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Market with Crop Insurance

January 8, 2014
By: Ed Clark, Top Producer Business and Issues Editor
washed out field flooding
If producers take 80% coverage, a $4.50 revenue crop insurance guarantee becomes $3.60 futures from a whole farm basis, or $3.20 factoring in a 40¢ basis, although basis varies widely.  
 
 

With lower guarantees, marketing 2014 crops requires early and aggressive action

It’s still a good three months before planters roll, but unlike the last three years, getting a jump-start on corn and soybean marketing will likely be rewarded.

One thing that won’t change in 2014 is that marketing begins with crop insurance revenue as a base. In recent years, this has served as an effective put option, but it won’t be that way for 2014.

"Crop insurance won’t cover costs like it has the past four to five years," says Jim Hilker, a Michigan State University ag economist.

The spring price guarantee will likely be $4.50 for corn and $11.50 for soybeans, says Darrel Good, a University of Illinois economist.

"This means producers need to be more aggressive when prices spike," adds Frayne Olson, North Dakota State University ag economist.

In June, December 2014 futures could be $4 per bushel or $3.60 forward contract quotes, factoring in 40¢ basis, Hilker says. That makes a February price and insurance guarantee of $4.50 look enticing.

With coverage levels as high as 80%, Hilker says, it could serve as a first marketing ploy for the season. After those guarantees are locked in, he advises selling up to 30% of expected 2014 production this winter.

"Eventually, prices will go lower," Good says. He believes the March 31 USDA Prospective Plantings report will be a major market mover. Barring any major events, he doesn’t expect the markets to move much between now and then. This gives farmers time to fine-tune their strategies.

When putting together a plan, you need to know how many bushels are protected by crop insurance and how many are not, says Chad Hart, Iowa State University ag economist.

"People get into trouble when they  think 80% coverage applies to a spring price of $4.25 to $4.50," Hart says. If you expect to grow 180-bu. corn, at 80% coverage, you have a price floor on protected bushels of $4.25 to $4.50 minus basis. That means 144 bu. are covered, but the remaining 20% are unprotected.

"Producers need to be aggressive marketing the 20% not protected by crop insurance," Hart says, knowing that it’s possible for summer prices to be in the $3 range.

For protected bushels, Hart says that farmers can afford to wait for potential price spikes. There’s no incentive to market protected bushels at or below guarantees.

Hilker says cost of production also should be factored into your strategy.

"If producers have break-even costs of $4.75, it’s more important for them to lock in $4.50 futures on unprotected bushels, even if it’s at a loss, than for producers with a breakeven of $3.85," Hilker says.

If prices next fall are $3.60, farmers with high breakevens will burn through a lot of reverses and working capital, he says, adding that, "farmers need to protect net worth."

Insurance also provides farmers the ability to protect themselves against poor yields and the opportunity to participate in bull markets, if they purchase the harvest option.

Invest to Protect. This year, it’s worth the investment, says Corinne Alexander, a Purdue University ag economist. Farmers who need the harvest option to a lesser degree are those who choose a high level of forward selling with futures or forward contracts, adds Michigan’s Hilker.

Crop insurance complements your marketing strategy because it protects price and yield, Alexander says. Because of that, producers are free to market up to their percent covered during market spikes, without risking being short on contracts.

That won’t work on unprotected bushels. Hart says farmers should consider put options on unprotected bushels because of potential delivery concerns on contract requirements. A low-cost strategy is out-of-the-money puts at $4 per bushel or higher strike price levels for those who want more price protection. The latter requires higher premiums.

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FEATURED IN: Top Producer - January 2014

 
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