Early-Pricing Peace of Mind

December 29, 2009 06:00 PM

Linda H. Smith, Top Producer Executive Editor
Although the revenue products basically act as a put option, that doesn't mean you should ignore marketing. Crop insurance frees you up to price more of your crop in advance, says Chip Flory, editor of Pro Farmer.
"With the crop insurance products available, when profit opportunities are offered, we need to take advantage of it because the insurance product removes much of the risk in getting ‘too heavily sold' early in the year,” Flory says.
Flory uses a 15% return over costs as a good place to start pricing. "In 2007, we sold 50% of expected production early in the year to cover 100% of expected production costs. That left 50% of the crop to sell for profit because all the costs were covered with the first 50% sales,” he explains.
"In 2008, with the increase in production costs, we could use the same strategy, but had to increase sales to 70% to cover 100% of production costs,” he says. "That left 30% of the crop to sell for profit because all costs were covered with the first 70% sale.”
Last year didn't offer such attractive opportunities. "We would have had to sell 90%. In that case, the crop insurance would not have covered the entire amount if the crop was short and we had to buy bushels in the market to deliver on the contracts,” Flory says. Thankfully profit opportunities look somewhat better for 2010.

You can e-mail Linda Smith at lsmith@farmjournal.com.

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