RED DEER – The time may be right for a privately run cattle price insurance program in Alberta.
A proposal prepared by Calgary consultant Ron Gibson for Alberta Beef Producers suggests a program similar to the livestock price risk protection scheme offered in the United States.
ABP chair Darcy Davis said his group is presenting the proposal to a wider audience to assess whether it has merit.
“At this point we are going to release it to the government. We haven’t endorsed it as a program,” he said.
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Gibson said that as Canada’s largest beef marketer, Alberta needs an insurance program to protect producers from disasters as well as the normal fluctuations of the market cycle.
“Somewhere along the line Alberta has to develop a product like that,” he told the annual Alberta Agricultural Economists Association annual meeting in Red Deer May 4.
“It is unbelievable that we have such a huge market in dollar terms and financial risk and there is little risk management available.”
The BSE border closure in 2003 emphasized the shortcomings of using American risk management products such as the Chicago Mercantile Exchange.
Alberta cattle producers see their price risks in terms of the CME futures, changing exchange rates and basis, which is the difference between Alberta cash and CME prices plus exchange.
“There is no risk management instrument that captures all three of those components,” Gibson said. “Price insurance is one possible approach to developing a made-in-Alberta risk management product.”
Before BSE was found in Canada, producers could live with the basis because the spread was never that wide. However, they are now more aware of basis risk.
For example, the difference ranged between $20 and $80 per hundredweight while the border was closed to Canadian cattle.
Few people are protected when markets turn sour. A private insurance program similar to crop insurance may be a better option than government support.
The proposed program could be offered throughout the year and sold through a public-private partnership using an organization such as the
Alberta government’s Alberta Financial Services Corp. It could use a re-insurance firm similar to what is done with crop insurance.
Gibson said determining premiums for fat and feeder cattle is a complex operation for the insurer but it would be relatively simple for the producer, who would pay a premium upfront for a certain number of pounds based on a daily province-wide price.
“The payout is simply based on the insured price compared to an index,” Gibson said.
“It is a settlement mechanism that is based on a province-wide index for fed cattle or feeder cattle.”
Davis agreed more work is needed on prices and premiums.
“It needs a good price identification mechanism and I don’t think we have that,” he said.
Canfax is a reliable source of fed cattle prices but key information for feeders comes from auction markets and they tend to provide only averages.
A greater challenge is persuading producers to buy into the concept, which forces them to take responsibility for price risk and may require a cultural change for many.
