Strong prices have cow-calf producers optimistic

CPIP-Calf guarantees producers a floor price for calves they plan to sell in the fall

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With a new calving season underway and Alberta calf prices at near-record highs, there’s a renewed sense of optimism building among cattle producers in the Ponoka area and across the province.

But it’s cautious optimism, says an Alberta beef industry analyst who warns there is plenty of uncertainty over where prices may end up between now and the fall when most calves are weaned and sold as feeder cattle.

“I see lots of opportunity for continued strength in prices, and lots of risks,” says Brian Perillat, senior analyst with Canfax, a division of the Canadian Cattlemen’s Association that tracks cattle industry prices and trends in Alberta and across North America. He points out fall calf prices have climbed more than 30 per cent over the last year and futures prices on feeder cattle remain bullish.

“Since February, we’ve been watching feeder cattle prices bounce around the record levels set in 2001 before BSE hit. It’s exciting to see prices finally rising when they’ve been down in the doldrums for so long.”

Beef demand is “soft”

The strong prices are being driven by a shrinking cow herd and growing demand for beef, which was hammered hard by the recession — both in Canada and internationally, explains Perillat. Alberta’s cow herd has shrunk 20 per cent since its peak in 2005 due to several years of poor prices and high feed costs. The U.S. herd is at 50-year lows. Tightening supplies and improved demand have resulted in a significant price rally for beef, says Perillat.

“A lot of it is being spurred on by a low U.S. dollar which is fuelling U.S. exports and driving up beef prices.” However, he cautions beef demand is still relatively “soft” because the U.S. and world economies are far from stable and could easily  stumble backwards, causing demand and Alberta cattle prices to weaken again.

Perillat adds the strong dollar and high feed costs are also key risk factors that could trigger a sudden drop in calf prices. “With last year’s carry-over corn stocks at almost record lows, any issue such as drought or frost that impacts the 2011 corn crop could cause a huge spike in feed costs – taking all the bloom off the calf market.”

Floor price protection

With so many unknowns, Perillat says Alberta’s new Cattle Price Insurance Program for calves (CPIP-Calf), launched this month, could prove to be a valuable tool for local cow-calf producers.

“There are definitely guys who have been waiting for this because it lets them lock in a floor price on their calves for this fall, helping protect them from the negative risk we’re seeing.”

It also leaves their upside wide open because it doesn’t limit them from selling those calves at the highest price if the market climbs further, says Perillat. He notes CPIP-Calf is the third price insurance program unveiled for Alberta cattle producers by Agriculture Financial Services Corporation (AFSC), which administers CPIP on behalf of the provincial government.

The other two CPIP programs launched previously include CPIP-Fed for feedlot operators who feed cattle to slaughter weight, and CPIP-Feeder for producers who feed calves to about 850 pounds before they move to a feedlot to be finished. The new CPIP-Calf program is designed for cow-calf producers who sell weaned calves weighing 550-to-650 pounds.

“A real need”

“We’ve had strong interest in the Fed and Feeder programs, and producers tell us there’s a real need for this third program because most cow-calf producers are “price takers” who sell their calves at auction marts in the fall, leaving them at the mercy of prices being offered on any given day,” says Jennifer Wood, co-ordinator of CPIP programs for AFSC.

“The average cow-calf producer has very few options when it comes to managing price risk,” adds Wood, explaining most don’t have the time or expertise to hedge their price risk using futures and options markets.

“With CPIP, they don’t have to. It’s a market-driven program that internalizes those complexities so what producers see is very simple and straight forward. They’re guaranteed an Alberta floor price for the calves they plan to sell in the fall. If prices fall below that point, they’re protected.”

Greg Bowie, who runs a cow-calf operation southwest of Ponoka, says while he’s “reasonably optimistic” prices will continue to improve this year, he’s also very aware of how quickly things can change.

“Right now, prices are better than we’ve seen in quite a while, but there are a lot of things we don’t have control over, such as the weather, the Canadian dollar, and the recession which I think is nowhere near being over,” says Bowie. That uncertainty is the reason he plans to take a close look at CPIP-Calf now that it’s available.

“If we were hit with a disaster like an extreme drought or flooding, for example, we’d kick ourselves for not having this kind of insurance in place. It gives the cow-calf producer another option.”

Don’t have to sell cattle to make a claim

Wood says an important feature of CPIP-Calf is that producers aren’t obligated to sell their cattle to make a claim. “If they’re eligible for a claim, that means prices are lower than forecasted. If the market is telling you to hold on to your calves and maybe sell them later once prices improve, we wouldn’t want to influence that decision.”

The floor price producers insure against with CPIP-Calf is based on the forecasted Alberta price of a 550- to 650-pound calf in the fall, explains Wood. “It’s based on very consistent methodology that factors in the critical components that impact calf prices, such as the futures price for feeder cattle, the currency exchange risk, the price of barley, and the basis — the difference between U.S. and Canadian calf prices.”

Market Driven

CPIP-Calf is available for purchase from February to May each year. Premiums are market-driven and fluctuate daily based on market volatility, says Wood. Policies expire during the fall calf run from September to December. Producers choose policy lengths of 16 to 36 weeks depending on when they plan to sell their calves.

During the last four weeks of the policy, if the average price of an Alberta steer weighing 550 to 650 pounds falls below their insured price, they can submit a claim, says Wood.

“We calculate that provincial average price for Alberta steers every week by collecting sales data from 22 auction marts across the province. If you’re selling calves at the auction mart in Ponoka, for example, the price you receive is reflected in that average steer price,” she says.

There is no minimum number of steers or heifers that can be insured with CPIP-Calf, so even the smallest cow-calf operation can participate, says Wood. The voluntary program is open to producers at least 18 years old who file farm income and expenses in Alberta. Producers must own the insured calves for at least 60 continuous days during the policy.

Hog price insurance coming

All three CPIP programs have been developed in consultation with the Feeder Associations of Alberta and Alberta Beef Producers, which initiated the research that led to the first CPIP program.

“Now that we have three programs, the entire Alberta cattle industry has access to price insurance, from the calf to the finished animal,” says Wood, adding that AFSC is now developing a Hog Price Insurance Program (HPIP). “Alberta hog producers have been watching CPIP with great interest and have been asking for a similar program.”

For more information about CPIP-Calf or any CPIP program, producers can contact the AFSC call centre at 1-877-899-AFSC (2372) or visit www.afsc.ca.

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