Sep 18, 2014
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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.

A month Reprieve for 2014 Price Flex Insurance Pricing

Oct 10, 2013

I hate to belabor the subject of Price Flex but it is one of the only items available to look into 2014 at the moment. Since July I have been talking to producers about this product as you could us it then.  In July the average was $5.24, August was $5.03, Sept was $4.93 and Oct is currently at $4.83.

I personally thought that September was going to be the last month that I would tell guys to continue to buy a product like this because I thought the October report along with harvesting would but serious downside pressure that that it would continue into this Spring of 2014 which would probably be the next time we could get a bullish scenario.

 With the government shutdown we will not see the October 11 USDA report which would probably have suggested that the crops are huge. They have also not rescheduled the release date and I feel there is a very good chance they will just wait until November to release any data. I also feel that whenever they do decide to release the data that it will be much more accurate and will be harder for the marketplace to say that data is not accurate and try to stay bullish which will make it easier for the market to convincingly go lower and stay lower.

This report delay is also coupled with the fact that harvest is behind do to maturity AND the fact that farmers are not selling much out of the fields. These three main factors lead me to believe that we have been given a one-month reprieve in downward prices that farmers should take advantage of if they can.

 Although the current price average of $4.83 is lower than the other months that have gone by it does not matter. The past is the past. What we have to do as marketers is manage what is in front of us. I still believe that anything around the $4.70 and above average is still going to be much higher than what we will receive in Feb, 2014.

Soybeans are currently at $11.69. This average has also consistently gone down each month since July as well. I do think this will still be higher than what we will see come February but there is a slight story in the soybean market that could possibly bring about a uptick in price into November so I am tempted to wait.

I am posting an earlier post that explained what Price Flex is for those of you that have not read it. For the ones that have already read about it and have not pulled the trigger learn about it and get signed up for October.

2014 Price Flex is an RMA approved private insurance product that allows the producer the opportunity to "lock" a potentially higher 2014 Insurance Revenue Price Guarantee than the spring or harvest price set by the RMA for both the RP and GRIP policies. The additional months to determine the 2014 insurance price is Oct, Nov, Dec of 2013 and Jan, March, April, May, June and July of 2014. (Ex. The CZ14 futures price will be averaged during the above mentioned months to determine the additional monthly prices for 2014 insurance price guarantees). You can purchase as few as one of the above mentioned month or as many as you want up to all of the months. The number of months will have an impact on your price per bushel. For example one month in corn may cost you $.12 per bushels and three of the months may cost you $.16 per bu while buying all the months may cost you $.23 per bushel.

2013 Performance:

Corn: This worked out great for corn growers in 2013. Farmer that were able to take advantage of this opportunity were able to lock in a price level of $6.27 in November of 2012 as opposed to the government price of $5.65 and it cost $.16 per bushel for this product leaving a profit of $.46 cents. Most farmers also purchased a summer month just in case of a summer rally for about $.04 more cents (a cheap call) which will expire worthless as we are currently at $4.99 leaving the farmer with a profit on his insured bushels of $.42 cents.

Soybeans: Farmers were able to lock in a price of $13.05 vs. the government price of $12.87 but the cost of the product was about $.18 leaving this hedging strategy flat. Not ideal but well worth the opportunity to lock in a price drop which did happen.

Available States:

Corn: AL, CO, GA, IA, IL, IN, KS, KY, MI, MN, MO, MS, NC, ND, NE, OH, SC, SD, TN, TX, VA, WI

Soybeans: CO, IA, IL, IA, KS, KY, MO, MI, MN, MS, ND, NE, OH, SD, TN, TX, WI

Example: The Oct. price average for corn is currently at $4.83. If you had purchased the month of Oct. then this will act as your 2014 Insurance Revenue Guarantee Price if the government spring and harvest prices in 2014 come in below $4.99. If the government price comes in higher than $4.83 (or whatever the Oct. average is) than the Oct. average will expire worthless and you still owe the premium (about $.11 cents a bushel). You will then go ahead and use the higher government price like you had done every year and you will be out the premium you paid for the August average. Due to the $1.00 cap in corn if the government price happens to go below $3.83 then it will bring down the October price along with it but you are assured at that point that your Revenue Insurance Guarantee Price will still be $1.00 higher than the price set by the government.

 Soybeans work just like the example shown above for corn using their respective prices and limits.

As a risk management consultant and farmer it is always disheartening to watch the futures prices and the Insurance Revenue Price Guarantee for the following year go lower. In the past the only way to hedge a price drop was on the board. Now there is an opportunity to put on a strategy to protect a price drop through a private insurance product. This is great for a farmer that does not utilize the board because of paying money of front, margin calls, etc. This is also nice for farmers that like to hedge on the board because they now have another option that might be cheaper.

Essentially you are buying what is called a put spread. The perks of using this method is that you are buying the same for of coverage as a put spread for about the same price and you do not have to pay anything up front. Additional there are no margin call and the premium is not due until Oct. of 2014.

With the current USDA Supply and Demand Tables as well as the technical price action we are facing lower too much lower prices for our 2014 crops. This program gives the farmer another alternative to try and lock in some higher prices on your bushels covered by insurance.

The deadline to sign up for the month of October is Sunday, Oct. 20, 2013. You have until the 20th of each month to buy that month. You can purchase future months anytime you want. The product closes down on the respective crops MPCI Sales Closing Date so for example in corn the 2014 summer months would have to be purchased by March 15th in the Midwest.

Feel free to contact me (Jamie) for more information about this program at 707-365-0601 or email at Jamie@gulkegroup.com.

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