Spring Price Endorsement - Alberta Crop Insurance

[charliep]

By now most of you (Alberta farmers) will have recieved your crop insurance forms. A new program that you haven't had access to before is the spring price endorsement. The revenue insurance component is also new but is irrelevant this year give the crop insurance prices established this winter are well above guaranteed levels. Variable price benefit is just a re-hash of something you have had before.

TO HELP YOU, THE SPRING PRICE ENDORSEMENT IS A PRICE RISK MANAGEMENT TOOL. It acts like a put option with a strike price 10 % below the crop insurance (eg. canola has a CI price of $340/t so the spring price endorsement would kick in at $306/t). It will pay if prices decline below this level on actual production up to your coverage yield you have chosen (60, 70 or 80 % of area average or your individual coverage yield). It is the same as the variable price benefit in that a trigger you the entire benefit (9.9 % decline - no payment whereas 10 % generates an entire payment).

Are you comfortable you understand this payment well enough to make a decision? What do you think of the premium on this price insurance? What strategies can you see coming out of the program?

[wd9]

Charlie, how does this compare to the cost of just getting a put option? Is there a benefit to doing it thru insurance? The put would also just expire should prices remain the same or go up also.

Also, using Excel I determined including SPE, even though it does provide more insurance - no doubt, it does increase the cost for me over 2001, taking 60% coverage for example:
Canola 53%
Wheat 112%
Peas 79.2%
Not using SPE at any percentage 60,70,80 costs about 10% more for the same dollar coverage over 2001 - however it includes the old VPO or VPB as it is called today with no additional funds required - so I feel it is good value.

My main question is given that if production is high which causes low prices generally, is the extra cost worth it? I'm leaning to the not but am unable to confidently calculate it as in taking only all risk VPB hail.

[TOM4CWB]

Charlie;

I understand we do not have to take the SPE on any, part, or all of our crops... so a person may pick and choose which crop makes the most sense.

The CPS wheat SPE is very expensive... some other crops are more reasonable...

[rain]

Charlie what is the cost of this canola insurance.

[rain]

Can a person get the crop insurance info on line?

[charliep]

Too much war and can't sleep so may as well write here.

WD9 - Hard to comment on costs/effectiveness. A note is the difference between this program and options. Under options, the premium you pay relates to time, volitility, relatitionship of strike price to futures, etc. on a GIVEN DAY. Under the spring price endorsement, AFSC establishes prices and premiums well ahead of your decision based on a static price model. You can use this to your advantage in deciding whether to use.

I can suggest this approach. I would leave the crop insurance decision as late as I could into April. If fall prices are above the CI price ($340/t local or WCE Nov. futures above $365/t), buying puts or a grain company will likely be a better route (can likely get some combination of a better strike price/guaranteed minimum price and/or lower premium). If new crop prices drop over the next month, then you are likely better to use the spring price endorsement (relatively cheap coverage for an put option equivalent that is relatively close to the money). Long and short - when you are making your decision in April, you need to look at the costs of each (or the possibility of carrying the risk yourself) and come up with a decision that is best for you.

Tom4cwb - You are right in that you can pick and choose crops you can carry the spring price endorsement (the only requirement being you have to carry regular crop insurance which is includes the variable price benefit this year).

Rain - Will have to get this information off farmers who have just gotten their letter. A farmer at Clyde yesterday indicated his cost for spring price endorsement on canola (don't know the CI yield side) was about $6/acre with regular crop insurance about $12/acre (I think was at 80 % coverage). Does this fit with what others are seeing? I checked the AFSC and couldn't find specifics either other than a list of meetings and the toll free number.

[wd9]

I've done some more research.

The cost of a 1/3 of a tonne of a put for 340 canola would be about $5.30 ($16 divided by 44 bu per tonne under my 15 bu per acre coverage) including brokerage - give or take a bit. At 60% coverage the SPE would be $2.79. Seems like a very inexpensive put option highly worth considering.

Also when considering costs remember that with VPB if your liability is $150 with $7 canola, if the canola hits $10.50 insured liability is now $225 with no additional premium. So when comparing costs from last year, this potential increase in insurance liability needs to be considered. Also since everyone takes VPB as opposed to last years optional VPO, the rule of averages in insurance allows VPB to cost a lot less.

Charlie, what I would like to be able to do is take crop insurance at 60% and the SPE at 80%. The two really are not related. One is for production risk, the other is for price risk. Right now we can't, but I'd like to see it in the future.

In regards to other people's questions about cost, price and how much this varies extremely widely between areas and even producers. I think comparisons can really only be made on an individual level. Cost of canola coverage I have heard ranges from 15 to 30 dollars just in my little area alone. Including 50% coverage this range extends down to as little as $2.

[charliep]

Just an interesting note on the SPE. 2CWRS 11.5 crop insurance price - $177/t. Trigger for the SPE - $159/t (10 % below the CI price). December converted MGE futures (http://www.cwb.ca/db/contracts/ppo/ppo_prices.nsf/fixed_price/03-032003-mhrs.html) - $196/t minus $45/t deduction = $151/t Payout if today's price existed next October on actual production up to crop insurance yield -$26/t. Market rallies $10/t - payout zero.

