Price Flex as a Risk Management Tool
Mar 13, 2013
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