's Association, asserts that the program should be available across Canada. The plan was developed as a joint partnership between federal and provincial governments and Alberta Beef Producers, using some federal monies. Its goal is to provide protection against drops in Alberta beef prices over the time that cattle are fed.

The bare bones of Alberta's Cattle Price Insurance Program, which is offered by Agriculture Financial Services Corporation, Alberta's equivalent of Agricorp, were announced last December. The Alberta government says that it will be voluntary, be producer-funded and will provide timely claim payments.

Susan Crump, project manager, policy and program development, describes the program as a "risk management tool" that is "actuarily sound" and levels out the cash flow involved in a cattle operation over time. The program should be useable by all producers, regardless of their experience with hedging and other risk management tools. She says that the goal is to "develop a system that 65-year-old farmers are comfortable with."

The program will use "puts" and "calls" to allow producers to lock in a minimum return for cattle they are feeding. There's a floor under the price they will get for their cattle, but the feeder benefits if returns are higher.

If a payout is necessary, it's based on the difference between the futures price of cattle sold in Nebraska and the average price of cattle sold that same week in Alberta, based on Canfax price reportings.

A producer picks a price available that day and an interval according to when the cattle will be finished.

"The intent is that you would market your cattle at the end of that period," she says.
Farmers taking a position must have a good sense of where prices are going, Crump says. However, once a position in the market is purchased, daily price monitoring is unnecessary.

Crump thinks that the program will be popular with farmers who have previously had an unpleasant experience with conventional futures pricing and margin calls. A product for feeder cattle is more difficult to establish because of different weights of cattle but is on its way, she says.

The Ontario Cattlemen's Association is looking at a proposal developed by Peterborough County for a price stabilization plan. It was presented to the association's annual meeting. Hardy expects the Peterborough plan's proponents to come before the association's board in late April to answer some questions. BF