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Get the Red Out

March 6, 2009
 
 







It's true that profits from grain production will be harder to come by this year. In fact, for some, the goal will be capital preservation and finding ways to break even, says Jamie Wasemiller of Strategic Marketing Services in Chicago. "We've penciled in a $3.15 average cash corn price. With $600/acre costs, that spells red ink for many growers even at good yields," he says.

However, combining crop insurance and price protection can reduce your red zone from a third of your potential price/yield combinations to just a few (see tables below). "Revenue protection with the harvest price option gives you the confidence to hedge or forward price covered bushels because if there's a disaster and prices rise, it represents an ownership position, offsetting hedge losses if you have a production shortfall—or buying bushels to fill a cash contract, for example," Wasemiller points out.

Furthermore, if there's a good crop and prices fall, you may collect a revenue payment. "Loss payouts in Iowa for 2008 crops were substantial," says William Edwards, Iowa State University economist. "The biggest factor was the large decrease in market prices from February to harvest."

Right mix. This year, we might see a swing back toward revenue coverage versus the widespread interest in county products last year, says Brian Brandt, a farmer, crop insurance agent and Allendale commodity broker. Bankers are playing a role, he says. "Lenders are pretty nervous and want to be sure they get repaid. There's some concern a farm might have an individual loss without the county being affected."

To find the right mix, market advisers and crop insurance companies are teaming up to design proprietary spreadsheets. The farmer supplies input cost and yield information; the program then spits out tables or diagrams of possible profit/loss outcomes given various price and yield combinations. You can compare different crop or revenue insurance products at various coverage levels, as well as pricing strategies.

"A lot of growers are looking for a simple answer," Brandt says. "But it isn't possible to make a blanket recommendation."

One program. "We never talk about crop insurance on its own; it is part of a total risk management program," says Dawn Betancourt of The Andersons. "And the correct combination is very individual—costs are different, risk tolerance is different.

"We see the first part of our marketing program as selling the bushels covered by crop insurance that won't fit in your bin," she says. "The second increment of selling includes the bushels that are covered by insurance. But we won't price 100% of a farmer's expected crop until late summer, when yield is pretty well known."

The tables below are based on projected costs for Jerry Gulke's Rockford, Ill., farm. They show at a glance the impact of Revenue Assurance and an inexpensive option spread. Net returns under some outcomes are reduced due to the cost of the protection, and negative results come into play at high price levels, but losses are limited to much smaller dollar amounts and disappear at the lower yield/price combinations.

"Revenue products shine when your crop is hurt but the overall crop is good, so both yield and prices fall," says Chris McCray of Silveus Insurance Group. Futures hedges or put options also gain in value as prices drop.

Cost savings. You can let Uncle Sam pay more of your revenue coverage premiums by consolidating farm units into enterprise or whole-farm units. Enterprise units include all acres of one crop grown in the same county. Whole farm combines all crops into one policy. "Because this reduces the likelihood of an indemnity payment, these units have always had lower premiums," says Edwards. "But prior to this year, they also had the same percent premium subsidy. This year, they will receive the same dollar value of subsidy, which will be a higher percent of the premium cost."

The savings from switching to enterprise units might amount to $30/acre—close to 50% of the premium—and switching to whole farm might save even more, McCray adds.

Another approach might be buying high-level multi-peril crop insurance (MPCI) plus a put option for the price protection, says Bill Biedermann of Allendale. MPCI covers your individual farm but has a cheaper premium, so you may be able to gain higher coverage for the same cost.

In mid-February, for example, based on estimated crop insurance premiums, you could buy 85% MPCI at a 185-bu. actual production history yield and a $3.80 December 2009 corn put for about the same cost as Group Risk Income Protection.



To contact Linda H. Smith, e-mail lsmith@farmjournal.com.



Top Producer, March 2009

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FEATURED IN: Top Producer - MARCH 2009
RELATED TOPICS: Marketing, Corn Navigator

 
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