WLPIP-Feeder Price Insurance
The Western Cattle Price Insurance Program (WCPIP) – Feeder offers price insurance to insure weaned or nearly weaned animals being backgrounded and/or intended for grass. The feeder program follows the design of the WCPIP-Fed price insurance very closely as the same three components are included: U.S. prices (CME feeder cattle futures), the Canadian/US currency exchange rate and the cash to futures basis. The WCPIP-Feeder program is based on the Western Canadian feeder 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 feeder coverage in relation to their own cattle feeding operations and anticipated marketings. Features of the WCPIP-Feeder 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 are available up to 95% 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 sale weight of the 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-Feeder is a market driven program as coverage offered directly reflects the feeder cattle futures and the Canadian dollar on the day the coverage levels are published. The current cash to futures basis is compared to the three year historical basis and when all calculations are conducted a forecasted price is provided for an 850 pound steer. Price coverage is offered for 12, 16, 20, 24, 28, 32 and 36 weeks from the purchase date. The coverage offered through WCPIP-Feeder price insurance is calculated Tuesday, Wednesday and Thursday using market data from each given day.
- Chicago Mercantile Exchange (CME) Feeder Cattle Futures – The nearby futures data is used to calculate a forward U.S. price.
- 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 feeder cattle price settlement index over the last three years to the average of the CME feeder cattle nearby futures during the previous three years.
- This calculation assumes the basis will eventually return to the three year average but also takes into account the current cash to futures basis
4. Current and forecasted market conditions.
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 backgrounding 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 Feeder Cattle Price – The only forward looking estimate for feeder cattle prices in North America is the feeder 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. This model assumes that the basis will eventually return to the three year average basis.
- Volatility – There is no options market for feeder cattle in Western Canada. The only forward looking estimate for the volatility of options on feeder cattle prices in North America are the options on feeder 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-Feeder program creates a settlement index based on weekly data collected from auction markets across Western Canada. From this data, a settlement index is made publicly available on Mondays (Tuesday when Mondays are a holiday).
The settlement index is representative of the average price of an 850 pound steer in any given week. The index is calculated by:
- Collecting data from auction markets across Western Canada using data from steers sold in the weight range of 750 to 950 pounds.
- In order to ensure the settlement index represents an average quality steer, animals sold in one or two head lots are not included.
- A four week average slide is calculated and is applied to standardize prices to represent an 850 pound steer.
- Auction mart sales will be used if there are five lots or greater sold in one particular sale. The average price is calculated and prices which are above or below 10 per cent of the average are excluded from the calculation. If there are fewer than five lots sold during a sale the data is rolled forward to the next sale day. This ensures the index is reflecting current market conditions.
- A weekly average is then taken using all sale data from that week. This becomes the published index.
- If fewer than 1,000 head are sold at all reporting auction markets in a given week, a settlement index may not be available immediately.
Participating Auction Markets for WLPIP
While WCPIP-Feeder policies are not settled against the exact price the policy holder may have sold their feeders for, by having a large number of auction markets participating in the program, the settlement values reflect the market conditions of the week. If you sold feeders at one of the participating auction marts during the claim window, your feeder price is being included in the settlement index.