Jul 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.

Start Locking In Your 2015 Crop Insurance Spring Price

Apr 15, 2014
2015 Price Flex: The following states have been approved: AL, CO, GA, IA, ID, IL, IN, KS, KY, MI, MN, MS, MO, NE, NC, ND, OH, PA, SC, SD, TN, TX, VA, WI Price Flex is a private insurance that 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 the RP and ARP policies. The additional months to determine the 2015 insurance price starts this month and goes until April of 2015. (ex. The CZ15 futures price will be averaged during the above mentioned months to determine the additional monthly spring price opportunity for 2015 corn insurance). Price Flex is available for corn, cotton, soybeans, and wheat in the states mentioned above. 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, $1.50/bu for wheat, $2.00/bu for soybeans, and $0.20/lb for cotton. Producers may choose from several options for price caps that are less than these policy limits. Corn: The current April price average is $4.96. If you purchased the month of April then this will act as your spring price for 2015 as long as the government Feb price is lower. If the Feb 2015 price comes in higher than the final April 2014 average you will still get to use the higher Feb average and the April average will expire worthless. Due to the $1.00 cap in corn if the Feb price happens to go below $3.96 then it will bring down the April price along with it but you are assured at that point that your spring price will still be $1.00 higher than the government spring price. Soybeans: The current April price average is $11.70. If you purchased the month of April then this will act as your spring price as long as the government Feb price is lower. If the Feb 2015 price comes in higher than the final April 2014 average you will still get to use the higher Feb average and the April average will expire worthless. Due to the $2.00 cap in soybeans if the Feb price goes below $9.70 than it will effectively lower the Nov average but again you will be $2.00 higher than the government spring price. As a risk management consultant and farmer it is always disheartening to watch the futures prices/ insurance revenue guarantee for the following year go lower. In the past the only way to hedge this price drop was on the board. That is fine for some but many do not want to do that. Now there is an opportunity to put on a strategy through a private product. The other nice feature about this product is that it is like insurance is the sense that you can buy now and not have to pay until October, 2015. The Deadline for this month is April 20th. If you have any questions about Price Flex or want to look into buying this product contact an agent or give me a call at 707-365-0601.

Now What

Nov 02, 2013

I received plenty of phone calls while on the combine this week in regards to people upset about how the USDA report being delaying their report until November was going to impact their insurance payment because the report in October would have sent the markets lower which would have increased their insurance payments. Some even suggested it was done on purpose.

I am not in that camp as there is a lot of data that is needed to be compiles for these reports and to be honest there was a lot of missing data and it made sense to delay it until November. With that being said I do agree that the delayed report did have a supporting aspect to the CZ13 futures price during the month of October. While we now know that the harvest price of corn is likely to be $4.29 and $12.87 for soybeans not all of us have a complete grasp of our bushels production. With many farmers still in the fields harvesting it is easy to just put your head down and not pay attention to the markets. In the past farmers may have been able to get away with that because typically while we are in the middle of our fields we have had an implied "put" in place in the form of crop insurance to protect us if prices declined. As of Nov. 1 we do not have that luxury anymore. Now all of the American farmers are completely at risk to the price of our grains on the board going down and the risk may be significant if the USDA November crop production numbers are as big as we and many of the other analysts are now projecting.

I know that the title of my blog talks about how to tie crop insurance into your risk management strategy but unfortunately this is one instance where they are totally separate and we all need to realize this. In the recent past if a farmer would call and ask if they should short the markets I could tell them that based on their insurance do they really need to do that as they might be "double dipping" because they may already be in the money due to their insurance and that their real risk might be in prices going higher because it would negatively impact what they would receive from the government. That philosophy had completely changed now. Now the only thing that can alter insurance is production and many farmers out there are experiencing better too much better bushels compared to their APH. If prices continue to decline from this point forward it will have zero impact on insurance and it will directly affect the price of the grains we have in the field or in the bin. This is now a time we have to solely rely on our own decision making process and are very much in harm’s way in regards to the USDA, futures prices and local basis.

With that implied put gone we need to focus on protecting that last leg down on our 2013 corn crop that we could experience mainly due to that November crop report. If you are a farmer that had average to below average production and you are content with the money you will receive from insurance for your corn due to the drop of $1.26 drop in price from the spring price to the harvest price along with the cash sales you are making that is great. I would still advise you to protect any further drop in price to add to your cash sales (or however you want to cook the books). If you are a farmer that is experiencing better to much better production that will negate the price drop you really need to look at the board for added protection as it will probably not come from the elevator or ethanol plant.

In regards to soybeans we had the same spring price and harvest price. This means that insurance this year will only help you if you have a yield loss below your deductible and that does not seem to be the case for many farmers that I have talked to. I will say that I have heard of many farmers that have already sold their soybean crop so that helps but for the farmer that has not done that has to be very concerned with the production numbers they have been hearing nationwide along with the prospect of big acres in South America as well as the USD A report.

