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December 2011 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.

Consider a MPD Policy

Dec 31, 2011

Although most producers are not currently focused on their crop insurance decisions this early on but every now and then an opportunity come around that producers need to take a few minutes to learn about. This is one of those times and the product is called Multiple Price Discovery.
 
This product provides producers with two additional opportunities to improve their spring price for crop insurance thus creating a higher Revenue Guarantee per acre for your operation.
 
Here are some of the highlights of the program:
 
  • Available for Corn & Soybeans in the following states: IN, IA, KY, MI, MN, NE, OH, SD, TN, WI and IL.
  • This is an add-on to Federal Crop Insurance.
  • By purchasing this policy, an insured will receive the higher of the December or January Average projected price for the future December CBOT corn contract not to exceed fifty cents ($0.50) over the MPCI projected price set in February. For soybeans an insured will receive the higher of the December or January Average projected price for the future November CBOT soybean contract not to exceed one dollar ($1.00) over the MPCI projected price set in February. If the projected prices for the MPCI Federally reinsured corn or soybean policies set in February are higher than the December or January average prices then coverage expires and premium is earned and payable.
  • The month of December ended with Corn at $5.60 and Soybeans at $11.61.
  • Producer must purchase either a RP policy at the 70/100 or greater with Enterprise Units or a GRIP-HRO at the 80/100 or greater level.
  • Most quotes per acres have been between $3 and $6 per acre with an opportunity to add an additional $70 in corn and $50 in soybeans on top of the revenue guarantee provided by the Federal Crop Insurance.
  • Producer will not have four opportunities to lock in the highest possible Revenue Guarantee per Acre: They are the Dec. Average, Jan. Average, Feb. Average and the Harvest Average.
  • The deadline for this product is Jan. 2, 2012.
 
Here are some illustrations to help understand the program.
 
Example of Upside Price Cap:
The average price for December for corn was $5.45 and January was $5.70. The average price for MPCI policy in Feb. was $5.00. The maximum increase is $.50 cents above the February Price so your price used to establish coverage would be $5.50.
 
Here are some MPD Loss Scenarios if you are interested.
 
1. Loss Scenario #1: An example of a lower Harvest price, and no yield loss on the underlying RP
policy, but a qualifying loss on the MPD:
 
The average price of December 2012 corn traded during the month of December 2011 was $5.50. The insured elected to apply for coverage prior to January 1st and selected the 80/100 (80% coverage at 100% of the price election) Revenue Plan and has an enterprise unit actual production history of 180 bushels, with 1,000 acres, and 100% share.
 
The average price for the month of January was $5.40, and the average price for the month of
February was $5.10. In this case the MPD policy would provide coverage starting at $5.50 a bushel. The MPD Revenue coverage provided would be: $5.50 X 180 bushels X 80% X 1,000 acres X 100% share = $792,000, minus the underlying coverage of $5.10 X 180 bushels x 80% x 1,000 acres x 100% share = $734,400.
 
$792,000 - $734,400 = $57,600 of MPD coverage.
 
The Harvest price for the underlying RP policy is $5.00 (average price of the monthly trading days of Oct 2012 for the Dec 2012 CBOT corn contract).
 
The Harvested production is 150,000 bushels.
 
The loss is determined by multiplying the Harvested Production (150,000 bushels) by the Harvest Price ($5.00) 150,000 X $5.00 = 750,000. $750,000 is greater than the underlying coverage provided by the Revenue Plan policy ($734,000) but less than the Revenue Plan with MPD coverage of $792,000. The indemnity (not to exceed the Max MPD liability is calculated by taking $792,000 - $750,000 = $42,000 MPD Indemnity.
 
Loss Scenario #2: An example of a price increase at harvest above the MPD and RP Projected
Price.
 
The average price of December 2012 corn traded during the month of December 2011 was $5.50.The insured elected to apply for MPD coverage prior to January 1st and selected the 80/100 (80% coverage at 100% of the price election) Revenue Plan and has an enterprise unit actual production history of 180 bushels, with 1,000 acres, and 100% share.
 
The average price for the month of January was $5.40, and the average price for the month of
February was $5.10. In this case the MPD policy would provide coverage starting at $5.50 a bushel. The MPD Revenue coverage provided would be: $5.50 X 180 bushels X 80% X 1,000 acres X 100% share = $792,000, minus the underlying coverage of $5.10 X 180 bushels x 80% x 1,000 acres x 100% share = $734,400. $792,000 - $734,400 = $57,600 of MPD coverage.
 
The Harvest price for the underlying RP policy is $6.00 (average price of the monthly trading days of Oct 2012 for the Dec 2012 CBOT corn contract).
 
Because the Harvest Price is higher than the Projected MPD price the MPD liability expires, however the underlying RP liability increases in value with a new revenue guarantee of $864,000. ($6.00 X 180 X 80% X 1000 acres X 100% share = $864,000.
 
The Harvested production is 140,000 bushels.
 
The indemnity is determined by multiplying the Harvested Production (140,000 bushels) by the
Harvest Price ($6.00) 140,000 X $6.00 = $840,000. $840,000 is less than the underlying Revenue
Plan revised coverage of $864,000 so the indemnity would be covered by the Revenue Plan:
$864,000 - $840,000 = $24,000
 
Loss Scenario #3: An example of a higher projected price for the RP policy than the MPD policy
 
The average price of December 2012 corn traded during the month of December 2011 was $5.50. The insured elected to apply for coverage prior to January 1st and selected the 80/100 (80% coverage at 100% of the price election) Revenue Plan.
 
The average price for the month of January was $5.80, and the average price for the month of February was $6.10. In this case the MPD Policy would have no liability and premium would be earned and payable at the same time as the underlying Revenue Plan policy.
 
"With the volatility that we are experiencing in the markets it is very hard for us as producers to predict what the 2012 spring price is going to be for crop insurance. With both cash rent and input costs on the rise we need to see the same in the value of our grain. This could be tough if we continue to see a drop in demand for our grains coupled with the fact that as of now we stand to see millions of additional acres going back into production that was prevent planted in 2011. If prices go down it is going to be a much tougher year to market out grains. This product is a very low cost hedge against a drop in grain prices between now and March 1".
 
If you want to learn more about this product you can contact Jamie Wasemiller of the Gulke Group at 707-365-0601 throughout the weekend.
 

Happy New Year!
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