Risk Management
Alberta Introduces Revenue Insurance Coverage
by Brian Doidge, OCPA Economist & Market Analyst
After two years of
working closely with producer groups in the province to develop the concept, the
Alberta government introduced Revenue Insurance coverage to its Crop Insurance
program on January 28, 2003. Through a combination of benefits and options, these
innovative additions essentially guarantee a floor price for a specified crop
up to a producer’s Crop Insurance production guarantee level, regardless
of whether actual production was higher or lower than the guarantee.
The revised program represents the Alberta government’s proactive and aggressive
response to the legitimate concerns of grain and oilseed producers about long-term,
chronic revenue erosion caused by factors beyond an individual farmer’s ability
to counteract.
Here’s how it works. Basic Crop Insurance in Alberta provides coverage for
insured producers at a pre-determined ‘spring insurance price’ at their
choice of 60%, 70% or 80% of their long-term normal yield. Premium costs vary
with production coverage choice. In addition to this basic coverage, a series
of additional coverages kick in.
Once producers take basic coverage, they are automatically eligible for the Variable
Price Benefit (VPB) at no additional premium cost. VPB will compensate insured
farmers for production shortfalls up to their insured coverage production level
if actual fall market prices are higher than the spring insurance price by at
least 10%, up to a maximum of 50% higher. The spring insurance price is a projection
of the average market price expected in the fall. The fall market price is an
automatic formulated price based on the Winnipeg Commodity Exchange (or Chicago
Board of Trade as the case may be) plus actual basis. VPB was previously an option
available at additional premium cost, but is now included as part of the basic
package.
Premiums for basic Crop Insurance have been adjusted higher in order to offer
this additional protection to all. By making VPB part of the basic package for
all, risk is spread over all clients rather than only those who choose. The additional
cost of providing the enhanced coverage (hidden now because it is included in
basic premiums) is spread over more clients and acreage, thus reducing the individual
cost to less than the previous extra optional premium cost.
What is noteworthy for Ontario is that premiums for basic Crop Insurance are shared
between producers, the provincial government, and the federal government. Thus
the Feds are covering part of the additional cost of guaranteeing a higher fall
price benefit to all Alberta growers.
In addition to the VPB component of basic Crop Insurance, Alberta is offering
a new Spring Price Endorsement (SPE) option at additional premium cost to the
producer. If purchased, a SPE payment is triggered when the actual fall market
price of an insured crop decreases by at least 10% (to a maximum 50%) below the
spring insurance price. The payment is made on the chosen production coverage
level regardless of actual production, but will not exceed the selected Crop Insurance
production coverage level.
What is noteworthy for Ontario is that the federal government, thus far, has not
agreed to share in the premium cost for SPE. The cost is borne equally by the
producer and the province.
The third component is Revenue Insurance Coverage (RIC). This is what Alberta
has to say about RIC: “Producers can suffer from reduced revenue when market
prices are low at the time seeding decisions are made and remain low through the
crop year. Low prices reduce coverage under Crop Insurance and the Spring Price
Endorsement. Revenue Insurance Coverage has a floor price to help offset some
of the effects of long-term low market prices.” Alberta obviously recognizes
the detrimental impacts of long-term chronic price erosion. A RIC payment is triggered
when the spring insurance price and the fall market price are less than a previously
determined fixed floor price. RIC is automatically provided at no additional premium
cost to producers who purchase the SPE. However, when a payment is triggered,
the producer receives only 50% of the payment with the balance retained in lieu
of premium (Alberta refers to this as ‘co-insurance’) similar to the
way Ontario’s Market Revenue Insurance (MRI) program used to work. The RIC
payment is the difference between the floor price and the fall market price or
spring insurance price, whichever is higher (minus the 50% holdback). The RIC
payment is made on the Crop Insurance production coverage level previously selected
regardless of actual production.
RIC establishes a floor price for each insured crop, but it is not a formulated
price; it is set by committee. Taken into consideration are several factors: an
estimation of the value and impact of subsidies in the U.S., the relevant U.S.
loan rate (90% of the value is used), the relevant cost of production, acreage
relationships (distortion of production decisions is to be avoided), and the Alberta
government’s ability to pay. RIC prices for 2003/04 for crops of interest
in Ontario: Red
Spring Wheat $3.95/bu; Canola $6.69/bu; Barley $2.89/bu; Corn $3.56/bu.
The net effect of the combination of basic Alberta Crop Insurance, VPB, SPE and
RIC is a guaranteed floor price (minus cost of CI and SPE premiums, minus the
50% RIC holdback) on a producer’s Crop Insurance guaranteed production coverage
level. One big advantage over MRI in Ontario is that Alberta payments are made
at fall harvest whereas MRI final payments are not received until after the end
of the marketing year which is approximately 12 months after harvesting. This
crop insurance revenue insurance concept is worth further analysis and evaluation
for application in Ontario.
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