This year may be a perfect example to show farmers that when referring to risk management you need to implement both insurance and marketing because there are years where one of the two may not work for whatever reason but the other is still there utilize.

Lastly, do not forget about the bushels that were not covered by your deductible. Hopefully you have already hedged those off in some fashion but if you have not do not get too complacent.

If you have any questions or would like to know more about how to incorporate insurance and grain marketing, feel free to contact me at Jamie@gulkegroup.com or at 707-365-0601.

There are substantial risks involved with both futures and options trading. While risk is limited to purchase price when buying an option, it is not limited when selling an option. Commodity trading and other speculative/ hedging investment practices involve substantial risk of loss. Past results are not necessarily indicative of future results when utilizing the commodities markets. This material and any views expressed herein are provided for informational purposes only and should not be construed in any way as an endorsement or inducement to invest.

A month Reprieve for 2014 Price Flex Insurance Pricing

Oct 10, 2013

I hate to belabor the subject of Price Flex but it is one of the only items available to look into 2014 at the moment. Since July I have been talking to producers about this product as you could us it then.  In July the average was $5.24, August was $5.03, Sept was $4.93 and Oct is currently at $4.83.

I personally thought that September was going to be the last month that I would tell guys to continue to buy a product like this because I thought the October report along with harvesting would but serious downside pressure that that it would continue into this Spring of 2014 which would probably be the next time we could get a bullish scenario.

 With the government shutdown we will not see the October 11 USDA report which would probably have suggested that the crops are huge. They have also not rescheduled the release date and I feel there is a very good chance they will just wait until November to release any data. I also feel that whenever they do decide to release the data that it will be much more accurate and will be harder for the marketplace to say that data is not accurate and try to stay bullish which will make it easier for the market to convincingly go lower and stay lower.

This report delay is also coupled with the fact that harvest is behind do to maturity AND the fact that farmers are not selling much out of the fields. These three main factors lead me to believe that we have been given a one-month reprieve in downward prices that farmers should take advantage of if they can.

 Although the current price average of $4.83 is lower than the other months that have gone by it does not matter. The past is the past. What we have to do as marketers is manage what is in front of us. I still believe that anything around the $4.70 and above average is still going to be much higher than what we will receive in Feb, 2014.

Soybeans are currently at $11.69. This average has also consistently gone down each month since July as well. I do think this will still be higher than what we will see come February but there is a slight story in the soybean market that could possibly bring about a uptick in price into November so I am tempted to wait.

I am posting an earlier post that explained what Price Flex is for those of you that have not read it. For the ones that have already read about it and have not pulled the trigger learn about it and get signed up for October.

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 Oct, 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.

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.

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

Example: The Oct. price average for corn is currently at $4.83. If you had purchased the month of Oct. 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 $4.83 (or whatever the Oct. average is) than the Oct. average will expire worthless and you still owe the premium (about $.11 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 $3.83 then it will bring down the October 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 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 call 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 October is Sunday, Oct. 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 (Jamie) for more information about this program at 707-365-0601 or email at Jamie@gulkegroup.com.

2014 Price Flex - Attention Winter Wheat and Corn Growers - Must Read

Sep 17, 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.  

Price Flex is currently available for Corn, Winter Wheat, Spring Wheat, Soybeans 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, $1.50 for wheat, $2.00/bu for soybeans and $.20 for cotton. Producers may choose from several options for price caps that are less than these policy limits. 

September Deadline:

Since 9/30/13 is the sales closing date for Winter Wheat this is the last month that you can purchase 2014 Price Flex. 

For corn the deadline to sign up for the month of September is Friday, Sept. 20, 2013. There will be additional opportunities to buy corn for 2014. 

Available States for Corn and Wheat 

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

Wheat: KS, IA, ID, IL, IN, NE, OH 

Winter Wheat: Winter Wheat has a government spring price average of $6.72 in IA, ID, IL, IN, OH, $7.02 in KS and $7.11 in NE. 

We know what the spring price is for winter wheat. There are 7 month timeframes that have an opportunity to be higher than the government prices listed above in your respective states. The cost for ALL 7 months is about $.15 per bushel. That is just over 2 cents per month period to try and lock in a higher price for your insurance guarantee. It is almost impossible to find a better opportunity for that kind of price. Read below for an example of how this works. BUY THIS!

