We are now in the second year of the price insurance program in Saskatchewan, Manitoba and B.C. Alberta producers have had price insurance for the last six years.
It is an interesting program. It certainly has the potential to reduce the risk of price fluctuation. Since it has been available we have experienced steadily rising prices in the cattle business so we have some idea of how price insurance works in the current market but we really have no idea how it will function in a steady or declining market.
I can see three different approaches to price insurance:
- As an insurance program.
- As a program to increase profit.
- As a program I choose not to use.
1. If we view it as price insurance we would determine the price required to make a small profit in our business. In difficult times we might even determine a break-even price. This price will be different for each operation. In this example I’ll use a price of $2 for an 850-lb. steer as our small profit number. I anticipate marketing our yearlings in September. For those of us with home-raised yearlings I think this is a realistic price. Under this scenario we would purchase price insurance as soon as the sale date and price fit our requirements. On January 13 price insurance was available for September. You could purchase a policy with a support price of $2.26 with a premium of $8.01 per cwt. On the same day we could purchase a policy with a support price of $2 at a premium of $4.65. If the $2 price would allow us to be profitable we would purchase that policy. We now have a price that will allow us to be profitable and we have protection for 36 weeks.
If we are marketing calves or if we want to have long-term protection we might use the same approach. Calf insurance was available on February 1. At that time you could purchase a policy with a price of $2.50 and a premium of $9.06 per cwt. On the same day you could also purchase a policy with a price of $2.26 and a premium of $2.47 per cwt. The calf program is based on a 600-lb. calf. Using a slide and knowing our costs what price do we need to make a small profit? If the $2.26 price would allow us to be profitable we purchase the policy and have 36 weeks of protection.
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2. If we view price insurance as a way to increase profits we will monitor the support price three times a week and attempt to purchase at or near the highest price available. The downside to this approach is that we may have no coverage for an extended period of time.
3. Choosing not to use price insurance is clearly an option that is available to all of us. If we are not concerned about challenges like BSE or a border closure this may be our best choice.
The following table shows the support price and premium for the feeder cattle program for September under the Sask./Man. program. The first price for Sept. was available on Jan. 13. The price was $2.26. The premium was $8.01. A price of $2 or higher has been available each week. The highest price available to date was $2.46 on March 31. The premium was $6.13. The lowest price available to date has been $2.22 that was available on February 5, 24 and 25. The premiums were $7.23, $5.89 and $5.81, respectively. The support price has varied $22 per cwt or about $200 per head so far. The September price will be available three times a week until about the middle of June.
My personal opinion about price insurance has shifted. Last year we purchased a policy trying to be on the high end of the program. This year we have decided that price insurance is insurance. With this in mind we purchased a policy that would make us profitable and cover our risk. We also purchased a policy on our calves at a relatively low price as soon as it was available. We will use price insurance as a floor price in case of some unforeseen disaster. We want to be insured as long as possible.
The best outcome would be to never collect on price insurance. We will use our marketing skills and knowledge to generate our profit. How do you plan to use price insurance? I invite you to give this topic some serious consideration.