Insurance Protection Expiration
Oct 09, 2013
Markets closed mixed on Wednesday without much fresh fundamental news for direction. Overnight there were some heavy sellers of January soybeans and the overall negative bias remained for the back months of soybeans. December corn settled 1 ¾ cents higher at $4.43 ½, November soybeans 1 cent lower at $12.87 ¾, and December wheat 3 cents lower at $6.90 ½.
If there has been an impact on the markets from the partial government shutdown it may be more related to lower volatility than an overall negative or positive affect. The price swings appear to be tapering as the trade waits for production and export data from the USDA. The cash market continues to talk about Chinese demand for US corn but we won’t have an accurate sales estimate until the USDA starts reporting again. Even if the Chinese are ramping up their US corn purchases it shouldn’t make a significant dent in our final carryout assuming we get that strong national average yield we are expecting.
We have been voicing our concern over the past few days about the Federal Crop Insurance price protection expiring this month. There are many in the market who believe most of our downside risk has been capped around this $4.50 level and can’t go lower. Consider 2008 for example. December 2008 corn had a contract high that summer of $7.99. By October 9th it was down to $4.38 ¼ but it didn’t stop there. It fell to a contract low of $2.93 ½ on December 5th! This is why we recommend replacing that insurance "put" as it expires this month. Many producers could be left without that protection, only to see the market break into the end of the year. Like always, we can’t predict the future but we can try to position ourselves to maintain profitability if this were to happen.
Here is a chart of December 2008 Corn (blue) along with the Dec08-Dec09 Corn Spread (black). I included the spread to show that it also continued to widen as the price dropped. We are currently at 41 ¾ cents carry from Dec13-14 but that got up to well over 60 cents in 08.
Harvest Price Example
There are 23 business days during October which means every day you will have 1/23rd (4.35%) less price protection on your crop insurance "put". The average December corn price so far in October is $4.42 after 7 trading days which makes up over 30% of the harvest price already. To show how this is already limiting your coverage take the following as an example:
Seven days are already set at $4.42 but the remaining 17 days theoretically trade at an average price of $4.00.The equation is (7days/23total)*$4.42 + (16days/23total)*$4.00 = $4.12 ¾ final harvest price instead of $4.00. The higher price means less "revenue" lost and even though a producer had a good insurance put on he may not be getting the payment he would otherwise be expecting at $4. As time goes on this discrepancy will only get larger until the insurance "put" has expired and no protection is left.
Those who are relying on that "guaranteed revenue" are less and less covered everyday and need to make a decision of whether or not they want to stay protected and take action. If you would like to look at a strategy to help with the crop insurance in detail please contact an EHedger risk manager to discuss a trial of our services at 866-433-4371.
Premier full service commodity brokerage offering risk management services for the agricultural sector as well as professional traders.
Premier full service commodity brokerage offering risk management services for the agricultural sector as well as professional traders. EHedger is a premier full service commodity brokerage offering risk management services for the agricultural sector as well as professional traders. Trading commodity futures and options involves substantial risk of loss and may not be suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge and financial resources. The market information contained in this message has been obtained from sources believed to be reliable, but is not guaranteed as to its accuracy or completeness. Market information may not be consistent with current or future market positions of EHedger LLC, its affiliates, officers, directors, employees or agents.