Weather, feed availability and trade barriers affect markets, making it important to understand what tools are available
Glacier FarmMedia – Cattle prices remain strong in Canada and look to stay that way in 2024.
However, the market can change quickly, as producers saw in March when avian influenza was first detected in U.S. dairy cattle.
Introduction of risk in a red-hot market affected prices and price insurance.
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That may have cattle producers wondering about the best way to manage market risk.
Brenda Hagen at Agriculture Financial Services Corp. says cattle risk management is a complex issue.
“We suggest producers make a risk management plan so they understand their break-even point and risk tolerances,” she said in an email.
Many things affect cattle markets, including weather, feed availability, disease and trade barriers, so it’s important to understand risk management options.
Jodie Griffin is the Livestock Price Insurance Program co-ordinator with Saskatchewan Crop Insurance Corporation. As a rancher, she knows how volatile markets can be and that beef producers don’t have as many tools to manage risk as other sectors. Saskatchewan offers livestock insurance policy lengths as short as 12 to 16 weeks or as long as 36 weeks.
“This is all about preparing for something that could happen in the future,” Griffin says. “It’s about getting them to the finish line, in a futures state to the market, and the risks that can happen between now and then.”
Brian Perillat, an agribusiness specialist and agricultural economist with Bullseye Feeds, says he expects cattle numbers to tighten.
“Cattle-on-feed numbers really haven’t dropped versus last year and historically are still relatively high. So, short term, we continue to see heifers go on feed and come to market.”
Cow-calf producers are in the driver’s seat now because of high demand for calves from feedlots and processors as calf crops shrink. That provides opportunities as well as challenges.
“The challenge is to gain as much as you can for as long as you can,” Perillat says, and that involves risk management.
A call option shares some characteristics with price insurance. It takes advantage of a rising market; in this case, rising cattle futures. For example, producers can buy a call option on the cattle futures if planning to buy cattle in the future but not yet prepared to do so.
“If the futures go up, then your option value goes up and the gains you make there can offset the rising cost of the cattle. If the market goes down, you can buy the cattle cheaper, and then you are just out the value of the premium you paid for the cattle options,” Perillat says.
Purchasing a put option establishes a floor price.
“Price insurance, it’s a Canadian put option. You’re protected from futures basis, the dollar, all of our main risk factors, even rising feed costs, which can factor into cow prices. You are kind of protected from that with price insurance.”
Hagen and Griffin say price insurance protects against all three sources of market risk —futures, basis and currency — which set it apart from other options.
The Livestock Price Insurance Program was developed after the BSE crisis in the early 2000s. Now, there are three types of insurance available — a calf program, a feeder program and a fed program.
The fed program is for beef heifers and steers and is specific to producers who finish their cattle. The feeder program is for those who background steers and heifers and the calf program is primarily for cow-calf producers.
Griffin says the calf program is the only risk management tool available that will protect Canadian ranchers from risks related to the futures market, currency and basis.
Price insurance coverage is market-driven, so it ebbs and flows with fluctuations in livestock and currency markets.
The deadline for the calf price insurance options is in June. The other two can be purchased year-round.
Perillat says the grain industry has a better understanding of managing market risk, and cattle producers can learn from it.
“I think the grain industry was maybe first to do more of these — locking in profits, forward contracting, selling your crop before you’ve even seeded it. It’s just being aware all those options are available to cow-calf producers.
“On the other side, the cow-calf producer has to be willing to live with his choices if the market continues to go up and he sold early. You have got to understand what’s best for your business at the time you made that decision.”
The low-hanging fruit is planning. Perillat says there is a lot of opportunity for producers if they watch the markets and plan accordingly.
“Follow market trends, know your cost of production and take advantage of protecting good profit levels or negative market shocks, either through price insurance or forward selling, put options, etc.”
