You’re finally making money. Do you part with some of it to insure the bottom line?
The Cattle Price Insurance Program (CPIP) was launched by Agriculture Financial Services Corporation four years ago. The program offers prices insurance on finished cattle in the feedlot or feeder cattle, as well as for calves sold in the fall.
“CPIP is designed to put a floor under provincial average prices and cash-to-cash price spreads with Nebraska for spot cash sellers of feed cattle,” said Herb Lock of Farm$ense Marketing. “What any individual cattle sells for is not a concern when it comes time to cash out forward positions previously purchased.”
“It’s a way to take the U.S. futures market and take the Canadian dollar and basis and put all these things into a product where a producer can buy a bottom price to protect the market from going below that level,” added Anne Wasko, market analyst with Gateway Livestock services. “If the market is lower, it triggers an insurance payout.”
So is it worth buying?
Wasko calls CPIP a good risk management because of volatility and unpredictability of basis levels.
“It’s unique and it’s fairly new, and as anything in our industry, it takes awhile to get a lot of buy-in,” she said.
And interest is growing, she added.
“I think one of the reasons is because even though the prices are very high, it means there’s a lot of risk if something goes wrong.”
Breton rancher Duane Movald has been crunching the numbers and likes what he sees.
“When things are uncertain, it’s detrimental, but if you can have a solid number to look at, and through CPIP, if you can do that, and set a base price, why wouldn’t you do it?” he asked. “There are costs associated with the premium. But everyone has to look at what they’re comfortable with, I guess.”
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Lock is a little more skeptical.
“Whenever the government takes money from you and sends it back at a later date, that’s not a good feeling,” he said. “The important thing to realize here is that programs need to be actuarially sound. That means the farmer can only get out what the farmers pay in. Typically, government programs have always paid out more than they pay in, so people are always encouraged to buy government insurance programs and get an element of subsidy.”
CPIP has a number of support levels, depending on an individual’s costs and perceptions or price risk. Once these support levels are purchased, they are non-refundable if cattle are sold in an early period or moved out in further calendar months. With other programs, timing and support levels can be adjusted.
“It’s being implemented in all the western provinces, probably by this summer. I don’t know all the details,” Lock said. “Government programs should not indicate where industries and markets are going and this one certainly has. Relatively speaking, it’s been good for Alberta, but bad for Saskatchewan and Manitoba because they don’t have similar insurance.”
Support levels are 95 per cent for the time at which the insurance was purchased.
“Support levels bring in historical cash basis levels, which are the one element of price that is front and centre on this country-of-origin labelling (law),” said Lock.
“That’s the difference between a steer standing here and a steer standing in a U.S. lot. That’s the crux of this thing. That’s where producers are probably overestimating the value of the program. This is not going to save them from that.
“As time goes on — as we incorporate history into the support levels and get into more of our history with these really wide basis levels — the support falls dramatically. All of a sudden, the things we had for support don’t work anymore.”