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November 2012 Archive for 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.

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.
 


 

Sunday Night Deadline for November Price Flex Insurance (Corn & Soybeans)

Nov 17, 2012

Price Flex: The following states have been approved for Price Flex; IL, IN, IA, KY, MI, NE, NC, OH, SC, TN WI. They are anticipating additional approvals to follow soon in VA, AK, CO, FL. 

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 GRIP policies. The additional months to determine the 2013 insurance price is this Nov., Dec., Jan., March, April, May, June and July (ex. The CZ13 futures price will be averaged during the above mentioned months to determine the additional monthly prices for 2013 corn insurance). 

Price Flex is available for corn, cotton, soybeans, and wheat in all counties where there are either GRIP or RP offers for spring sales closing dates (January 31, February 15, February 28, and March 15).  Price Flex imposes 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. 

The current November averages are vey enticing considering that South America is moving forward with planting and the fact the the United States will have record acres to plant either corn and/or soybeans. As a producer I would be thrilled to see the prices head back up to previous levels but I also need to consider risk managment.

The current November AVERAGE price of CZ13 is $6.25 for corn and the SX13 is $13.12 for soybeans. For comparison the current futures price for CZ13 is at $6.08 3/4 and the SX13 is $12.62 1/2. 

The Deadline for the month November is Sunday, November 18th at midnight.

The remaining seven months will still be available to purchase after November 18.


Contact your agent to learn more and sign up for this insurance option or you can contact me at 707-365-0601 for a quick explanation.

Quick Recap of Crop Insurance Revenue Guarantees for Corn and Soybeans

Nov 03, 2012

We now know what the Harvest Price is for Corn and Soybeans for the majority of the United States. Corn had a $7.50 Harvest Price compared to the Spring Price which was $5.68. Soybeans had a Harvest Price of $15.39 compared to the Spring Price of $12.55.

One of the nice things as far as calculating insurance payments is that when the Harvest Price is higher than the Spring Price a Revenue Policy turns into a Yield Policy in the sense that the producer gets paid out for every bushel below the approved APH. 

Now is a good time to just do a quick recap of the tools that a producer can take advantage of. I will use our farm in Winnebago County, IL.  In Corn, we have an APH of 167 and I will use an 80% policy as that is currently more common of a purchase than an 85% policy. I am also incorporating utilizing the Enterprise Unit Discount. 

Revenue Protection policy vs. Revenue Protection policy with the Harvest Price Exclusion: Using the information above an RPHPE policy would have been about $5.37. To include the Harvest Price the cost was about $11.04.  In this scenario by spending an extra $5.72 we increased our revenue per acre by $244. 

Revenue Protection Policy vs. Trend Adjusted Yield: As mentioned above the RP policy would cost about $11.04. If we had elected to also purchase the Trend Adjusted Yield option (which increased my trigger yield by 8 bu) it cost about $15.15.  In this instance by spending an extra $5.11 we increased our revenue per acre by $60.  

By taking advantage of the Harvest Price Option and the Trend Adjusted Yield this year we spent $15.11 an acre or $.09 cents a bushel and locked in revenue of $1062.00 on 80% of our APH.  

I will not run through a Soybean example as the results are comparable to the Corn scenario just described.

I have had many discussions with producers that feel that it is not worth paying the extra price to have the harvest price option as it does not happen very often. Since 1995 the Harvest Price has been higher than the Spring Price seven times for Corn and eight times for Soybeans but the amount of dollar coverage that it has added to the revenue per acre should make this option very attractive each year. The harvest price option gives the producer an opportunity to purchase a pseudo call option while having it subsidized by the government and it also helps alleviate some of the concern regarding when and how much grain I can sell before harvest.

In regards to the Trend Adjusted Yield this was the first year it was available and it was only for corn and soybeans and limited to certain counties. Overall the TA yield worked very well it has been expanded to cover wheat and the RMA should be expanding its availability. 

The RMA has given us the tools to add both bushel and price coverage to our insurance policies at a subsidized rate. We can argue its viability and how effective it is but at least we have options. On top of this there are many private products that can be purchased for additional coverage that although they are not subsidized can be very beneficial. 

Here is one of the most basic ways a producer can begin to market his grain each year and the government is helping to share the cost. Make sure you fully understand the opportunities that are in front of your within the insurance arena before you dismiss them because of a price tag or your disdain for government programs.

If you have any questions or would like to know more about how to incorporate insurance and grain marketing, feel free to ask me in the comment section of this blog, or contact 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.

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