Livestock Price Insurance (LPI) has never looked better for cattle producers, says Manitoba Agriculture Farm Management Specialist, Ben Hamm.
Cattle prices have been rising steadily over the past 12 months, and they’re approaching the highs seen in 2014 and 2015.
“We saw some significant profitability in 2014-2015,” says Hamm. “We never dreamed that we would get there, and we’re getting close to those same levels again,” he says. “We did go a little bit over three bucks in 2014–2015. Right now, we’re still only seeing $2.90 (CWT) for calves that are coming up for the fall. We are within 10 cents of the highs.”
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Hamm was speaking to an engaged audience of cattle farmers at the Manitoba Beef Producers annual general meeting on February 3 in Winnipeg.
“There’s some tremendous opportunity for profitability if we can lock in those prices and realize them in the fall,” says Hamm.
Buying LPI is essentially hedging against a price drop. It’s easy to see why locking in at these prices would be an attractive proposition.
Why it matters: Livestock price insurance is in the sweet spot for adoption under current market conditions.
The Co-operator caught up with Hamm after the meeting, where he expanded on his presentation.
“This program is fun to talk about when you’re on the highs, because that’s when you should be protecting your profits, because that’s when you have a long way to fall,” he says.
The size of the North American cattle herd has been decreasing over the past 10 years.
“We have a big supply crunch, and that’s what’s projecting some of these prices,” Hamm says.
While a similar supply crunch pushed prices higher in 2014–2015, there are a lot more factors impacting the market now. Prices remained high for nearly two solid years during the last peak, but there’s no guarantee that we will see that kind of longevity this time around.
“We have a lot of inflationary pressures right now,” says Hamm. “There’s concern that people may start balking at the price of beef in stores, and that could affect demand.”
But there’s also geopolitical instability with the war in Ukraine, and input prices remain high.
“With all this volatility, we need to have that price to get some profitability back into the livestock industry,” he says.
Producers have said in the past that they don’t like paying out what they see as hefty premiums, calling it a risky proposition.
The other side of the coin is that, if you don’t take price insurance, you’re gambling that everything will remain as it is. And that’s a risky bet too, according to Hamm.
“We’ve kind of been trained to always wait for tomorrow and see if it’s better. I think we need to get away from that and get as many days of protection as we can,” Hamm says.
LPI just opened for calf sales on February 1, and Hamm recommends locking in some of the first days of premium offerings.
“I would really be encouraging guys to lock in as many days of coverage as they can,” says Hamm. “Because if they wait until May, they’ve only got three to four months of actual coverage left.”
Yes, it would be a little cheaper, and the coverage might be a little higher, but he points out that’s just because the volatility of those first few months is behind you. But if the volatility does tank the market, you lose out.
Hamm admits LPI is a little pricey.
“Right now, we’re at about $7 CWT for those calves. If you’re putting on a 600-pound calf, it’s about $42 on some of the higher premiums,” he says, noting that those prices change daily. “But $40 isn’t so bad when you have $300 to $400 of profitability in there. So that’s something to keep in mind.”
And if the price is still too steep, Hamm recommends that producers not get stuck on the top price.
“We are still profitable at $280 CWT, and the premium is half (about $3 CWT on average),” says Hamm.
“So $3.00 CWT for a 600-pound calf works out to $18.00 a calf — still a very profitable level,” he says. “We can go down to $270 CWT, and it drops by about half again.”
Another risk management option that Hamm says might be worth a second look in today’s market is AgriStability. Hamm says the program is massively underutilized by cattle producers.
“It’s unfortunate; AgriStability has gone through cycles, and what really frustrated cattle producers was the reference margin limiter,” says Hamm. “And I don’t blame them for being frustrated about that, because that really slashed our coverage.”
The reference margin limiter limits a producer’s reference margin to their allowable expenses.
“That really took the coverage out of livestock producers’ control,” says Hamm. “But that’s now been removed.”
Another complaint about AgriStability is that a lot of cattle operations hover just north of the break-even point, and AgriStability, by design, works best with operations that go through boom and bust years and only pays out on a large margin decline. If your reference margin (calculated by using the average of the margins over the past five years, excluding the years with the highest and lowest margins) is right around the break-even point, the payout won’t be very big.
But with the high prices and profitability in the cattle market right now, Hamm says this is a perfect time to sign up.
“This is a time when we should be getting in to ensure that margin is there to cover you when the time comes,” he says.
“The reason I’m such a fan of AgriStability is because it is whole-farm coverage,” says Hamm. “Having said that, there is some detriment to being diversified. If one industry does well and the other doesn’t, it does balance out.”
“But as a whole farm, if you are still protecting a profitable farm, which we are all in the business of doing. I just don’t understand why it hasn’t taken off a bit more,” says Hamm.
Some of the problems lies in knowing the ins and outs of calculating benefits. Hamm says it’s not enough to take the forms to an accountant and hope they’ll get you the best deal. “You do have to understand a little bit about your accounting; everyone needs to step up their game and understand what calculation of program benefits,” he says.
“When they’re just letting their accountant do it all and never looking at their calculations, reporting, or benefits, and they just throw up their hands and say, ‘I don’t like the program, because it doesn’t pay,’ that’s the most frustrating thing for me,” says Hamm.
Hamm says there are some things that producers can control inside their calculation programs. All the information producers need is contained in the AgriStability Handbook. “It’s only 12 pages, but they do need to know it because it’s their own information, their own inventories, and their own income and expenses,” he says.
