Archive for the ‘hedging’ Category

New Cattle Price Insurance Program Offers Alberta Producers Much-Needed Protection

September 10, 2009

The following is the official press release from AFSC on the Cattle Price Insurance Program CPIP. This truly is a revolutionary program that will allow Albertan cattle feeders to hedge some risk. I have not fully investigated the nuts and bolts of the program but I think on the surface it is a great step in the right direction.

Alberta-Only Program Launched

As Alberta beef producers prepare to move cattle off pasture and onto feed for the winter, many in the industry are glad to see the launch of Alberta’s long-awaited Cattle Price Insurance Program (CPIP) for fed cattle – saying it provides much-needed price protection that could offer welcome relief amid rising feed costs, weak cattle prices and a strong Canadian dollar.

“CPIP gives us a tool we can use today to put a bottom price on our cattle and manage our risk going forward,” says beef industry specialist Anne Dunford, who works with producers across Alberta to market their finished cattle. Dunford is general manager of Gateway Livestock Exchange in Taber, and was the senior cattle market analyst at Canfax for more than two decades.

‘Huge Volatility and Risks’

“Anytime we have a new tool to help manage price risk, it’s a good thing, especially in today’s environment of huge volatility and more risks than I think our industry has ever had to deal with over the last several years,” says Dunford. In the last few years, she says Alberta fed cattle prices have been severely impacted by factors like the global financial collapse, an oversupply of beef and pork that resulted from the H1N1 outbreak, mandatory Country of Origin Labelling (COOL), and extreme exchange rate volatility “which is taking the limelight today.”

Dunford says CPIP fills an important gap in the risk management tools available to producers because it’s made-in-Alberta risk management that gives them a minimum Alberta price for their fed cattle – protecting them from basis risk, which is the difference between U.S. and Canadian cattle prices.

Basis Risk Protection

“Most risk management tools are based on U.S. futures markets and directly reflect American cattle prices. So when there’s a border or trade issue that sends Canadian cattle prices tumbling sharply below American prices – like we saw with BSE and COOL – these U.S. futures market instruments leave Alberta producers exposed to severe losses caused by basis risk,” explains Jennifer Wood, CPIP Coordinator with Agriculture Financial Services Corporation (AFSC), the provincial Crown Corporation administering CPIP.

“Anyone who feeds cattle in Canada understands how extreme and unpredictable basis risk can be,” says Dunford, adding American producers don’t face the same kind of basis risk that Canadians do. “CPIP helps give us a leg back up to equality.”

“By insuring an Alberta price for their fed cattle, CPIP protects Alberta beef producers from basis risk. That’s why the program was created,” says Wood. CPIP began taking shape five years ago – not long after BSE closed the border to Canadian cattle – when Alberta Beef Producers sponsored initial research exploring the idea. Since then, Alberta Feeder Associations, Alberta Agriculture and Rural Development, and AFSC have joined in the development of the program. While the first CPIP products target finished cattle, work is underway on a yearling product that will extend coverage to feeder cattle “hopefully next year,” says Wood.

Alberta Minimum Price for Fed Cattle

CPIP offers Alberta cattle feeders two products: Basis-only Insurance to protect against a widening basis; and full Price Insurance, which covers all three components of price risk – the futures price risk, currency exchange risk, and basis. “It gives Alberta cattle producers a minimum price for fed cattle, so they know in advance the minimum they’ll receive once those animals reach market weight,” explains Wood.

Lyle Miller, part owner and manager of Highway 21 Feeders, a 20,000-head custom feedlot near Acme, says the Basis-only product appeals to him. “We use a lot of futures and options which leaves our basis open. Until now, the only way to cover basis was to contract with a packer. And at times what packers want to pay can be less than what people think their cattle are worth. That’s where CPIP could offer us some value.”

But many cattle producers aren’t comfortable using futures markets, says Miller. “So the full meal deal Price Insurance will be more attractive for them because it covers all of their price risk with one simple tool. It’s an alternative to contracting with a packer or just staying in the cash market and crossing their fingers and praying. And with CPIP, they won’t take huge losses from the big price swings we’ve been seeing.”

