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Risk Management Strategies

28/03/2016


This article was previously published in Western Producer March 2016.​

As producers in the middle of calving season you have a lot on your mind. During this rewarding time of the year you take extra steps to ensure your cows are in good body condition prior to calving, you ensure calving facilities are clean and dry, protect newborn calves from extreme weather and you implement a vaccination program to protect your calves from diseases.

In later spring and summer, your concerns move to adequate grass and grazing rotation and good water sources. With the recent dry summer behind us, you may be forced to lower animal units on your pasture or you may have to put up more hay this year than in prior years. All these examples are key risk management steps that you have incorporated in your daily routine to ensure you can maintain or increase your weaning average and sell more and heavier calves in the fall.

However, many producers give little thought to risk management around the price they receive in the fall for their calves. While the main concern at calving season is to ensure a healthy calf crop, it is also a good time to take a look toward the future and come up with risk management strategies to protect the financial side of your business.

Last fall we saw the wide variation in prices during the fall run. Depending on what week you sold your calves, could have had a huge impact on the price you received. Prices on 600 - 700 lb steers in September averaged around $2.93 per lb in Alberta and by December the average was $2.23 per lb. The month of November saw a lot of volatility in prices and if your calves where marketed on the wrong day or week, it would have made a large difference in the cheque you received from the auction market or your cattle buyer.

With so many factors affecting prices it is important to take a step back and assess the risks you are exposed to financially, and then determining if there is any way to mitigate these risks. As cow-calf producers most of you know that often you are price takers, and depending on your operation you may be forced to sell your calves once grass runs out or if you do not have any facilities to feed them longer.

Calf prices are affected by many factors such as the beef futures price, the Canadian dollar, basis, and barley price. There are ways you can hedge each of these factors individually if you have the time and knowledge. You can also take a look at using a simple risk management tool such as the Western Livestock Price Insurance Program (WLPIP).

WLPIP is available to cow calf producers in March and April to hedge a price for your calves for a period in the fall. For example last March, for a premium of $6.77/cwt, you could have locked in a floor (minimum) price of $270/cwt. Average market price for 600 lb steers in November was around $249/cwt. For example, on a 600 lb steer delivered last November with WLPIP would have netted the producer an extra $85.00 per head after the cost of insurance is factored in.

WLPIP has many different levels of coverage depending on the settlement price level you choose for the fall. You can choose a low premium for a low settlement price, or pay a higher premium for the maximum settlement coverage available. What is important as a producer, is to ask yourself what coverage level do you need in the worst case scenario to cover your costs to breakeven? Or, if prices would drop significantly in the fall and you are short of cash to pay bills, would WLPIP help me from selling bred cows, or bred heifers in the fall to generate additional cash flow?

The fall calf market conditions impacts a lot of future decision for your operation in relation to cash flow, heifer retention, and expansion plans. As advisors, we recommend that you take a closer look at your operation to determine what your breakeven costs are so you can take a balanced approach at what type of coverage you need. If you are a young producer, expanding your herd take a look at your business plan and see if using a risk management tool such as WLPIP would allow you to mitigate a few risks, and allow you to execute your business plan and grow your operation faster.

Contact Marvin Slingerland, CPA, CA a business advisor with MNP’s Livestock Services [email protected] or 1.800.661.8097 for more information on how you can effectively determine your breakeven costs on your operation.