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March 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.

Rain on Planting Protection

Mar 17, 2011

Now that we have decided what crop insurance policy we are going to use on our farming operation we have a better understanding of our kind of protection it will provide us and what bushels we still have at risk. As we are getting ready to prepare and start planting throughout the country we know the importance of getting our crops planted during key planting periods to optimize yields.

Here is a part of a story that the National Weather Service released yesterday.

National Weather Service (NOAA) models show this year’s snowpack in the north-central U.S. contains a water content ranked among the highest of the last 60 years. “For the third consecutive year, the stage is set for potential widespread, record flooding in the North Central United States,” said Jack Hayes, Ph.D., director of NOAA’s National Weather Service.

The highest spring flood risk areas include the Red River of the North, which forms the state line between eastern North Dakota and northwest Minnesota, the Milk River in eastern Montana, the James and Big Sioux Rivers in South Dakota, the Minnesota River, the upper Mississippi River basin from Minneapolis southward to St. Louis, and a portion of lower New York, eastern Pennsylvania and northern New Jersey. Many metropolitan areas have a greater than 95 percent chance of major flooding, including Fargo, Grand Forks, St. Paul, Davenport, Rock Island, Sioux Falls and Huron. Devils Lake in North Dakota has an 80 percent chance of reaching two feet above last year’s record of 1452.1 feet.

Warm temperatures in the forecast this week could cause much of the snowpack to melt across South Dakota and southern Minnesota, setting off moderate to major flooding in eastern South Dakota next week. Minor flooding could begin this week on the Mississippi River and its tributaries over southeastern Minnesota and southwestern Wisconsin, leading to moderate to major flooding by early April.

In addition, a series of storm systems are forecast to move across the region during the next two weeks, which could bring additional snow or rain on top of the remaining snowpack. These systems may cause substantial runoff and the beginning of minor flooding in the southern headwater portion of the Red River of the North, eventually leading to major flooding sometime from the last week of March through early April.

Rain on Planting Protection allows growers to be insured in the event that wet weather causes delays during key planting periods. I like them for three main reasons. These contracts can be utilized to help insure top bushels that are not covered under your federal crop insurance. Also, since Prevent Planting will only pay you at a 60-70% level they can help cover the remaining 30-40%. I also find that they are a great tool for anybody that elected to use Enterprise Units for their insurance. Weather insurance can cover the acres that are going to experience some bushel loss without triggering an insurance payment.

If you would like to know more about the Rain on Planting Protection call 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.

Building A Foundation

Mar 03, 2011

We now have another piece of the puzzle. The spring insurance guarantee for insurance on spring crops has been set. The corn, soybeans and wheat prices (northern states) have been set at $6.01, $13.49 and $7.19 respectfully. Depending on an individual’s inputs costs we are looking at potential profits on the acres that we can insure that we have not seen before. We now need to start putting the pieces of the puzzle together so that we can create a good foundation for our marketing year.

In order to choose the best insurance policy this year a producer needs to do their homework and create a detailed summary of their input costs per acres. If unsure of input costs make sure to guess on the high side. Another item to consider is what hedging you have already done and it does not hurt to factor in what their historical basis is during your harvest period.
The next important thing to determine is the coverage level of insurance. One way to look at this is to compare the cost of the increase in the coverage level compared to the cost of hedging those bushels on the CME board. Currently, it makes more sense to choose a higher coverage level of insurance and take advantage of the government subsidy.
Once the insurance policy has been determined along with the current hedge positions applied this can be used as the foundation of the marketing year and moving forward any potential risk management strategies should be added to the “foundation” and analyzed to determine if it makes sense to execute a certain strategy or not and if it is executed it should be added to the foundation. This will make it much easier to market during the year.
It would be great if we as producers could lock in insurance and immediately make cash sales at these current price levels and be done with our marketing for the year. This is of course not practical and very dangerous. There is also the risk the there could only be marginal losses that do not trigger an insurance payment but at these prices can greatly impact revenue. With that being said there are many different ways to accomplish this through cash sales, futures, options, weather contracts, elevator programs, etc.
If you have any questions about insurance or how to incorporate insurance and grain marketing feel free to either 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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