Crop Insurance Monitor: Not Your Average Risk Management Options

 
Crop Insurance Monitor: Not Your Average Risk Management Options

By Jamie Wasemiller

Much like fingerprints, our farming operations are unique and special. From storage to seed, rotation to marketing, we are constantly evolving—and scrambling. No doubt most of you reading this are at different points in crop progress. At press time, the South was having a hard time getting into the fields while farmers in California were almost done planting. Some wheat has already been appraised, released and either planted to other row crops or planted to cover crops. While many are purposely waiting for the first of May to plant, others have already made their prevented planting decisions. Since actual production histories (APH) and coverage levels vary, crop insurance impacts each of us differently. 

The only factor that’s relatively constant for all producers is futures prices for grains. What options do producers have to pair futures prices and crop insurance?

Futures markets can be used to try and recoup insurance premiums. According to the March Quarterly Stocks Report, we have 13% more corn on-farm than a year ago and 7% more off-farm. Soybeans stocks are up 60% on-farm and up 18% off-farm. Wheat stocks are up 17% on-farm, and off-farm is up 3% from a year ago. 

Unless we have weather issues or demand dramatically picks up, the market will have to fight for significant rallies in any one of these crops. That being said, there will likely be opportunities for producers to sell calls to try and recoup some of the insurance premiums. 

As a risk manager, this is also a form of a hedge and can be referred to as selling a covered call because there can be beneficial results from a market that’s moving either up or down. A farmer should consider selling calls if he thinks prices are not going to move higher. 

If that is true, the seller of said calls will collect either some of or the entire premium to help create a higher value for his grain or, in this case, a way to lessen the cost of insurance. If prices do go higher, the seller will start to lose some of that premium he’d hoped to gain by selling the calls, but the value of his grain has improved. 

Most crop farmers are all for the markets moving higher, which means selling calls does not perform as well as hoped because there are bigger financial consequences than the alternative. 

To limit risk, consider selling out-of-the-money calls. You might not collect as much as selling at-the-money calls, but the risk is lower and you can always sell calls—or even puts—throughout the year depending on what the markets are saying.

Start focusing on crop insurance for 2016. Hopefully by now, most of you have a good understanding of the alternative private pricing products available. For those of you who do not, it is an opportunity to generate a higher spring price for insurance than the one the government provides. I work with multiple companies that sell these products, and each one has individual nuances.  Simply, it is worth taking the time to learn about the many different versions available. 

Private insurance products have been advantageous the past three years. For example, for 2015, I have clients using $4.68 for their 2015 insurance spring price for corn, $11.40 for soybeans and $6.78 for wheat. These price points, which were secured in July 2014, changed their approach to crop mix, hedging, cash sales and even crop insurance levels. 

Alternative pricing products are already available for 2016 crop insurance spring prices and should be considered in a long-term bearish scenario. Other private products will be released soon, so keep on top of them as some might be timely and advantageous to securing your bottom line.  

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