[kenzie]

Just worked through my numbers and 80% coverage will cost me 11% of the coverage value. I'm going top line on everything and my banker is realy happy about it. What really caused my premium to go up this year was that the discount level went from .66 to .81. Hail and droughts had an impact and now they want there money back!

[TOM4CWB]

Charlie;

Will the Spring Price Endorsement (SPE) use the MGE futures CWRS Producer Pricing Option (PPO prices)...

or a price based off the October Pool Return Outlook (PRO) from the Canadian Wheat Board (CWB)...

or a combination of the SEPT/OCT 03-04 PRO to calculate the Canadian Western Red Spring (CWRS) payment for Alberta SPE on Crop Insurance?

In 2001-02, the CWB MADE A PROFIT of $25.94/t on Wheat Fixed Price Contracts (FPC)/ Basis Priced Contracts (BPC) (page 46 CWB 2001-02 Financial Results)

In 02-03, the CWB already has taken much more Basis than last year... must be closer to $40/t.

Now if we subtract these PPO basis charges from the PRO in October, then the PPO price today, as shown in your example, does not yield a in the money put, but instead is still at least $15/t out of the money on CWRS SPE as was your example above!

I hope you can follow this!

[TOM4CWB]

Charlie;

The PPO verses PRO prices, on the Day the PRO is announced were as follows;

This is for the 02-03 crop year for 1CWRS 13.5, using CWB CWRS Mar. 03 CWB futures off the CWB Web site;

July 25th PRO $228/t

July 25th Mar 03 futures, $222.13
July Basis Mar 03, $2.57/t positive

Total FPC payment if priced July 25th, $224.70/t


Sept 26th PRO $308/t

Sept 26th Mar 03 futures, $285.42/t
July Basis Mar 03, $2.57/t positive

Total FPC payment if priced Sept 26th, $287.99/t


Oct 24th PRO $312/t

Oct 24th Mar 03 futures, $278.95/t
July Basis Mar 03, $2.57/t positive

Total FPC payment if priced Oct 24th, $281.52/t


Let us look at what happened this 01-02 crop year (remembering the CWB made almost $26/t) for 1CWRS 13.5, using Mar. 03 futures;

July 26th PRO $225/t
July 26th Mar 03 futures, $198.79
July Basis Mar 03, $11.31/t positive

Sept 27th PRO $206/t
Sept 27th Mar 03 futures, $187.92/t
July Basis Mar 03, $11.31/t positive

FPC Total of $199.23/t

Oct 25th PRO $209/t
Oct 25th Mar 03 futures, $189.62/t
July Basis Mar 03, $11.31/t positive

FPC Total of $200.93/t

I have extended the 01-02 performance report to show the lower PPO bias to PRO Basis;

Jan 02 PRO $212/t
Jan 02 Mar 02 futures, same day, $177.83/t

FPC Total of $189.14/t

Feb 02 PRO $213/t
Feb 02 Mar 02 futures, same day, $171.54/t

FPC Total of $182.85/t


THe point here is that on Oct. 24th 2002, the PPO contract yielded $30/t less than the PRO that day... when based off the end of July basis.

I hope this clarifies what I was getting at in the above entry!

[TOM4CWB]

I see I made a mistake on the following 01-02 futures month;

I wrote;

Sept 27th PRO $206/t
Sept 27th Mar 03 futures, $187.92/t
July Basis Mar 03, $11.31/t positive

FPC Total of $199.23/t

Should have been March 02, not 03.

[TOM4CWB]

Charlie;

I note the CWB really cooked the books on the PRO... this summer... as they usually sell grain right up till OCT/NOV. after the July 31st year end, 1.234mmt for the 2000-01 crop year.

This year they just deemed a price... and sold the 2.137mmt into the 2002-03 pool... pretty trickey eh...

AS far as I can figure... the CWB did this to offset the early hedging of the 2002-03 crop... so the fall 2002 PRO would look good during the Director Elections!

With this kind of CWB manipulation of the market place possible, I don't understand how you folks can project anything that will happen!

Just sit and stare at Page 56, of the 2001-02 CWB annual report... on the wheat pool... and see how the CWB manipulated PRO's from year to year... by changing carry over stocks and deeming sales... or selling at market price...

The contingency fund page is page 48, I guess I didn't enlarge it enough... the 48 looked like 46 the first time!

[charliep]

The fall wheat calculation will be based on the average MGE December contract wheat futures price adjusted to Canadian dollars/bu during the month of October and adjusted for a basis. The base wheat is 2CWRS 11.5 and is based on the average price minus $45/t. Other wheats will be adjusted for the spreads used in the October PRO.

[TOM4CWB]

Charlie;

You said "adjusted for a basis"...

What Basis are you going to use?

... PPO Basis from the last offer in July 03, PRO Basis in SEPT/OCT 03... there are as many CWB basis calculations possible as Carter has liver pills!

We need to know, for a risk management strategy to work!