“Producers tell us they’d rather use insurance to manage risk than deal with the uncertainty of futures markets, which require a fair bit of expertise and can be almost a full-time job,” says Wood. “With CPIP, they just pick a coverage level, policy length, and pay a premium up front to insure a price for their cattle. It’s similar to a put option on the futures market, but it’s sold as insurance. There are no bid-ask spreads, margin calls, or minimum number of pounds to insure. Even the smallest cattle finishing operation can participate.”

Secure Online Program Delivery

CPIP premiums and coverage levels are calculated and sold each Tuesday, Wednesday, and Thursday afternoon, says Wood. “They’re tied to what’s happening in the futures markets, so they change daily. That’s why CPIP is being delivered entirely online – so producers can monitor premiums from their own computers, and react quickly when they want to purchase coverage or file a claim. Considerable time and effort has gone into building a fully secure and user-friendly system.”
The following if the press release from AFSC on the official release of the Cattle Price Insurance Program CPIP. This truly is a revolutionary facility to

Producer-Funded Premiums

CPIP premiums are completely producer-funded and based on a forecast of where Alberta fed cattle prices will be when the policy expires, says Wood. Those Alberta forward prices reflect Chicago Mercantile Exchange live cattle futures prices, Canada-U.S. exchange rates, and a forecast of the Canada-U.S. basis. She says coverage levels range from 75 to 95 per cent of the Alberta forward price. Producers can choose policies from 12 to 36 weeks long. “The policy length should match the time it will take their cattle to reach market weight,” says Wood.

Claims can only be made during the last four weeks of the policy, but producers aren’t required to sell their cattle to make a claim – giving them flexibility if the animals haven’t gained at the expected rate, adds Wood. Policies are settled using a weekly Alberta average fed cattle price index based on steer and heifer sales each week. “If the settlement index is lower than the insured price, a claim cheque will be mailed out when the policy expires. Or if the spread between the Nebraska cash price and the Alberta average fed cattle price is wider than their insured basis, they’ll be paid.”

Premium Rates Change Quickly

To get started, Wood says producers must visit their local AFSC office to obtain a username and password giving them secure online access. CPIP transactions can be conducted online, through an AFSC office or the AFSC Call Centre at 1-888-786-7475, she adds. “We’re advising producers to check premium rates and coverage levels frequently because sometimes they’ll look expensive, but a few weeks later, once the markets calm down, that can all change.”

Brent Heidecker, co-owner of Coro View Farms near Coronation, says he plans to log on to the CPIP website daily to watch premiums and coverage levels. Heidecker already uses futures and options to manage risk on his 5,000-head feedlot. He says some of the sample premiums he saw earlier this year while CPIP was still being developed were quite attractive. “CPIP will be a good tool to cover our basis risk and an effective way to protect us against some pretty catastrophic risk” such as trade disruptions or border closures, he says.

Ross Purdy, senior manager of agriculture and agri-business for the Bank of Montreal in Alberta, says his bank will also be keeping a close eye on CPIP. He says producers who use the program will probably find it easier to access credit when they need it most. “As we all know, prices in agriculture are subject to rapid changes and fluctuations. So if we have two producers – one that has price insurance, and the other not – we will probably have a higher comfort level lending money to the one with insurance,” says Purdy.

More information on CPIP is available at http://www.afsc.ca/.

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Crop Marketing Update – Jon Driedger – FarmLink Marketing Solutions

June 24, 2009
On Monday afternoon I had the opportunity to sit down with Jon Driedger, a market analyst with FarmLink Marketing Solutions in Winnipeg. A day before the Canadian StatsCan acreage Report was released, Jon provided great insight into the dynamics facing the grains, oilseeds and pulse markets this summer and fall in North America.  

A special thank to Jon for his time and comments. Please take the time to check out FarmLink Marketing Solutions — Maximizing profitability farm-wide, through informed marketing decisions.

Tiffin Conference – Larry Hicks – Managing Risk in the Beef Business

January 23, 2009

Larry Hicks of Cattlehedging.com was one of the keynote speakers at the Tiffin Conference yesterday in Lethbridge. Larry spoke about the necessity of risk management in the beef business. Larry very clearly outlined what hedging is and that there is much more involved than calling your broker to buy or sell futures contracts. He emphasized that you must have a hedging plan in order to really obtain success.

I had a chance to sit down with Larry before his Tiffin speech to discuss some of the pressing issues in the beef business and get a better idea of how he views the beef business going forward.