Crop Insurance Provides Flexibility
Nov 20, 2012
Crop Insurance performed very well this year for the producers that had the harvest price option. The harvest price of $7.50 in corn was 32% higher than the spring price and the harvest price of $15.39 was 23% higher for soybeans. In Winnebago County IL, by taking advantage of the Harvest Price Option and the Trend Adjusted Yield it cost $.09 cents a bushel and locked in a revenue guarantee of $1062.00 on 80% of the corn APH.
I have talked about the need for flexibility in hedging through futures and if you go back to the summer edition I emphasized that same flexibility for insurance. Hedging with futures along with insurance provides more freedom for timely cash sales and creates opportunities to increase insurance revenue.
To illustrate this, Gulke Group clients were directed to sell cash corn for $7.90 (minus or plus basis) near the end of July along with a subsequent futures hedge of those bushels in CZ12. The futures were then lifted at the end of October (harvest price month) for a profit of $.45. This strategy locked in an additional $.45 on top of the harvest price to increase the revenue guarantee per acre on the amount of bushels this strategy was implemented on.
Looking forward there are statistics that suggest focusing on hedging and insurance needs to start immediately. At the time of writing this article the corn projected spring price was 6% higher than the highest spring price in history and the soybean projected price was the second highest in history. Although there is not an overwhelming trend that says the futures price from December to the end of February will be higher or lower but since 2006 the price swing has been significant.
A way to try and prevent a drop in the insurance revenue guarantee price is through an intriguing private insurance product called Price Flex. This has been approved by the RMA for certain states and is not subsidized by the government. It allows the producer the opportunity to "lock" a potentially higher revenue protection guarantee than the spring or harvest price set by the RMA for both RP and GRIP policies in specific states for 2013.
In corn, this could be done by using the CZ13 contract and taking its average in the months of Nov. and Dec. in 2012 and Jan., March, April, May, June and July in 2013. If any of those month averages selected are higher than the RMA spring or harvest price the producer gets to keep the highest one (with cap limits) to determine the producers insurance trigger level.