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2 Examples of Crop Insurance, Market Scenarios

April 20, 2013
By: Bob Utterback, Farm Journal Columnist
 
 

The following information is a Web Extra from the pages of Farm Journal. It corresponds with the article "Work the Market." You can find the article in Farm Journal's 2013 Late Spring issue.

The information below builds on the examples provided in the original story. It provides to additional examples of how market and crop insurance go hand-in-hand.

I’m using the hypothetical farm in central Indiana. It has gross costs of $760 per acre and an estimated corn yield of 160 bushels for an estimated $4.75/bu. basic costs. For initial planning purposes this evaluation is based on an early Dec cash sale with basis at 25 under the Dec contract. (Hopefully our marketing decisions can improve on this price.)

There are three pricing scenerios being addressed: (1) Nothing is done and the producer takes all the risk and sells in early December. (2) Crop insurance is purchased at the 85% RP level and the crop is sold in early December. (3) The final scenario uses an early crop selling strategy that starts first in Sept contract and then eventually rolls to December. Please note that this last strategy would be adjusted significantly depending on the desire of the producer. This is where it is necessary to customize it to each producer’s needs and the information in this article should only be used as a guide or baseline comparision.

Lets assume a 160 corn yield and Dec futures is at $5.62, as of late March the market is offering a producer a $100/acre contribution to land, management and overhead. The producer does nothing and takes all the risk and sells in early December. According to Table 1 [Silveus Financial Group], profit per acre quickly drops to a negative number if we see prices drop much lower than those seen in late March. The only way profits improve is if individual yield increases while prices rally. This is what happened last year for the Northern Midwest corn producers who avoided the drought. In summary 160 yield and low prices could be extremely fiancial painful unless your cost are significantly lower than my suggested $4.75 plus 25 cent basis or $5.00 basic cost.
TABLE 1. Assume a 160 corn yield and Dec futures is at $5.62, as of late March the market is offering a producer a $100/acre contribution to land, management and overhead.

Crop Insurance   Table 1

SOURCE: Silveus Financial Group Past performance is not necessarily indicative of future results.

Although every reasonable attempt has been made to ensure the accuracy of the information provided, Utterback Marketing Services Inc. assumes no responsibility for any errors or omissions.


The following table assumes the same basic costs as in Table 1, but includes a cost of $19/acre for 85% RP crop insurance coverage. The results are dramatic, in that, regardless of price or yield variance, the maximum downside risk is capped at $58/loss per acre while much of the upside potential is left in place. This reflects the power of crop insurance; there is a limit on the level of flat price loss/acre [the negative is its cost]!

TABLE 2. Assume crop insurance at a cost of $19/acre for 85% RP coverage, a 160 yield, Dec futures is at $5.62, and as of late March the market is offering this producer an $81/acre contribution to land, management and overhead.

Crop Insurance   Table 2

SOURCE: Silveus Financial Group Past performance is not necessarily indicative of future results.

Although every reasonable attempt has been made to ensure the accuracy of the information provided, Utterback Marketing Services Inc. assumes no responsibility for any errors or omissions.
 


 

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FEATURED IN: Farm Journal - Late Spring 2013

 
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