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.