q&a
CPIP strategy
Answering the following questions could reveal how you deal with uncertainty in the fed cattle market and how CP IP can fit with your cattle-feeding strategies.
A re you so emotionally attached to an action that you do not realize it requires near perfect conditions for success? _____Yes _____No
When you implement an action are you surprised by events that you did not see as possible outcomes? _____Yes _____No
H avepoorresultsinthepast caused you to avoid taking actions that could produce high returns? _____Yes _____No
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The Cattle Price Insurance Program (CPIP) gives Alberta cattle feeders the ability to limit the downside of volatile Alberta fed cattle prices or the basis component of price while retaining the upside potential of higher prices.
CPIP protects the downside
There is no certainty whether fed cattle market prices will rise, fall or stay the same. CPIP can contain the downside price movements without limiting the upside. Individuals can weigh the cost/benefit ratio the same as they do for other forms of insurance. The decision to insure a new vehicle before driving it home from the dealership recognizes the possibility of loss from some unforeseen event. The loss could be significant and even affect the financial health of the farm business. The decision to insure the vehicle gives the individual protection against potential losses while enjoying the benefits of the operating the vehicle.
The importance of limiting losses to an individual business is often influenced its strength. The greater the financial strength, the greater the ability to withstand losses. Financial strength gives a business the ability to take a hit and stay in the game.
A business with limited financial strength is less to withstand losses. Buying insurance such as CPIP gives it greater ability to withstand falling prices.
Protecting against losses may also be key part of a longer-term strategy focused on growth and development or even exiting the business (retirement). These individuals are placing a high priority on protecting the wealth they have built up. For them the cost of buying protection is modest compared to the value of protecting their wealth.
Lenders like certainty
Lenders are starting to send signals that managing the impact of losses is an important factor in gaining access to borrowed capital. Taking steps to limit losses can be an important building block in the relationship between cattle feeders and their lenders.
CPIP may not work if the cattle-purchase decision requires near-perfect conditions for success. The levels of insurance coverage provided by CPIP are derived from the market fundamentals of futures prices, currency and basis along with the costs of doing business. Ideally individuals can buy protection at or just under the breakevens for a specific group of feeder cattle. The downside of price movements is contained so that losses are limited to some manageable level without giving up the upside of price movements.
However there will be cases when the best available insurance coverage is well below the breakevens for a group of cattle. Even with insurance coverage, individuals are exposed to greater levels of downside price risk. This is not necessarily a flaw in the program. Most often it goes back to the purchase decision being offside with the market fundamentals on which the CPIP coverage was based. When purchased cattle require a significant price increase to break even, the best available CPIP coverage can still leave a farm exposed to downside price risk that is not appropriate for the situation.
CPIP keeps the upside open
In volatile fed-cattle markets, CPIP can allow feeders to pursue profits (by limiting losses) that others might shy away from. When there are increased levels of uncertainty in the fed-cattle market, the ability to limit losses to an acceptable level opens the door to take actions that might achieve exceptionally high returns.
We have an interesting confluence of events. Anecdotally there is a noticeable shift in business tactics among cattle feeders. Gaining downside price protection is becoming an important driver of business performance. At the same time the CPIP program is available to provide this type of protection. Alberta cattle feeders are the beneficiaries of having a readily available tool that provides downside price protection while still being able to pursue the profits that accrue through upside price movements.
Is it possible that the Alberta government is providing the right tool at the right time?
