Western Livestock Price Insurance Program (WLPIP) June 9, 2014 SSGA AGM & Convention

Presentation Outline Factors Impacting Canadian Prices Why Consider Risk Management Western Livestock Price Insurance Program What is it? How does it work? Examples Program delivery

How are Canadian Cattle Prices Determined? North American market conditions Reflected in U.S. commodity prices Live cattle and feeder cattle futures trading Chicago Mercantile Exchange Exchange rate of the Canadian dollar Local market factors Canadian beef demand Transportation, border fees, cost of gain, trade issues (COOL) Very challenging to quantify these factors

www.barchart.com Futures Market Risk

Currency Risk $0.01 CDN $0.03/LB

Basis Risk What is basis? The basis needs to be clearly defined every time it s used. Difference between the current cash price and the nearby futures price Cash market reflects the actual selling price of a physical commodity (auction market) Futures prices reflect what traders think today that cattle will be worth at a specific future time (Chicago Mercantile Exchange) Trade issues, cost of gain differential, transport fees, border fees, supply/demand of cattle, etc.

Why Risk Management? The market is influenced by factors beyond producer control Greater capital is required to operate in the industry Narrower margins make recovery of losses more challenging Long-term industry profitability is at a breakeven (from a cash market standpoint)

Source: CanFax Why Risk Management?

Things to Consider What are your business goals/objectives? What is your break-even price? What market environment are you buying and/or selling into? Will the bullish market hold?

What is the Livestock Price Insurance Program? One-stop-shop risk management: Price floor with upside price potential Reflects the local market Flexible variety of indices no minimum purchase or settlement amounts no commitment to sell 4 week window to submit claims (cattle only)

What is Price Insurance? Establishes a price floor with upside price potential Cash market higher = sell for higher $$$ Coverage (floor price) Cash market lower = price insurance pays the difference

How does Price Insurance Work? 1. Purchase insurance based on your expected sale weight 2. Match insurance to time period when you plan on selling 3. Choose your coverage and pay the premium 4. Now have a protected average market cash price 5. If the cash market is below your coverage during the last 4 weeks of a policy, option to make a claim

WLPIP Programs Calf Feeder Fed Hog Class of Cattle Un-weaned calves Backgrounded/ Grass Feeder Finished Market hogs** Coverage Components WCPIP-Feeder forecasts, spread, barley CME Feeder Cattle futures, Canadian dollar, cash to futures basis CME Live Cattle futures, Canadian dollar, cash to futures basis CME Lean Hog futures, Basis, Canadian dollar, WHE Alberta factor Availability Purchase in Spring for Fall Settlement Year Round Year Round Year Round Policy Lengths 16-36 weeks 12-36 weeks 12-36 weeks 2-10 months **weaner pigs can be insured against market using a factor of 1.7

WCPIP Coverage Available for purchase Tues, Wed, Thurs afternoons Includes three program options with multiple regions Calf Feeder Fed AB AB AB ONLY SK/MB SK/MB

Settlement - Monday 1:30 PM Calf Feeder Fed Hog Data Source Auction Markets (43 Across the Western Provinces) Canfax: Producer Reported USDA HG206 Sex: Steers Only 60-40 Ratio Steers to Heifers 100 kg (dressed) Weight Range 550-650lbs 750-950lbs Finish weight n/a Adjustments None (generally on average of a 600 lb steer calf) Slide Adjusted to 850lbs Producers Capped to 20% of index Yield Ratios used to convert Rail-to-Live Currency, Yield (US to CDN), Metric Conversion (US to CDN), Average grade (CDN) Outlier Rule 1&2 Head Dropped +/- 12% of Daily Mean 1&2 Head Dropped +/- 10% of Daily Mean +/- $4 of Average is examined n/a

WCPIP Program Basics

Calf Example - Coverage In spring 2012 a producer had 75 calves; intended to sell in mid-november at 600 pounds Mid-November price coverage level = $158/cwt Bought insurance in spring based on expected weight 75 calves * 600 pounds = 45,000 pounds 45,000 lbs / 100 lbs/cwt = 450 cwt Total coverage = 450 cwt * $158/cwt = $71,100 Per head coverage = $947

Calf Example - Premium Premium cost for selected coverage = $2.11/cwt Total premium : 450 cwt * 2.11/cwt = $949.50 Per head premium = $12.66

Calf Example - Claim Mid-November settlement price in 2012 was $147/cwt Settlement based on shortfall : $158/cwt - $147.53/cwt =$10.47/cwt Total claim : 450 cwt * $10.47/cwt = $4,711.50 Less the premium -$949.50 Net value $3762.00 Per head claim = $ 50.16

How would CPIP have worked? Oct 29 8.26 * 6 cwt = $49.56/hd Nov 5 8.15 * 6 cwt = $48.90/hd Nov 12 9.64 * 6 cwt = $57.84/hd Nov 19 10.47 *6 cwt = $62.82/hd

Calf Example Spring 2013 Had 75 calves, intend to sell in mid November at 600 pounds. Bought insurance based on weight 75 calves * 600 pounds = 45,000 pounds 45,000 / 100 = 450 cwt Top insurance coverage was $144/cwt Premium 450 cwt * $3.33/cwt = $1498.50 total Per head premium = $19.98

Calf Example Spring 2013 Continued Provided a guaranteed floor price of $144/cwt 600lb calf x $144/cwt = $864.00/head If the market dropped below $144 in the last 4 weeks of the claim window an indemnity would have been paid

How would Price Insurance have worked? Because the market was strong this past fall, no indemnities were paid Mid November 2013 settlement price = $158.77/cwt Spring 2014 coverage reached as high as $212/cwt

Livestock Price Insurance Benefits Benefits Price, Currency and Basis Risk Little discipline needed No minimum purchase amounts Simple Program Easy to execute Upfront costs known Effective in all border situations Limitations Less flexible Threshold limits Non-traditional forecasting and pricing methodology Restricted purchase/settlement hours

Hours of Operation Purchase is available: Tuesday, Wednesday, Thursday: 2 p.m. to 5:30 p.m. MST- Alberta SK is currently on the same time as AB Calf policies will be available for purchase in the spring for fall price coverage Settlement is available: Monday: 1:30 p.m. to 7:00 p.m. MST-Alberta

File farm income and expenses in the Saskatchewan 18 years of age or older Eligibility CPIP-Calf/Feeder - Own the cattle for a minimum of 60 continuous days throughout the policy length CPIP-Fed - Own the cattle for 4 weeks prior to claim window HPIP Own the hogs for a minimum of 20 continuous days throughout the policy

Program Delivery WLPIP is available through Saskatchewan Crop Insurance Corporation (SCIC) WLPIP is a Western Canadian program involving the federal government, Alberta, British Columbia, Manitoba and Saskatchewan

Program delivery Alberta s Agriculture Financial Services Corporation (AFSC) is providing partnering provinces with the behind-the-scenes components of the program relating to: Premium calculations Forward prices for determining coverage Market data for claim settlement Technological support for the operating system Remember, Saskatchewan producers will contact SCIC

How to get started? Program delivery Access forms from WLPIP website www.wlpip.ca. Bring completed forms to your local SCIC office Get set up for online purchase functionality

Contact Information Saskatchewan Crop Insurance Corporation 1-888-935-0000 Jodie Griffin Saskatchewan Program Coordinator jodie.griffin@scic.gov.sk.ca