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Example #2: When portions of an insured cattle herd are sold below the insured price at two separate periods

Bob is an Alberta feedlot operator who in February 2012, has decided that there is a risk that the expected price for his cattle when he sells them in July may drop further than the futures markets are predicting. Because of this, he decides to purchase a Fed Price Insurance Policy. Bob knows that his 200 steers will be finished by mid-July (roughly 20 weeks for him), and expects them to weigh in at about 1350 pounds per head.

Bob looks through the Fed Price Index Table and decides that a Coverage Level of $116 per cwt works best for him, as it is at a level above his cost of production. From the Fed Index table he can see that a 20 week policy (ending 9 July, 2012) at $116 coverage will cost him $2.11 per cwt insured.

WCPIP Fed Index (Alberta) Table

 Example #2 Image1.jpg
** These are sample premiums only and do not constitute an offer to sell insurance coverage.**

So Bob’s total premium cost will be as follows:

Total Premium Cost:   

200 Head x 1350 pounds 270,000 lbs 
270,000lbs in cwt 2700 cw
2700 x $2.11 (premium cost per unit) $5,697

Bob sees an opportunity in the market and decided to sell 100 steers early, on 7 July, 2012. At this time his WCPIP policy is within its 4 week claim window. The settlement value published by WCPIP for Week 22 is $109.60 per cwt, $6.40 less than his insured price of $116. Bob decides to claim half of the cwt covered under his WCPIP policy (1350cwt) because he is not sure that the price won’t fall even further, creating an even bigger insurance payout. For the 1350cwt claimed, he receives a payout from WCPIP as follows:

1350 x $6.40 (difference between insured and settlement price) = $8,640 
1350 x $2.11 (premium cost per unit) $2,848.50
Net gain $5791.50

Bob sells the remaining 100 steers 2 weeks later, around the time when his policy expires at 20 weeks.

The settlement value (Alberta cash index) for Week 20 is $109.28 per cwt, $6.72 less than his insured price of $116. Bob’s remaining 1350cwt of insurance creates a payout from WCPIP as follows:

1350 x $6.72 (difference between insured and settlement price) $9,072
1350 x $2.11 (premium cost per unit) $2,848.50
Net gain $6223.50

Though Bob did not get the price he was hoping for when he sold his cattle, because he insured his herd at the price he was hoping for he was able to recoup what may otherwise have been a loss making, or less profitable position.