WCPIP-Fed Price Insurance
The Western Cattle Price Insurance Program (WCPIP) – Fed offers price insurance to insure finished cattle that are intended for slaughter and expected to grade A or better. The WCPIP-Fed price insurance has three main components: U.S. prices (Chicago Mercantile Exchange (CME) live cattle futures), the Canadian/US currency exchange rate and the cash to futures basis. The WCPIP-Fed program is based on the Western Canadian market and bundles all three of these risks into one convenient and easy to use risk management tool.
By offering policies continuously throughout the year, producers will be able to match coverage in relation to their own cattle feeding operations and anticipated marketings. Features of the WCPIP-Fed include:
- Policy lengths from 12 to 36 weeks.
- For each policy length, a range of coverage levels are offered that correspond to a premium. Coverage levels typically range from 75 per cent to 95 per cent of the expected forward price for each policy length. These coverage levels and premiums change on a daily basis in relation to various market factors.
- Policies will be purchased based on expected finished weight of the fed cattle, in terms of hundredweight (cwt). One hundredweight is equal to 100 pounds. There are no weight minimums required to complete a purchase.
- The claim window is the last four weeks of the policy. In each of these four weeks, a producer can compare their purchased coverage to the settlement index and decide whether to make a claim. There are no weight minimums to file a claim, so a producer has the flexibility to claim a portion of the insured weight in each of the four weeks of the claim window. There is no obligation to sell the cattle to make an insurance claim, although the intention of the program is to match policy length and claims to actual cattle sales.
- If the producer sees a settlement index which is below the insured price of their policy, they can choose to make a claim for all or some of their insured weight on that policy. If for any reason all of the insured weight is not specifically claimed by the producer, the policy will automatically expire at the end of the last week of the policy and the settlement index relevant to that week will be used. Indemnities are owed if the settlement index settled against is less than the coverage purchased.
WCPIP-Fed is a market driven program as coverage offered directly reflects the fed cattle market. Producers have the flexibility to insure all or just a portion of anticipated marketings as well as hold more than one policy at a time to match coverage to different lots of cattle. Coverage offered through WCPIP-Fed price insurance is calculated each Tuesday, Wednesday and Thursday using market data from each given day. After forecasting the price, the coverage offered begins at 95 per cent of that forecasted price.
- Chicago Mercantile Exchange (CME) Live Cattle Futures - The market driven futures data is used to calculate a forward U.S. price for each policy expiry date.
- Canadian Dollar - Forward currency exchange data is used to convert the forward U.S. price into Canadian currency.
- Basis - The Canadian valued forward price is then adjusted for basis which involves the historical, current and future market conditions.
- The basis is calculated for the policies expiry week by comparing the average of the fed cattle price settlement index over the last five years to the average of the currency converted CME live cattle nearby futures during the previous five years.
- This calculation assumes the basis will eventually return to the five year average but also takes into account the current cash to futures basis.
By taking into account each of these factors, producers have a market driven forward price coverage they can evaluate and use to help manage the risk of finishing cattle.
The premium for a WCPIP policy is reflective of the probability of a payment or indemnity being paid. The longer the life of the policy, the more chance there will be a payment, so all else being equal, the greater the WCPIP policy length, the higher the premium. Similarly, the higher the coverage, the more likely the policy will result in a payment, so all else being equal, the higher the coverage level, the higher the premium.
One of the most important factors influencing premium is volatility of the market. If cattle prices are highly volatile, then WCPIP premiums will be more expensive than when the market is quiet and prices are relatively stable. If cattle prices are highly volatile, traditionally there is a greater interest in purchasing price protection. As a result the premium is higher to compensate for the increased risk of a payment.
WCPIP Premium Factors
- Forward Fed Cattle Price – The only forward looking estimate for fed cattle prices in North America is the live cattle futures traded at the CME. For WCPIP, CME futures prices are used to establish a forward price which is then converted to Canadian currency and adjusted with a basis projection.
- Volatility – There is no options market for live cattle in Western Canada. The only forward looking estimate for the volatility of options on fed cattle prices in North America are the options on the live cattle futures traded at the CME. The premium calculation uses the implied volatility obtained from the CME options market.
- Coverage Level –WCPIP price insurance coverage levels begin at 95 per cent of the forecasted feeder price.
- Time – The number of weeks from the day the policy is sold until the expiry date (generally between 12 and 36 weeks in four week increments).
- Interest – A fixed interest rate is assumed throughout the life of the policy. Interest rates are based on the Bank of Canada treasury bills.
The WCPIP-Fed program creates a settlement index based on weekly data collected from CanFax. Settlement prices are based on data gathered from the previous week. The settlement values are made public each Monday afternoon.
The WCPIP-Fed program is not designed to insure quality or intra-provincial variations in price levels. While WCPIP is designed to reflect the actual markets of producers the insurance policies are not directly tied to the individual’s actual marketings or prices received.
The WCPIP Fed settlement represented an average weekly Western Canadian price for finished cattle sold during the week. The index is calculated by:
- Using CanFax data to determine the settlement price for finished cattle in Western Canada.
- Prices for all Canfax fed cattle sales transactions occurring in the previous week may be combined to form a weekly settlement index.
- Yield data may be used to convert rail data to a live basis
- The Data includes the prices for fed cattle reasonably expected to be graded at inspection as Canada Grade A or better and excludes prices for exotics or poor quality cattle.
- Protocols are in place to limit the effect of individual producers reporting large volumes (a producer is limited to 20 per cent of the weight on a given day) and figures which are either above or below $4/CWT from the weekly average will be reviewed and removed if considered invalid.
- A settlement index may not be provided in a given week if data volume falls below 2,500 head sold during the week.
- In the event there is not enough information to create a settlement index other reasonable market sources may be used.
While WCPIP-Fed policies are not settled against the exact price the policy holder may have sold their cattle for, using CanFax data of weekly fed cattle sales provides an accurate reflection of the Western Canadian market conditions for the week.