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Wednesday, February 17, 2016

Cattle price insurance premiums reflect higher levels of risk


Alberta Government Agri-News 

Cattle price insurance for the 2016 calf crop is now available from Agriculture Financial Services Corporation (AFSC) until May 31,2016 at a little higher cost than the same time last year. Bruce Viney, risk management specialist at Alberta Agriculture and Forestry says the higher premium rates directly reflect a higher level of risk and volatility.

“Increased levels of volatility are common across nearly all commodity and equity markets this year. Volatility is simply a statistical measure of risk and relates to the severity of market price swings. These up and down movements largely reflect the uncertainty that market participants have in their forecast of future prices,” he says.

In the current global environment, changing economic conditions around the world can have an instantaneous impact on the perceived future demand for our products.

“Global markets are also experiencing increased levels of uncertainty and volatility that can be observed nearly every day in stock markets around the world. Often, an announcement in Asia will impact their own local stock markets before creating a wave of activity that hits the North American markets within minutes of the market’s opening,” Viney says.

Electronic trading and the development of high frequency trading is also a major topic of discussion in cattle industry circles these days. Wild market swings and increased volatility makes Chicago Mercantile Exchange (CME) futures markets less effective and more expensive for managing price risk in all segments of the industry. The volatility impacts have become even larger since the CME raised its feeder cattle daily trading limits. To remain a sustainable, non-subsidized and responsive program, AFSC must charge higher premiums to offset the new higher levels risk.

Viney says that as s a truly market driven program, the Western Livestock Price Insurance Program must adjust its coverage and premiums every day based on a number of factors including CME price and volatility levels. It’s important to note that the daily premiums are calculated in a proven and defendable manner and are not just numbers that someone arbitrarily picks from the air.

“Higher levels of risk and volatility are not always bad for everyone. Volatility also implies that there are more violent market price swings to the upside. These upside opportunities can be very profitable for those producers that are able to take advantage of them. By design, the Cattle Price Insurance Program leaves those upside opportunities open for producers while eliminating a portion of the downside risk. Producers are encouraged to regularly monitor coverage and premium levels, and then make decisions based on their own tolerance for both downside risk and upside opportunity,” he says.

In the face of the higher risk levels, producers are also advised to get a handle on their cost of production. Knowing production costs and approximate breakeven selling prices will help determine the best level of coverage. The most appropriate level of coverage, or the amount of downside risk producers are willing to accept, is a largely a personal preference based on individual risk tolerances and risk management policies.

Producers looking for more in-depth risk management learning opportunities are encouraged to explore the new online Agriculture Business Risk Management Program that is offered by Lethbridge College. For assistance in calculating cost of production, Alberta Agriculture and Forestry has the free downloadable ‘Rancher’s Return Lite’ spreadsheet available.

For more information on cattle price insurance, Alberta producers are encouraged call the AFSC help desk at 1.877.899.2372 or visit www.wlpip.ca

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