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Market with Crop Insurance

January 8, 2014
By: Ed Clark, Top Producer Business and Issues Editor
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If producers take 80% coverage, a $4.50 revenue crop insurance guarantee becomes $3.60 futures from a whole farm basis, or $3.20 factoring in a 40¢ basis, although basis varies widely.  

With lower guarantees, marketing 2014 crops requires early and aggressive action

It’s still a good three months before planters roll, but unlike the last three years, getting a jump-start on corn and soybean marketing will likely be rewarded.

One thing that won’t change in 2014 is that marketing begins with crop insurance revenue as a base. In recent years, this has served as an effective put option, but it won’t be that way for 2014.

"Crop insurance won’t cover costs like it has the past four to five years," says Jim Hilker, a Michigan State University ag economist.

The spring price guarantee will likely be $4.50 for corn and $11.50 for soybeans, says Darrel Good, a University of Illinois economist.

"This means producers need to be more aggressive when prices spike," adds Frayne Olson, North Dakota State University ag economist.

In June, December 2014 futures could be $4 per bushel or $3.60 forward contract quotes, factoring in 40¢ basis, Hilker says. That makes a February price and insurance guarantee of $4.50 look enticing.

With coverage levels as high as 80%, Hilker says, it could serve as a first marketing ploy for the season. After those guarantees are locked in, he advises selling up to 30% of expected 2014 production this winter.

"Eventually, prices will go lower," Good says. He believes the March 31 USDA Prospective Plantings report will be a major market mover. Barring any major events, he doesn’t expect the markets to move much between now and then. This gives farmers time to fine-tune their strategies.

When putting together a plan, you need to know how many bushels are protected by crop insurance and how many are not, says Chad Hart, Iowa State University ag economist.

"People get into trouble when they  think 80% coverage applies to a spring price of $4.25 to $4.50," Hart says. If you expect to grow 180-bu. corn, at 80% coverage, you have a price floor on protected bushels of $4.25 to $4.50 minus basis. That means 144 bu. are covered, but the remaining 20% are unprotected.

"Producers need to be aggressive marketing the 20% not protected by crop insurance," Hart says, knowing that it’s possible for summer prices to be in the $3 range.

For protected bushels, Hart says that farmers can afford to wait for potential price spikes. There’s no incentive to market protected bushels at or below guarantees.

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