Risk Management with Insurance Tools
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.
Building A Foundation
Mar 03, 2011
We now have another piece of the puzzle. The spring insurance guarantee for insurance on spring crops has been set. The corn, soybeans and wheat prices (northern states) have been set at $6.01, $13.49 and $7.19 respectfully. Depending on an individual’s inputs costs we are looking at potential profits on the acres that we can insure that we have not seen before. We now need to start putting the pieces of the puzzle together so that we can create a good foundation for our marketing year.
In order to choose the best insurance policy this year a producer needs to do their homework and create a detailed summary of their input costs per acres. If unsure of input costs make sure to guess on the high side. Another item to consider is what hedging you have already done and it does not hurt to factor in what their historical basis is during your harvest period.
The next important thing to determine is the coverage level of insurance. One way to look at this is to compare the cost of the increase in the coverage level compared to the cost of hedging those bushels on the CME board. Currently, it makes more sense to choose a higher coverage level of insurance and take advantage of the government subsidy.
Once the insurance policy has been determined along with the current hedge positions applied this can be used as the foundation of the marketing year and moving forward any potential risk management strategies should be added to the “foundation” and analyzed to determine if it makes sense to execute a certain strategy or not and if it is executed it should be added to the foundation. This will make it much easier to market during the year.
It would be great if we as producers could lock in insurance and immediately make cash sales at these current price levels and be done with our marketing for the year. This is of course not practical and very dangerous. There is also the risk the there could only be marginal losses that do not trigger an insurance payment but at these prices can greatly impact revenue. With that being said there are many different ways to accomplish this through cash sales, futures, options, weather contracts, elevator programs, etc.
If you have any questions about insurance or how to incorporate insurance and grain marketing feel free to either 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.