The Western Hog Price Insurance Program (WLPIP) was developed with the aim of enhancing Western Canadian hog producers’ ability to manage price volatility in the hog market. WLPIP offers a risk management alternative to futures and options, with a highly transparent, fixed cost to the producer. There is no minimum weight to insure; as such it is is a tool available to both large and small producers. Participation is voluntary and flexible as there are a range of coverage levels and policy lengths offered, allowing producers to tailor coverage to their own operations and risk preferences.
Under the Hog Price Insurance Program, producers will have the option to purchase an insurance policy based on a forecasted hog price. When the policy expires the coverage purchased is compared to a settlement price that reflects the monthly average price of market hogs. If the settlement price is below the insured price, a payment of the difference is made.
By offering WLPIP continuously throughout the year, producers will have the flexibility to match coverage in relation to their own hog operation and anticipated marketings.
Features of the Hog Price Insurance include:
- Policies can be purchased year-round.
- Policy lengths are offered monthly. Producers can select policies that cover forward prices from two to 10 months.
- For each policy length, a range of insured prices (coverage levels) are offered which correspond to a premium. Coverage levels typically range from 75 to about 95 per cent of the forecasted price for a specific month. The insured prices and corresponding premiums change every Tuesday, Wednesday and Thursday (subject to blackouts) in response to market factors.
- Policies are purchased based on expected sale dressed weight of the hogs, in terms of 100 kilogram units of weight (ckg). There is no weight minimums required to complete a purchase.
- There is no obligation to sell the hogs at policy expiration, although the intention of the program is for producers to match policy length to actual livestock marketings.
- The insurance payment is triggered by a drop in the Western Canadian average market dressed hog price. If the settlement index in the month the policy expires is less than the insured price (coverage) the policy was purchased at, an indemnity is owed to the producer.
- An insurance payment is calculated as the difference between the insured price and the settlement price, multiplied by the dressed weight insured.
The Western Hog Price Insurance Program is available for purchase every Tuesday, Wednesday, and Thursday (subject to blackouts). Premium tables are published on www.wlpip.ca each of these days. The coverage shown on the premium tables are the insured prices offered and is calculated based on market data on each given day.
WLPIP now includes three indices for coverage. The Red Deer index is based off Alberta remains unchanged. A Saskatchewan index based off Brandon and a Manitoba index also based off Brandon have been added. These indices are geographically representative for the producers selling to these slaughter facilities.
The forward price is calculated using the Chicago Mercantile Exchange’s (CME) lean hog future with a cash-to futures basis adjustment. This price is then converted to a Western Canadian equivalent price by a forward exchange rate and a Western Canadian factor.
WLPIP Coverage Factors:
- CME Lean Hog Futures – The nearby futures contract for each policy length is used to calculate a forward U.S. price for hogs.
- Basis – The basis is calculated as the five-year-average of the appropriate local U.S. region-to-CME basis.
- Canadian Dollar – A forward currency exchange is used to convert the forward U.S. hog price into Canadian currency.
- Factor – Values from the appropriate plant are used to reflect the difference between the market conditions in Western Canada and the United States.
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 marketing hogs. The table below summarizes the three indices now available and the data sources used:
The premium for a WLPIP 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 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 hog prices are highly volatile, then WLPIP premiums will be more expensive, to compensate for the increased risk of a payment, than when the market is quiet and prices are relatively stable.
Cost to Participate
Premiums of the livestock price insurance program are fully funded by producers. The premiums are market driven and are based on traditional insurance principles. They will fluctuate based on a number of factors:
- Life of the policy – statistically, the longer the policy the greater the chance of the settlement price being below the insured price. As a result, in most cases the longer the policy is for, the higher the premium will be.
- Market volatility – If at the time the policy is being sold, the market is highly volatile, the premium to participate will be higher. If the market is relatively stable the premium should be less expensive.
- Coverage price – By selecting a higher coverage price, there is a greater chance the policy will produce a benefit. Similarly selecting a lower coverage price means there is less chance the policy will produce a benefit. The premium will be reflective of the coverage selected as higher coverage will produce a higher premium and lower coverage will produce a lower premium.
- Exchange rates and a forward price based on the difference between the futures market and the Western Canadian hog market will influence the premium cost for producers.
A producer can monitor the coverage levels and premiums and decide when the time is right to buy insurance. The total premium cost is based on the coverage level, the length of policy, and the amount of dressed weight insured.
WLPIP Premium Factors
- Olymel / WHE – The forward price works as the future market price of the WHE / Olymel lean hog. It is based on the CME Lean Hog Futures with an Iowa/Minnesota cash-to futures basis adjustment which is then converted to the Olymel / WHE equivalent price by a forward exchange rate and the Olymel / WHE factor.
- Maple Leaf / Signature 4 Contract- The forward price works as the future market price of the Maple Leaf / Signature 4 Contract lean hog. It is based on the CME Lean Hog Futures with a National cash-to-futures basis adjustment which is then converted to the Signature 4 cash-to-futures basis adjustment which is then converted to the Signature 4 equivalent price by a forward exchange rate and the Signature 4 factor.
- Maple Leaf / Signature 3 Contract- The forward price works as the future market price of the Maple Leaf / Signature 3 Contract lean hog. It is based on the CME Lean Hog Futures with a Western Cornbelt cash-to-futures basis adjustment which is then converted to the Signature 3 cash-to-futures basis adjustment which is then converted to the Signature 3 equivalent price by a forward exchange rate and the Signature 3 factor
- Coverage level – The insured price is a part of the premium calculation. A higher coverage level will produce a higher premium.
- Volatility – The market and exchange volatility are factored into the premium. The market volatility is derived from the CME Lean Hog Futures market. The exchange rate volatility is based on the forward looking U.S. dollar (USD) to Canadian dollar (CAD) currency volatility from Thomson Reuters. Volatility plays one of the biggest roles in the cost of the premium.
- Time – The duration between the premium calculation date and the policy expiry date.
- Interest – Interest rate data is provided by the Reuters service.
WLPIP Calculation of Settlement Index
The WLPIP settlement price is a monthly averaged formula price. It is calculated using the appropriate daily hog price, USD to CAD exchange rate and the appropriate factor.
- Using one of HG206, HG201 or HG212 hog price –
- Exchange rate – The USD-CAD noon rate from the Bank of Canada is used to convert the HG206 , HG201 or HG212 average daily price to Canadian dollars.
- Factor – Derived from the appropriate plant in AB or MB
The calculation of the WLPIP settlement price is a two-step process:
- The formula price is calculated for each business day of the calendar month.
- A monthly average of the formula price for the calendar month is the WHPIP settlement price. This settlement price is published publically at the beginning of the month, enabling producers to see if the policy they purchased resulted in a payment
Settling a claim
An insurance payment is accessed if there is a drop in the average market hog price when compared to the insured price. If the settlement index in the month the policy expires is less than the insured price (coverage) purchased by the producer, an indemnity is owed. An insurance payment is calculated as the difference between the insured price and the settlement price, multiplied by the dressed weight insured.
There is no requirement for the producer to sell their hogs at the time the policy expires. While the intent of the program is to match coverage with hog marketing timelines, there is no requirement to market hogs before the policy expires.