Shrinking cow herd fuels high prices — and risk

CPIP The floor prices being offered have 
also climbed to record highs, reaching 
more than $900 on a 600-pound calf

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While calving season is underway, Alberta’s beef cow herd continues to shrink — setting the stage for a smaller calf crop and tighter cattle supplies this year that are fuelling higher cattle prices and growing interest in Alberta’s Cattle Price Insurance Program (CPIP).

“Feeder cattle prices hit record levels in February and remain about 20 per cent higher than this time last year. Cattle futures also look strong for the second half of 2012,” says Scott McKinnon, an Alberta market analyst with Canfax. “Supply is a big factor influencing prices.”

The North American cattle herd dropped sharply in the last decade and Alberta’s cow herd declined steadily amid eight years of losses. The province’s beef cow herd sits at 1.66 million head as of January 1, 2012 — down 1.5 per cent from last year.

Many producers have sold off herds to cash in on current prices, as others retain heifers to rebuild their herds, taking more feeder cattle off the market.

“We’ll probably see at least five years of strong prices as supply slowly increases, although that may not translate into profit for everyone,” says McKinnon. Higher operating costs and increased calf prices are squeezing profitability for cattle feeders.

“The tone is definitely optimism, but there’s always something that can throw a wrench into things,” he says, pointing to the European debt crisis, volatile markets, and a sluggish North American economy.

High prices and uncertainty have triggered increased interest in CPIP price insurance among producers and lenders.

“We’re seeing producers take on risk levels not witnessed since the ’90s, as far as investment per head at today’s prices. That’s why we’re actively encouraging them to consider price insurance,” says Reg Schmidt, general manager of the Feeder Associations of Alberta (FAA). “When prices reach record highs, they’re more likely to fall than climb higher,” he says. “I worry most about farmer-feeders and backgrounders,” he says, explaining they buy high-priced calves on the spot market and sell them as heavy feeder cattle to feedlots grappling with high operating costs and price pressure from packing plants. “They could get crushed from both sides if they’re not using risk management.”

“Producers are very aware of the risks. We’re getting a lot more inquiries and writing new policies for CPIP-Feeder. We’ve also had strong attendance at CPIP-Calf information sessions,” says Brenda Campbell, a field analyst with Agriculture Financial Services Corporation (AFSC).

Because CPIP is market driven — based on forecasted Alberta cattle prices — the floor prices being offered have also climbed to record highs, reaching more than $900 on a 600-pound calf.

“I’ve spoken with cow-calf producers who are excited by the prices they can lock in,” says Schmidt, explaining in today’s volatile markets, price insurance protects them from being caught in a down cycle when they sell.

Most producers insure floor prices at the top end of CPIP premium tables to cover record-high input costs, says Campbell, “although many still choose lower-level disaster coverage to protect them from more extreme price drops when marketing their cattle.” She adds, “If average Alberta cattle prices drop lower than their floor price at the end of the policy, a payment is mailed within a couple weeks. And they don’t have to sell the cattle to make a claim.”

At the end of the day, price insurance protects even the smallest producer from a drop in market prices — something they typically have no control over, says Campbell. She adds no minimum number of cattle need be insured and producers aren’t required to insure the whole herd. CPIP floor prices and premiums change three days a week reflecting futures markets.

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