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May 24, 2012
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Risk Management with Insurance Tools

RSS By: Jamie Wasemiller, AgWeb.com

Insurance tools have become an integral part of managing your farming operation. Stay current on insurance tools and how to incorporate them with your current risk management strategies to market your grains throughout the year.

2012 Crop Insurance Webinar

Feb 21, 2012

Space is limited!

 

Reserve your spot now!

 

I will be conducting an insurance webinar on Wednesday, Feb. 22 from 2:00-3:00 pm. In this webinar I will discuss my thoughts regarding corn and soybean insurance for 2012 and describe the benefits of the Trend Adjusted APH.

I will also explain how you can benefit from working with me as your insurance agent focusing on utilizing the Silveus Profit Matrix as part of our crop insurance package. Here you can track your cash sales, futures and options and see how it affects your profitability in real-time.

 

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Advice for Hedging Your Crops

Feb 06, 2012

 

Another successful and informative Top Producer Seminar has come and gone. It is always an honor to be asked to speak at this event and I was lucky enough to also be asked to speak to the younger farmers at the Tomorrow’s Top Producer Seminar.
 
One thing I always like to do is learn from the audience what tools they utilize to hedge their crops. A few things that stuck out in my mind was the fact that not many people in the room (especially the young farmers) utilize futures and options and most have not done any marketing yet for their 2012 crops.
 
With an increase in input costs for 2012 and the possibility of the U.S. growing a very large amount of grain this year farmers should work on taking the emotion out of the process and look at hedging some crops early on especially if it cash flows for your operation.
 
For the cash hedger that has not done anything I would say closely monitor the local basis and instead of waiting for previous highs go ahead and get a small portion of your crops marketed. It just makes good risk management sense.
 
If you only do a small amount you should not have to be concerned with not having the actual production to deliver. Effective cash sales early in the season (based on operational break-even numbers) makes it much easier to manage crops especially in conjunction with the right insurance policy and level.
 
As a farmer I can appreciate being nervous to utilize futures and options especially if you have rarely utilized them but as a risk management specialist I understand the benefits of getting educated and utilizing these tools in conjunction with crop insurance to effectively market their crops.  By spending money on crop insurance money that would have had to spend during the season on the board can be mitigated. When factoring in crop insurance futures and options can be used in a timely and cost effective manner.
 
Having the right tools (software) will dramatically help you choose the right insurance policy, incorporate it into your marketing strategy and effectively manage your marketing strategies throughout the year. Your risk and revenue changes daily and in order to correctly execute any additional hedging you need to know how it will impact your current financial position.
 
If enough people respond to today’s blog and would like to have me conduct a webinar on this I am happy to do one so please let me know. Otherwise if you are interested in how to get these tools you can contact me at 707-365-0601 or at Jamie@gulkegroup.com.

 

 

 

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Consider a MPD Policy

Dec 31, 2011

Although most producers are not currently focused on their crop insurance decisions this early on but every now and then an opportunity come around that producers need to take a few minutes to learn about. This is one of those times and the product is called Multiple Price Discovery.
 
This product provides producers with two additional opportunities to improve their spring price for crop insurance thus creating a higher Revenue Guarantee per acre for your operation.
 
Here are some of the highlights of the program:
 
  • Available for Corn & Soybeans in the following states: IN, IA, KY, MI, MN, NE, OH, SD, TN, WI and IL.
  • This is an add-on to Federal Crop Insurance.
  • By purchasing this policy, an insured will receive the higher of the December or January Average projected price for the future December CBOT corn contract not to exceed fifty cents ($0.50) over the MPCI projected price set in February. For soybeans an insured will receive the higher of the December or January Average projected price for the future November CBOT soybean contract not to exceed one dollar ($1.00) over the MPCI projected price set in February. If the projected prices for the MPCI Federally reinsured corn or soybean policies set in February are higher than the December or January average prices then coverage expires and premium is earned and payable.
  • The month of December ended with Corn at $5.60 and Soybeans at $11.61.
  • Producer must purchase either a RP policy at the 70/100 or greater with Enterprise Units or a GRIP-HRO at the 80/100 or greater level.
  • Most quotes per acres have been between $3 and $6 per acre with an opportunity to add an additional $70 in corn and $50 in soybeans on top of the revenue guarantee provided by the Federal Crop Insurance.
  • Producer will not have four opportunities to lock in the highest possible Revenue Guarantee per Acre: They are the Dec. Average, Jan. Average, Feb. Average and the Harvest Average.
  • The deadline for this product is Jan. 2, 2012.
 
