Crop Insurance Beneficial in Multiple Scenarios
Feb 09, 2013
As we have seen since the January 11 USDA Quarterly Stocks Report the markets have been volatile. The market has two main responsibilities. The immediate one being curbing demand in the near term as the USDA told use there are tighter stock than many thought. The second is trying to keep that demand around for new crops as there will be near record acres planted with better yield potential. This second scenario will also be dependent on weather.
With February being the main discovery month for corn and soybeans the spring price average so far has been able to take advantage of the markets trying to curb demand in the short-term. The front month futures prices are seeing the most upside movement it has still been supporting the far out contracts. At some point the marketplace is going to get past the critical point of needing to curb demand and we could then see a large drop in prices until we can gain that demand back. We got a little taste of that on Friday with corn and soybeans having a rough close on the week based on the new USDA numbers. With crop insurance covering both price and yield this alone is a big reason to buy the 80% or 85% level of insurance to cover as many bushels as you can at what may be a very high price compared to what it may be worth down the road. If you have the ability to attach the Trend Adjusted Yield due this as well because it bump up your coverage level closer to 90%.
If drought conditions persist through the year the markets could have real upside potential. In the a recent survey by Agweb it painted a good picture as to the severity of subsoil absence and what it would take to replenish areas around the United States. We saw what the market did last year in an effort to curb demand due to lack of bushels and if the drought persists the market will do it again. In 2012 the harvest price was $1.82 higher than the spring price for corn, $2.84 higher in soybeans and $1.46 higher in wheat. This upside potential is one the main reason that producers should almost always elect the harvest price option. It is also a very inexpensive way to cover the upside compared to options and a lot less risky than hoping you will have the bushels produced to sell a bunch of them at very high prices.
If you are of the belief that the markets will rise in the summer above the spring price and then come back down in time for the harvest price than you need to look at the private product called Price Flex which anyone can reference my old blog posting for more information on.
Last year less than 3% of the total cost on our farmland was attributed to crop insurance and that included being at an 85% policy along with the Trend Adjusted Yield option. Along with the help it gives in managing risk throughout the year insurance on a yearly basis is money well spent. We all would much prefer to make money the old fashion way and grow it but insurance provide peace of mind against the what if’s and is an additional marketing tool.
Market volatility is showing us that the market is just not sure what it wants to do and when it will do it. This makes it very difficult to determine how to effective manage your risk and the timing of doing something is almost always the determining factor. Crop Insurance can provide some protection against the unknown and as I hopefully conveyed above can benefit a person in many different scenario that could play itself out.
If you have comments or questions I can be reached at 707-365-0601 or you can email me at Jamie@GulkeGroup.com.