Higher prices bring higher risk, says market analyst
As Alberta’s Livestock Price Insurance Program expands across Western Canada this month, demand for price insurance in Alberta is growing as cattle producers in Ponoka County and across the province witness cattle prices that have been hitting record highs over the last few months.
“Cattle producers are experiencing some of the strongest prices in history on their cattle, and they don’t want to risk losing that money if prices fall for some reason. That’s why so many Alberta producers are using price insurance to protect the high cattle prices they’re seeing today. Participation in cattle price insurance has tripled in Alberta over the last year because it gives producers an Alberta floor price that locks in up to 95 per cent of the future forecasted price on their cattle. And it doesn’t put a ceiling on the price they can sell their cattle for if markets keep climbing,” explains Brenda Hagen, with Agriculture Financial Services Corporation (AFSC) – the provincial Crown corporation that has administered livestock price insurance since the program was first unveiled in Alberta five years ago.
No program changes in Alberta as WLPIP expands across west
Now renamed the Western Livestock Price Insurance Program (WLPIP), Hagen says the success and uptake of price insurance in Alberta was a major factor in the decision to expand it across Western Canada this spring. AFSC will now deliver the program – which has only been available in Alberta – to cattle and hog producers across the West on behalf of the federal and provincial governments.
As WLPIP rolls out across the region, there will be no changes to the program in Alberta, says Hagen. “Other than a new logo and website at www.wlpip.ca, it’s the same program Alberta producers have used for years to protect themselves from any risk that could cause these high cattle prices to drop below their insured floor price,” she says, noting, “We’re adding settlement indexes and coverage levels for the other provinces, but coverage and settlement prices in Alberta will still be based on the Alberta cattle market.”
Cattle prices jumped 20 per cent
The expansion of WLPIP comes at a good time, says Brian Perillat, a senior Alberta cattle market analyst with Canfax. Cattle prices have jumped about 20 per cent over the last four months – and those higher prices bring higher risk, says Perillat, especially for feedlots and backgrounders that buy high-priced calves and feeder cattle to place on feed or pasture.
“Those producers have more money on the table than ever before. And with the increased market volatility that often comes with high prices, producers could easily lose a lot more money a lot faster if they’re not using tools like price insurance in today’s markets,” he explains.
Unexpected risks
And while there’s every indication today’s strong prices will continue through 2014 – due to tight cattle supplies in Canada and the U.S., a weak Canadian dollar, and low feed costs – there are always unexpected risks that can come out of nowhere and change that picture, says Perillat. “For example, the Canadian dollar can be extremely volatile and negatively impact cattle prices. Or if there’s a drought or some other weather concern that results in a small U.S. grain crop, that could reduce cattle prices this year,” explains Perillat.
“There’s too much at stake not to protect the high prices we’re seeing today with price insurance. That’s why we actively promote WLPIP to our members,” says Reg Schmidt, with the Feeder Associations of Alberta (FAA), an industry group that sat on the steering committee that developed livestock price insurance in Alberta. The FAA helps producers finance feeder cattle purchases through a Loan Guarantee Program. “We also finance WLPIP premiums with our loans so every producer can purchase coverage if they wish,” says Schmidt, noting that as cattle prices have increased, so have the floor prices producers can lock in with WLPIP.
Easier access to credit
About 40 per cent of FAA members enrol in WLPIP through the Cattle Price Insurance Program (WCPIP). Schmidt anticipates that number could double because “producers are realizing price insurance is a necessary part of doing business. It’s bankable so they can take it to their lender to access credit more easily. And you don’t have to look hard for examples of how WLPIP has helped cattle producers manage their price risk,” he says, pointing to the XL Foods plant closure in Brooks almost two years ago due to E. coli concerns. “Feeder cattle fell nearly $20 per 100 pounds at that time, and producers who had price insurance were getting payouts of nearly $200/head,” he says.
Ken Solverson, who runs a 700-head cow-calf-to-finish operation with his brother near Camrose, says with cattle prices so high right now, “we’ve insured everything we have available to insure” through the WCPIP-Fed and Feeder programs. “Not insuring our cattle and protecting our investment with price insurance would be foolish because who knows, some kind of border closure or E. coli scare, or even just a lack of consumer confidence could suddenly have a significant impact on the market,” says Solverson. “There’s no guarantee prices will stay this high. Look at what happened to canola – the same thing could happen to cattle.”
Before WLPIP came along, Solverson says the only risk management he did with his cattle was choosing which weeks he would sell the animals. “We were very happy when this program was announced. It’s easy to use. I get the premiums emailed to my phone every day and if I like what I see, I just pull the trigger. It’s not a lot of work.”
May 29 calf deadline
WLPIP programs are available year-round for fed cattle, feeder cattle, and hogs. The only exception is WCPIP-Calf which is offered from February to May due to the seasonality of calf sales, says Hagen, noting the deadline to purchase WCPIP-Calf policies this year is May 29.
For more information about WLPIP, producers can contact their local AFSC Branch, the AFSC Call Centre at 1-877-899-AFSC (2372) or visit www.wlpip.ca.