Here are some illustrations to help understand the program.
 
Example of Upside Price Cap:
The average price for December for corn was $5.45 and January was $5.70. The average price for MPCI policy in Feb. was $5.00. The maximum increase is $.50 cents above the February Price so your price used to establish coverage would be $5.50.
 
Here are some MPD Loss Scenarios if you are interested.
 
1. Loss Scenario #1: An example of a lower Harvest price, and no yield loss on the underlying RP
policy, but a qualifying loss on the MPD:
 
The average price of December 2012 corn traded during the month of December 2011 was $5.50. The insured elected to apply for coverage prior to January 1st and selected the 80/100 (80% coverage at 100% of the price election) Revenue Plan and has an enterprise unit actual production history of 180 bushels, with 1,000 acres, and 100% share.
 
The average price for the month of January was $5.40, and the average price for the month of
February was $5.10. In this case the MPD policy would provide coverage starting at $5.50 a bushel. The MPD Revenue coverage provided would be: $5.50 X 180 bushels X 80% X 1,000 acres X 100% share = $792,000, minus the underlying coverage of $5.10 X 180 bushels x 80% x 1,000 acres x 100% share = $734,400.
 
$792,000 - $734,400 = $57,600 of MPD coverage.
 
The Harvest price for the underlying RP policy is $5.00 (average price of the monthly trading days of Oct 2012 for the Dec 2012 CBOT corn contract).
 
The Harvested production is 150,000 bushels.
 
The loss is determined by multiplying the Harvested Production (150,000 bushels) by the Harvest Price ($5.00) 150,000 X $5.00 = 750,000. $750,000 is greater than the underlying coverage provided by the Revenue Plan policy ($734,000) but less than the Revenue Plan with MPD coverage of $792,000. The indemnity (not to exceed the Max MPD liability is calculated by taking $792,000 - $750,000 = $42,000 MPD Indemnity.
 
Loss Scenario #2: An example of a price increase at harvest above the MPD and RP Projected
Price.
 
The average price of December 2012 corn traded during the month of December 2011 was $5.50.The insured elected to apply for MPD coverage prior to January 1st and selected the 80/100 (80% coverage at 100% of the price election) Revenue Plan and has an enterprise unit actual production history of 180 bushels, with 1,000 acres, and 100% share.
 
The average price for the month of January was $5.40, and the average price for the month of
February was $5.10. In this case the MPD policy would provide coverage starting at $5.50 a bushel. The MPD Revenue coverage provided would be: $5.50 X 180 bushels X 80% X 1,000 acres X 100% share = $792,000, minus the underlying coverage of $5.10 X 180 bushels x 80% x 1,000 acres x 100% share = $734,400. $792,000 - $734,400 = $57,600 of MPD coverage.
 
The Harvest price for the underlying RP policy is $6.00 (average price of the monthly trading days of Oct 2012 for the Dec 2012 CBOT corn contract).
 
Because the Harvest Price is higher than the Projected MPD price the MPD liability expires, however the underlying RP liability increases in value with a new revenue guarantee of $864,000. ($6.00 X 180 X 80% X 1000 acres X 100% share = $864,000.
 
The Harvested production is 140,000 bushels.
 
The indemnity is determined by multiplying the Harvested Production (140,000 bushels) by the
Harvest Price ($6.00) 140,000 X $6.00 = $840,000. $840,000 is less than the underlying Revenue
Plan revised coverage of $864,000 so the indemnity would be covered by the Revenue Plan:
$864,000 - $840,000 = $24,000
 
Loss Scenario #3: An example of a higher projected price for the RP policy than the MPD policy
 
The average price of December 2012 corn traded during the month of December 2011 was $5.50. The insured elected to apply for coverage prior to January 1st and selected the 80/100 (80% coverage at 100% of the price election) Revenue Plan.
 
