Canola growers may soon have another risk management option at their disposal.
The Canadian Canola Growers Association is assessing the feasibility of providing farmers with an index-based canola margin insurance product.
The association’s members have told it that current risk management tools such as forward contracts, futures contracts and options contracts are not meeting their needs.
“The current products aren’t necessarily bankable or predictable, which this product would be,” said Cheryl Mayer, the association’s director of policy development.
“You would know right away whether you were going to get a payout on something like this and not have to wait for an extended period to determine that.”
Margin insurance is designed to protect gross profit margin from decreasing. The policy would comprise an index of canola futures prices minus an index of major variable production costs such as fuel, fertilizer and interest rates.
“If canola prices go down or input prices go up or both, then that would decrease your margin and you could potentially receive a payout,” said Mayer.
However, producers would not receive a payout if margins go up
Errol Anderson, analyst with ProMarket Wire, disagreed that risk management tools are failing to meet grower needs.
“Growers have had tons of tools and tons of opportunities to lock in tremendous canola prices,” he said.
He wonders if the government will be involved in the proposed gross margin insurance plan.
“Anytime government gets into price insurance, it’s not healthy for the market,” said Anderson.
Mayer said a year of investigating margin insurance has made it apparent that growers like the idea.
“The preliminary results suggest that an index-based canola margin insurance product may be of interest to farmers and it could actually provide them with an efficient risk management tool,” she said.
The next step is for farmers to complete a survey on the association’s website.
The 10-minute survey asks growers what risk management tools they are using, their thoughts on alternative forms of risk management and what features they would like to see in a margin insurance product.
“Things like what would be the length of the policy, the premiums they would like to pay, the level of coverage,” said Mayer.
The association wants at least 200 farmers to fill out the survey.
It hopes to have a product ready for a pilot test or to go straight to market in the next 12 to 18 months.