Sep 23, 2014
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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.

Price Flex Crop Insurance Back and Already Available for 2014

Aug 23, 2013

2014 Price Flex is an RMA approved private insurance product that allows the producer the opportunity to "lock" a potentially higher 2014 Insurance Revenue Price Guarantee than the spring or harvest price set by the RMA for both the RP and GRIP policies. The additional months to determine the 2014 insurance price is Sept, Nov, Dec of 2013 and Jan, March, April, May, June and July of 2014. (Ex. The CZ14 futures price will be averaged during the above mentioned months to determine the additional monthly prices for 2014 insurance price guarantees). You can purchase as few as one of the above mentioned month or as many as you want up to all of the months. The number of months will have an impact on your price per bushel. For example one month in corn may cost you $.12 per bushels and three of the months may cost you $.16 per bu while buying all the months may cost you $.23 per bushel. Once you buy a month you are eligible for a multi-month discount so you can by additional months at a cheaper rate either at the time of the original month purchased or you can buy other months at a later date as you know more about fundamental and market price action. 

Price Flex is currently available for Corn, Soybeans, Spring Wheat, Winter Wheat and Cotton. Price Flex has a limit on the difference in price between the highest Price Flex additional price discovery price designated and the price determined by the RMA. The limits are $1.00/bu for corn, $2.00/bu for soybeans, $1.50 for wheat and $.20 for cotton. Producers may choose from several options for price caps that are less than these policy limits. 

2013 Performance:

Corn: This worked out great for corn growers in 2013. Farmer that were able to take advantage of this opportunity were able to lock in a price level of $6.27 in November of 2012 as opposed to the government price of $5.65 and it cost $.16 per bushel for this product leaving a profit of $.46 cents. Most farmers also purchased a summer month just in case of a summer rally for about $.04 more cents (a cheap call) which will expire worthless as we are currently at $4.99 leaving the farmer with a profit on his insured bushels of $.42 cents. 

Soybeans: Farmers were able to lock in a price of $13.05 vs. the government price of $12.87 but the cost of the product was about $.18 leaving this hedging strategy flat. Not ideal but well worth the opportunity to lock in a price drop which did happen. 

2014 Performance:

The July average of the 2014 December corn contract was $5.24 for corn and $12.24 for the 2014 November soybeans contract. (Only corn and soybeans were available in July). 

The current August averages are: Corn: $4.99; Soybeans: $11.77; Spring Wheat: $7.65; Winter Wheat: $6.76; Cotton: $.79 (All these crops are now available for the above mentioned months). 

Available States: 

Corn: AL, CO, GA, IA, IL, IN, KS, KY, MI, MN, MO, MS, NC, ND, NE, OH, SC, SD, TN, TX, VA, WI

Soybeans: CO, IA, IL, IA, KS, KY, MO, MI, MN, MS, ND, NE, OH, SD, TN, TX, WI

Wheat: KS, IA, ID, IL, IN, NE, OH

Cotton: AL, GA, KS, MO, MS, NC, TN, TX, SC, VA 

Example: The August price average for corn is currently at $4.99. If you had purchased the month of August then this will act as your 2014 Insurance Revenue Guarantee Price if the government spring and harvest prices in 2014 come in below $4.99. If the government price comes in higher than $4.99 (or whatever the August average is) than the August average will expire worthless and you still owe the premium (about $.13 cents a bushel). You will then go ahead and use the higher government price like you had done every year and you will be out the premium you paid for the August average. Due to the $1.00 cap in corn if the government price happens to go below $3.99 then it will bring down the August price along with it but you are assured at that point that your Revenue Insurance Guarantee Price will still be $1.00 higher than the price set by the government. 

Soybeans, Wheat and Cotton work just like the example shown above for corn using their respective prices and limits. 

As a risk management consultant and farmer it is always disheartening to watch the futures prices and the Insurance Revenue Price Guarantee for the following year go lower. In the past the only way to hedge a price drop was on the board. Now there is an opportunity to put on a strategy to protect a price drop through a private insurance product. This is great for a farmer that does not utilize the board because of paying money of front, margin calls, etc. This is also nice for farmers that like to hedge on the board because they now have another option that might be cheaper. 

Essentially you are buying what is called a put spread. The perks of using this method is that you are buying the same for of coverage as a put spread for about the same price and you do not have to pay anything up front. Additional there are no margin calls and the premium is not due until Oct. of 2014.  

With the current USDA Supply and Demand Tables as well as the technical price action we are facing lower too much lower prices for our 2014 crops. This program gives the farmer another alternative to try and lock in some higher prices on your bushels covered by insurance. 

The deadline to sign up for the month of September is Friday, Sept. 20, 2013.You have until the 20th of each month to buy that month. You can purchase future months anytime you want. The product closes down on the respective crops MPCI Sales Closing Date so for example in corn the 2014 summer months would have to be purchased by March 15th in the Midwest. 

Feel free to contact me for more information about this program at 707-365-0601 or email me at Jamie@gulkegroup.com. I highly recommend this product as a risk management tool for all farmers!

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