The average price for the month of January was $5.80, and the average price for the month of February was $6.10. In this case the MPD Policy would have no liability and premium would be earned and payable at the same time as the underlying Revenue Plan policy.
 
"With the volatility that we are experiencing in the markets it is very hard for us as producers to predict what the 2012 spring price is going to be for crop insurance. With both cash rent and input costs on the rise we need to see the same in the value of our grain. This could be tough if we continue to see a drop in demand for our grains coupled with the fact that as of now we stand to see millions of additional acres going back into production that was prevent planted in 2011. If prices go down it is going to be a much tougher year to market out grains. This product is a very low cost hedge against a drop in grain prices between now and March 1".
 
If you want to learn more about this product you can contact Jamie Wasemiller of the Gulke Group at 707-365-0601 throughout the weekend.
 

Happy New Year!
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Federal Crop Insurance May be the Last Program Standing

Nov 03, 2011

 

It looks like the farm bill will be written by the four principles of the House and Senate Ag Committee and hopefully they will include it within the bill the Super Committee will present to Congress. If this is true, then the farm bill will be voted within the debt reduction package as a whole. Keep in mind that the debt reduction bill is not amendable. At this point the accepted rumor is that there will be a reduction of $23 billion.
 
How does this dollar figure impact government programs?
 
These are some of the ideas being tossed around the industry:
 
  • $4 billion will be taken from the nutrition program
  • A reduction of CRP acres ranging from 4-7 million acres.
  • Direct and Counter-Cyclical payments along with both the ACRE and SURE programs may go away. This will results in a reduction of around $14 billion.
 
It appears that the Senate Ag Committee has not proposed any reductions within the current Federal Crop Insurance program. This is mainly due to the cuts that were already put in place last year with the new SRA agreement. Federal Crop Insurance may even gain more support if the previously mentioned cuts due, in fact, happen. If so, Federal Crop Insurance could be looked upon as one of the few programs left to protect the farmer.
 
I believe early evidence of this is the introduction of the new Trend-Adjusted APH program being introduced in certain states. The Trend-Adjusted APH adjusts eligible yields, in qualifying APH databases, to reflect long term increases in the county’s historical yield. This should have a positive impact for many farmers within the approved states.
 
That being said, the next questions to consider are what will happen to the items above if the Super Committee’s plan is not approved? What if the “powers-to-be” decide in the future that even more budget cuts needed? In both cases, Federal Crop Insurance may be targeted . . . . especially if prices stay at these high levels. This is just another reason why we need to become more diligent in diverse and effective marketing strategies. Understanding both will ultimately give us the flexibility to thrive in our profession.
 
If you have any questions or would like to know more about how to incorporate insurance and grain marketing, feel free to ask me in the comment section of this blog, or contact me at Jamie@gulkegroup.com.
 
There are substantial risks involved with both futures and options trading. While risk is limited to purchase price when buying an option, it is not limited when selling an option. Commodity trading and other speculative/ hedging investment practices involve substantial risk of loss. Past results are not necessarily indicative of future results when utilizing the commodities markets. This material and any views expressed herein are provided for informational purposes only and should not be construed in any way as an endorsement or inducement to invest.
 
 
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Corn Final Planting Date Approaching

May 26, 2011

 

With the Final Planting Dates for Corn approaching I wanted to go over a few options that are available if Corn not planted by its Final Planting Date. I have also included some important points to remember about Prevented Planting. I will cover replant and first crop/second crop options in upcoming blog posts.
 
Take Prevented Planting:
·         Submit a Prevented Planting claim. A Prevented Planting claim will receive 60% of the original guarantee. There is an option to buy up prevented planting coverage to a 65% or 70% level but that needed to be done by the insurance deadline date. No other crops can be planted on these acres other than approved cover crops. Prevented Planting acres will not affect your APH in this instance.
 
Example:  Insured producer selects 75% coverage level on insurance policy resulting in $75,000 in total coverage. Take $75,000 X 60% to get a PP payment of $45,000.
 
·         Submit a Prevented Planting claim and plant a second insurable crop on or before the end of the Late Planting Period. If the second crop is planted before the late planting period, coverage for the second crop can replace the coverage for first. No Prevented Planting payment will be paid on the first crop.
 
