Risk Management Strategies...

[smcgrath76]

I have been thinking about this lately for a couple of reasons, mostly pasture insurance and my latest FCC newsletter.
We all employ risk management strategies in our business. We use a variety of insurance products (vehicle, pasture, animal), we use a health protocol, we use grazing management, we use proven sires in AI, we use market timing tools (eg:Canfax), some of us use direct marketing, we use CAIS, etc.
What really got me thinking was a statement in the FCC newsletter that hedging on the futures market is probably not a realistic risk management tool for cow/calf producers, largely because of how the cattle are marketed, the disparities in product quality/pricing, market timing, etc. As well, there are not a lot of contracts out there for cow/calf guys to forward sell production.
As we are working on our risk management strategy at home, does anyone here have any experience in using the futures to mitigate production risk (I know you grain guys do) and secure pricing?

[gcreekrch]

Good question, Ive been wondering about the possibilities myself.

[kato]

Me three.

Wasn't there some talk a while back about putting some sort of livestock production insurance into the new programs?

[farmers_son]

Efforts are being made at the national level to create a price risk insurance vehicle for the cattle industry. It is based on options. The challenge is to make it affordable. I saw advantages for smaller operations who sought protection from market and dollar fluctuations. The larger operations are already doing that with futures.

A production risk program for cattle is being discussed as well. Based on crop insurance it would guarantee a live calf percentage. The initial premiums were very affordable but the premiums increased rapidly if the producer collected more insurance than they paid in premiums.

The CAIS program should have taken care of these risk factors for the cattle industry. However CAIS does not work for cow calf operations. CAIS discriminates against the cow calf industry which has a cycle of good and bad years that is much longer than the 5 year reference margin window allowed under CAIS. On top of that the BSE crisis was viewed by CAIS as a production or management problem instead of an industry crisis which seriously depleted reference producer's margins but saved the federal government billions.

What I would expect to see happen if some kind of new risk management programs do come out is that the producer will be required to participate in the program or risk having a deemed disposition calculated against any potential CAIS payout (assumings there is any reference margins left to generate a payout) just like is done with crop insurance now.

At some point our government needs to realize that CAIS is not working and get rid of it. The Conservatives promised to get rid of CAIS but when the rubber hit the road they merely renamed it and we cattle producers are stuck with it again. CAIS will do wonders for the grain sector though as the grain guys should build up some very good reference margins with $17 bushel canola prices. The livestock feeding sector is left holding the risk bag all by themselves.