Hog price insurance: D.O.A. from the get-go

RISK MANAGEMENT | WLPIP is available in Manitoba but was never a viable option for hog producers. Why?

Since 2014, Manitoba and Saskatchewan have had livestock price insurance for hogs. It’s been used exactly once.

“We were pretty excited when they introduced it because I mean we, at that time, didn’t have a lot of risk management options,” said Mark Ferguson, general manager of Sask Pork.

In 2014, Alberta-based Western Livestock Price Insurance (WLPIP) expanded to the rest of the western provinces.

But when hog producers saw the premiums — $10 to $20 per animal to lock in a price that was 90 per cent of market price — Ferguson said it was no surprise producers didn’t bite. Hog farmers opted to stick to what they knew, like fixed forward contracting.

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Why it matters: COVID-19 hit the hog sector hard, but producers currently have few risk management tools at their disposal.

If premiums were doable, producers might consider WLPIP. COVID-19 has hit the hog sector hard with reduced demand and large supplies weighing heavily on the market.

“The prospect of profitability at current forward prices and at current cash prices is nil… and there’s really no prospect of making anything this year,” said Tyler Fulton, director of risk management with [email protected] Marketing in Manitoba, in an interview with MarketsFarm.

Fulton added that while many producers are still staying profitable due to forward contracts — and government programs should also provide some support for the industry — the current weakness in the market means some hog farmers will likely be forced out of business.

Dead on arrival

WLPIP began as a cattle price insurance program after the BSE crisis. Beef producers and cattle groups approached Alberta’s Agriculture Financial Services Corporation (AFSC) and asked for a price risk management program in case of another catastrophic price decline, said Bill Hoar, who co-ordinates WLPIP.

Beginning in 2009, AFSC progressively rolled out fed, feeder and calf programs. In 2012, it added a hog program after “lengthy” meetings with Alberta Pork and producers, Hoar said.

“Those discussions were definitely around premiums — a lot,” said Hoar.

Despite fears the program would be too costly, Hoar said they had to find a level at which the program could be actuarially sound and self-sustaining.

“It’s not for us to say, well yeah we would like everyone to buy this and we should make it really cheap so everyone can afford it,” he said.

The program has to account for the volatility of the industry, and the various disasters that have happened over the years, and be ready to pay out if those occur, he said.

In Alberta, the program saw some uptake. According to a report from AFSC, producers insured 2,000 hogs from 2012 to 2013, and 6,700 hogs from 2013 to 2014. However, between 2015 and 2019, no more than 10 hog policies per year have been sold in Alberta.

In 2014, WLPIP became available in Saskatchewan, Manitoba and B.C., said Hoar. He recalled that year a member of Manitoba Pork bought a small policy, to see how it functioned.

Based on MASC reports, it appears this is the only policy ever sold in Manitoba. Based on Saskatchewan Crop Insurance Corporation data, it appears no policies have ever sold in Saskatchewan.

Why didn’t it work?

“We did not ask for the program option for hogs, nor were we involved in its development,” said Andrew Dickson, general manager of Manitoba Pork, in an email.

He added that Manitoba Pork provided information on the program in newsletters and on its website.

“Our producers are aware of the program… but find it expensive for the potential protection it offers,” said Dickson. “We have other tools such as forward pricing offered by [email protected] Marketing which seem to be more attractive.”

[email protected] is a marketing co-op serving Manitoba and Saskatchewan, which also provides risk management services.

Dickson added that about half of market hogs in Manitoba are owned by two processing plants through vertical integration, and have no need for the program.

Unlike WLPIP, forward pricing doesn’t require paying premiums which makes it more attractive for farmers whose survival depends on pinching pennies.

“Hog margins have been so tight for so long, and the hog markets have been and really have always been very volatile,” [email protected]’ Fulton told the Co-operator. “The higher the volatility, the higher the premium costs.”

In a scenario with a relatively low margin with high volatility, it makes it difficult to pencil out how you can keep spending $15 to $20 per pig on insurance said Fulton.

“Producers over the last 15 years have just been masterminds at reducing their cost of production,” said Fulton. “They’re just extremely lean.”

Fixed forward contracting has been around since the ’90s, said Fulton. It allows producers to lock in parts of their production at set price levels so, when it comes time to sell, they’re not forced to take whatever the packer offers them.

It allows producers to take some control over their own cash flow, said Fulton, and it averages out the shocks of the market — both highs and lows.

It’s also significantly simpler, he added. WLPIP has numerous price points and policy lengths which can freeze some producers in indecision. Forward pricing is “take it or leave it,” he said.

However, cash prices may also rise higher than the forward price the producer locked in for a particular month, said Dickson, leaving the producer to feel like they’ve lost money. Producers must also market the hogs on the day contracted. If production issues arise and they’re unable to market, there may be penalties.

Fulton also noted that as COVID-19 wreaked havoc on markets, [email protected] had to put restrictions on producers’ ability to hedge because the company didn’t have enough equity.

This is backwards as this is exactly when producers need to hedge, Fulton said. [email protected] is exploring options and trying to secure intermittent, short-term financing to address this.

Can it be salvaged?

In 2016, AFSC reduced WLPIP hog premiums by 22 per cent based on a review of the program.

“We thought that was a reasonable start,” said Hoar. However, AFSC saw no visible increase in uptake.

It might be possible to simplify the program, he said. Initially, the hog program was based off the fed program, which is very attuned to small differences. Hog producers may not need that level of customizability.

Hoar said it might also be possible to widen the window to purchase — currently producers can buy policies three days a week, for about 3-1/2 hours per day. However, a wider window introduces risk as it allows more time for markets to change.

WLPIP premiums are paid completely by producers, though as a COVID-19 relief measure, Saskatchewan producers can now get a 40 per cent rebate on their premiums. Ferguson said Sask Pork has suggested having a (permanent) cost share on WLPIP similar to crop insurance (which is cost shared between producers, provincial and federal governments).

“That would have been a fair thing to do,” he said.

The federal and provincial governments pay the administrative costs of WLPIP, Hoar said. However, subsidizing premiums is problematic to the federal government because it isn’t a nationwide program.

“They don’t want to be seen as helping one area of the country at the expense of another,” he said.

WLPIP is currently under review, Hoar said. If producers’ objections to the program are still the premiums, Hoar mused, do they need to come down another 22 per cent?

If reducing premiums still didn’t make a difference, Hoar said, it may be time to terminate the program.

“We don’t like it either. We don’t like that we go month after month and nobody buys the program,” he said.

Though forward pricing offers some ability to protect against risk, pork producers could use more options said Dickson.

“The real issue, in my opinion, is the fluctuations in cash flow each week for pig producers,” he said. “Margins are tight and any losses can have an immediate impact on the ability of the business to continue.

“We need BRMs which can respond quickly,” he continued, “but this is a challenge for government whole-farm programs which have considerable documentation requirements for financial reporting, and a cautious approach to expending public funds.”

About the author

Reporter

Geralyn Wichers

Geralyn Wichers grew up on a hobby farm near Anola, Manitoba, where her family raised cattle, pigs and chickens. Geralyn graduated from Red River College’s Creative Communications program in 2019 and was previously a reporter for The Carillon in Steinbach. Geralyn is also a published author of science fiction and fantasy novels.

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