Risk Management with Insurance Tools

As we are now in the month of May and with the Final Planting Dates for Corn approaching I wanted to go over a few options that are available if Corn is not planted by its Final Planting Date. I have also included some important points to remember about Prevented Planting. For this example let’s use a farmer with a 165 bu APH that purchased an 80% RP policy with this year’s spring price at $5.65. This gives the farmer a revenue trigger level of $746 per acre. 

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: Take 60% of $746 which will give the producer a prevent plant payment of $447 per acre. 

·         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: In the first example it was determined that the producer would receive a PP payment of $447 per acres. If a second crop is planted there would only be a payment equivalent to 35% of the $447 which would be $156 per acre. 

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. 

A few other items to remember about Prevent Planting:

·         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 1^st crop has any interest in the 2^nd 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.  

Since many producers are already coming off a bad crop yield in 2012 I would suggest that you take the time to do an analysis on the impacts. In the near term it will alter input costs which ultimately will change the breakeven price per acre. It may also have an impact on any hedging already done or how to approach marketing for the rest of the year. In the long term long term it can have an impact on the producers APH especially coming off of a drought year for many.  

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.

We are quickly approaching the March 15 crop insurance deadline and I am still receiving numerous calls from producers still deciding what insurance policies they are going to go with. One of the reasons I write this blog is ways to tie in what insurance provides into risk management. That being said I am going to once again mention the Price Flex Product.

We know that the spring price for corn is $5.65 and $12.87 for soybeans. The current futures price for corn is around $5.80 and $12.60 for soybeans. If we are going to see prices rally beyond the spring prices that the government set it is more than likely going to be due to continued drought conditions and the likelihood of a production problems. Through the purchase of the Price Flex product if there is a rally in the months between April and July producers can now increase their coverage levels by replacing a higher monthly average for the price set by the government.

Let’s quickly compare prices for the opportunity to capture a market rally. By utilizing the Price Flex it will cost you about $.04 a bushel for corn for the month of July. Alternatively it will cost about $.36 to buy a $6.80 July corn call. In soybeans if would cost about $.08 a bushel to buy Price Flex in July compared to about $1.20 for a S13.20 July soybean call.

I do not necessarily think that we are going to see prices skyrocket from current levels but my job is to help cover risk or find ways to take advantage of possible opportunities. Price Flex is by far the cheapest way to give a producer a chance to take advantage of a price appreciation especially since it will probably be due to potential production issues and producers will remember last year and be hesitant to make cash sales. Even if this strategy does not work out the cost of it will pale in comparison to the amount of money lost on a bad trade or cash sale.

In addition to the price component Price Flex does not require money up front and will not have any margin calls which can happen with futures and/or options.

There is not much time left as deadline for insurance and Price Flex is March 15 but it is still available. There are limits to the amount of Price Flex that can be sold in each state and with all the producers that are signing up for Price Flex there are going to be some that will not be able to buy this so if there is still interest the sooner you contact someone that can sell you this product.

Call me with any questions at 707-365-0601 or email me at Jamie@GulkeGroup.com

Due to the interest level of producers along with the lack of knowledge that agent out there have in regards to Price Flex I have decided that if there is enough interest I will conduct a webinar next Tuesday, Feb. 26 at 10:00 am central standard time. During this webinar I will discuss the Price Flex Insurance option and briefly go over a few other insurance related items.

If you are interested please email me at Jamie@GulkeGroup.com and I will send you the information that is needed to register.

Just as quick reminder about the Price Flex Insurance option:

Price Flex is a private insurance that allows the producer the opportunity to "lock" a potentially higher revenue protection guarantee through higher month averages than the spring or harvest price set by the RMA for either RP or GRIP policies.  The higher level is limited to $1.00/bu in corn and $2.00/bu in soybeans.

The additional months still available to determine the 2013 insurance price is March, April, May, June and July (ex. The CZ13 futures price will be averaged during the above mentioned months to determine the additional monthly prices for 2013 corn insurance).

The following states that Price Flex is available are: AL, CO, GA, IL, IN, IA, KS, KY, MO, MI, MN, MS, ND, NC, NE, OH, SD, SC, TX, TN, VA, WI.