·         Submit a Prevented Planting claim and plant a second insurance crop after the first crops Late Planting Period: If the second crop is planted after the late planting period the second crop can be insured and a payment of 35% of the prevented planting payment will apply to the corn acres. Also, only 35% of the original premium for the policy on those acres will be charged. Keep in mind that depending on when you switch from corn to insured soybeans you may also run into Late Planting Period rules for the soybeans if they are planted after their Final Planting date. In this case the prevented planted acres will receive a yield equal to 60% of the approved yield, which will now be part of the 10-year history.
 
Example: Insured producer selects 75% coverage level on insurance policy resulting in $75,000 in total coverage. Since another crop is being planted the indemnity payment is reduced to 35% of the Prevented Planting guarantee so multiply $75,000 X 60% X 35% to get a payment of $15,750.
 
Plant during the Late Planting Period:
·         The late plating period generally lasts for 25 days starting on the date of the final planting date. Acres planted within this window will receive 1% less coverage per day. Acres planted after the late planting period can still be insured at the prevented planting level which again is 60% of the original guarantee. Remember that the late planted acres will be combined with any acres planted before the late planting window to determine your average guarantee.
 
Example: Insured producer plants corn on June 12 when the Final Plant Date was June 5. The insured producer planted seven days after the final planting date for corn; thus the production guarantee or amount of insurance is reduced 7%. $75,000 X 7% =$5,250. Take $75,000-$5,250 to get the new insurance coverage of $69,750.
 
A few other items to remember about Prevent Planting this year:
·         Prevented Planting acres must be 20 acres or more or 20% of the insurable acres in a unit.
·         A Prevented Planting claim should be reported to the loss adjustor within 72 hours after the decision has been made that the crop cannot be planted.
·         Taking prevented planted could affect a farmers ability to receive the enterprise unit discount.
·         Prevented Planting is not a voluntarily option. If famers surrounding you or in your area was able to get their corn in the ground there is a chance that your Prevented Planting claim will not get approved.
·         To be eligible for a Prevented Planting claim, a farmer must have “planted and harvested” or insured the crop in at least one of the past three years. 
·         Eligible acres (base acres) will be based on the most crop acres you have planted or prevent planted in one of the last 4 years.
·         Prevented Planting payments will be based on the Spring Price only.
·         If corn is prevented from being planted and the remaining eligible acres are for another crop with a higher PP payment the payment received will continue to be based on the lesser amount. If the only remaining eligible acres have a lower PP payment the payment will be based on the lower amount.
·         If another person plants a second crop on any of the PP acreage (first insured crop) after the late planting period (Final Plant date if the late plant period is not applicable) for the PP crop, then the Indemnity will be 35% payment on the first crop. (It makes no difference if the insured of the 1st crop has any interest in the 2nd crop.). 
·         Only one Prevented Planting payment may be received by the insured or any other person (excluding share arrangement) for each acre for the crop year, unless the insured meets the requirement for double cropping. Double cropping must be an insurable practice in the county for the crop. 
 
This is for informational purposes. Please contact me directly or talk to another insurance agent before making any definite decisions.
 
If you have any questions about Prevented Planting or want help determining what option is the most beneficial for your operation I can be reached at 707-365-0601 or you can email me at Jamie@GulkeGroup.com.
 
There are substantial risks involved with both futures and options trading. While risk is limited to purchase price when buying an option, it is not limited when selling an option. Commodity trading and other speculative/ hedging investment practices involve substantial risk of loss. Past results are not necessarily indicative of future results when utilizing the commodities markets. This material and any views expressed herein are provided for informational purposes only and should not be construed in any way as an endorsement or inducement to invest.

 

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AgWeb.com Farm Journal Legacy Project Top Producer Dairy Today Beef Today Pro Farmer Ag Day TV US Farm Report Cattle-Exchange.com Farm Journal Media MyMachinery.com Ultimate Farm Quest Corn College Marketing Rally Farmers Feeding the World Implement & Tractor Farmers Feeding the World - test Outdoors on the Farm Baxter Black Machinery Minute Consumer Ag Connection Radio AgWeb Radio Tractor Tales PFA Pioneer Blog
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