Available month timeframes: (2013) Sept 15-Oct 14, Oct 15-Nov 14, Nov 15-Dec 14, (2014)Jan 15-Feb 14, Feb 15-March 14, March 15-April 14, April 15-May 14 

Corn: The September price average for corn is currently at $5.02. If you had purchase the month of Sept. then this will act as your 2014 Insurance Revenue Guarantee Price if the government spring and harvest prices in 2014 come in below $5.02. If the government price comes in higher than $5.02 (or whatever the Sept. average is) than the Sept. average will expire worthless. You will then go ahead and use the higher government price like you have done every year and you will be out the premium you paid for the Sept. average. Due to the $1.00 cap in corn if the government price happens to go below $4.02 then it will bring down the September 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. 

Contact your agent for more information or you can reach me at 707-365-0601 or email me at Jamie@gulkegroup.com.

There are substantial risks involved with both futures and options trading. While risk is limited to purchase price when buying an option, it is not limited when selling an option. Commodity trading and other speculative/ hedging investment practices involve substantial risk of loss. Past results are not necessarily indicative of future results when utilizing the commodities markets. This material and any views expressed herein are provided for informational purposes only and should not be construed in any way as an endorsement or inducement to invest.

Protecting Your Current Insurance Indemnity Payment

Sep 12, 2013

If you have an APH of 200 and buy 80% coverage you have a trigger yield of 160 bu. Take that times $5.65 and your insurance guarantee is $904 per acre. Currently the price is at $4.70. Take that price times your currently projected expected yield to determine how much you are currently above or below your revenue guarantee as of today. This is a very important number to know. Here is why. 

If you are in an area that has been hit hard and have a potential yield of 140 bu with the current price of $4.70 the harvest revenue would be $658.  If that is the case than the insurance indemnity would be $904-$658 or $246 per acre.  

In this scenario you are 30% below your APH which means the corn price has to go a lot higher before you DON’T get an indemnity payment. Currently this farmer has a big indemnity already locked in and they would have NO REASON to have short futures or sell corn as insurance now is acting like a put option. Also, as prices go higher your insurance indemnity decreases. Even if the price goes higher than the spring price you will not bring in as much money as if the price stays at their current levels. 

So, with poor yields at this price you have UPSIDE PRICE RISK to consider—so buying calls ahead of the report just in case we’re blind-sided by a bullish report, would be a prudent thing to do.  What to buy?  Consider the ATM Oct calls that are currently around 11 cents or the Nov ATM which are about 19 cents. The Oct’s calls are cheaper and will get you through the Sept report and its aftermath but they do expire in just over a week. The Nov calls are more expensive but will get you through the Oct report and this critical next month for the markets. Take your pick. Also, if the report is not bullish you can sell that call you purchased and probably get back about half of the premium you paid so the risk is not that great. Another option would be to buy a call spread to mitigate the price even a little more but there is not that much money to gain from selling a higher priced call so it may not be worth it but if cost is a concern this is another option. 

If you are in an area that has had good weather and has a potential yield of 220bu at $4.70 the harvest revenue would be $1034 versus the original revenue guarantee of $904. If that is the case than the corn price would have to get below $4.11 before insurance would kick in. 

So, with good yields at this price there is still DOWNSIDE PRICE RISK so consider buying either the Oct or Nov ATM puts which are about the same price as the calls mentioned above.   

Another way to look at it is to take the original guarantee of $904 and divide that by the current price of $4.70 which would determine the yield reduction you would need to be at before your insurance would kick in.  In the case above $904/$4.70 is 192 bu. Because of the current price compared to the Spring Price it only takes a 4% bu loss before an indemnity is triggered. This helps to show the value of utilizing the Revenue Protection insurance plan. 

Farmers will sometimes get locked in looking at gross revenue per acre which is made up for cash sales, harvest revenue (taking the harvest price of corn times the remaining bushels not forward sold) and the insurance indemnity. Each piece of the equation should and can be effectively managed. In the scenario above if you left your bushels constant as prices fluctuate anywhere below the spring price the gross revenue will stay the same until you go higher than the spring price of $5.65 in which case the gross revenue will start to increase. In our case of price being at $4.70 and potentially going higher the gross revenue stays the same because as price goes up the insurance indemnity goes down but the harvest revenue part of the equation goes up.  If you can use some simple low risk market strategies such as the one mentioned above to capture some of the indemnity that would normally go away as prices go higher you have now increased the revenue of the insurance piece which should help increase your overall gross revenue per acre.   

If you have any questions or would like to know more about how to incorporate insurance and grain marketing, feel free to contact me at Jamie@gulkegroup.com or at 707-365-0601. You can also contact me if you want me to send a graph that shows you visually how the insurance indemnity changes based on the movement of the futures price in the example above.

There are substantial risks involved with both futures and options trading. While risk is limited to purchase price when buying an option, it is not limited when selling an option. Commodity trading and other speculative/ hedging investment practices involve substantial risk of loss. Past results are not necessarily indicative of future results when utilizing the commodities markets. This material and any views expressed herein are provided for informational purposes only and should not be construed in any way as an endorsement or inducement to invest.

 

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