Due to the interest level of producers along with the lack of knowledge that agent out there have in regards to Price Flex I thought I would again post an older blog I wrote for the long weekend so others may have the chance to see it. With the recent downturn that we have seen in both corn and soybeans for the spring price averages it has made this opportunity all the more enticing as a way to try and lock in a higher price in the future months. I cannot express enough that every producers needs to learn about Price Flex and give it some serious consideration for 2013.

I presented two sessions on crop insurance at the Top Producer Seminar. A feeling I got from the attendees was that while crop insurance is vital to the farming operation it does not provide enough opportunities to lock in seasonally price rallies. A common thought is that price will be relatively low in the spring, move higher through the summer and then fall back down in the fall resulting in an insurance spring price and harvest price that will not capture any of a summer rally. Attendees also stated they wished they could take the month price average in the summer months instead of in February and October.  

The new Price Flex Insurance product now fulfills those statements. 

Producers can now purchase those averages in the months of March, April, May, June and July. Either single of multiple months can be purchased. If any of those month averages purchased end up being higher that what the government set as the spring or harvest price the producer will be allowed to substitute the higher average price to determine their Insurance Revenue Guarantee.   

If a producer purchases the month of June there are now month averages created and the highest one will be used to determine the Revenue Guarantee level. 

(Ex. If the Feb. corn average is $5.70, June average is $6.00 and the Oct. average is $5.80 the producer will use the Price Flex June average of $6.50.) 

If either the spring or harvest price the government sets is higher than the month or months the producer purchased thru Price Flex than the government price average will be used and the Price Flex premium will still be due in October.  

(Ex. If the Feb. corn average is $5.70, June average is $5.60 and the Oct. average is $6.10 the producer will use the government October average of $6.10.) 

I was happy to see the interest that the attendees had while speaking to them about this product and it just showed me that more producers need to learn about this opportunity. One of the ultimate questions was how much would it cost to purchase this product. Although prices may slightly vary I ran some quotes and for corn the price was about $.04 per bushel for corn and around $.08 per bushel for soybeans for any of the month I mentioned above.  I have even noticed that some of the fringe states can purchase this for $.01 a bu per acre. Another nice feature is that the premium is not due until October. 

Price Flex appeals to the producer that uses the board to hedger their crops as it provided a reasonably priced hedging opportunity. The common practice to try and take advantage of a potential summer rally is to buy calls before prices go higher or wait and buy puts once price are high. As a comparison a call or put option premium is over $.30 per bushel and that premium will have to be paid up front.  

It is also appealing to the cash hedger because it now give them another opportunity to hedger their crops without having to use futures or options. It may also allow them to be more flexible on when they have to make cash sales.   

The deadline to purchase this product is March 15 so this is the time to learn more about this private product. Our farm utilized it, I recommend it to all our Gulke Group clients and I hope many producers out there strongly consider this opportunity. Our farm utilized this product and I also recommend it to all Gulke Group clients as well. 

If your agent cannot provide you with information about Price Flex please take the time to contact me at 707-365-0601 or email me at Jamie@GulkeGroup.com. 

The following states that Price Flex is available are: AL, CO, GA, IL, IN, IA, KS, KY, MO, MI, MN, MS, ND, NC, NE, OH, SD, SC, TX, TN, VA, WI.

As we look forward in risk management for producers it is very hard not to look at the fundamental data and with recent price movements and have concern that grain prices will not be significantly lower toward the end of the year. Although we are very light on subsoil moisture in many areas in the country but we also have a weather premium already built into the futures markets which will probably lessen the movement to the upside. If the weather become more favorable along with the fundamental data the price movement to the downside could be significant.

Take a good look at the fundamental information out there and it should volumes to you about why you purchase the highest levels of crop insurance that you can. If we are setting up for the possibility of low prices at the end of the year and into next year this is the time to protect as much as you can with the insurance spring price.

Bottom line is that we do not have want to be in a situation that we NEED a drought to keep above breakeven.

If the drought persists and prices go much higher a producer will still be very happy that they bought a high level of coverage along with the harvest price option and you only need to look back to 2012 to see how beneficial it was.

If you have any questions contact me at 707-365-0601 or email me at Jamie@gulkegroup.com.