Thursday, February 25, 2010
Use Your Revenue Crop Insurance To Cover Spring Pricing.
What is your marketing plan for 2010 crops? You have one, right? Oh. Well, OK, let’s get to work on it, and one of the major decisions is facing you right now on the calendar. That is crop insurance, since the deadline for signing up or changing your coverage is March 15. But we’re not going to talk as much about crop insurance today as we are about using it for your pre-harvest marketing strategies. If you are not using crop insurance to take advantage of any spring price rallies, why do you pay premium prices for it? We can wait for your answer; take your time.Crop insurance, at least the basic MPCI or APH versions, were somewhat helpful in covering part of your production expense, should a crop failure wipe out half of your crop. With the revenue types of crop insurance for the past 15 years, spring rallies in the grain market can be captured with the use of CRC and RA insurance policies. And Iowa State University farm management specialist Stephen Johnson says more pre-harvest bushels can be sold with the protection of those policies, and he says that provides better risk management. His newsletter advocates strong consideration of booking spring prices in the $4.15 to $4.50 area, helped by the use of revenue-based crop insurance policies.
Since the spring guarantees for November soybean and December corn contracts will be known about March 1, because they use closing futures during the month of February, farmers will be able to purchase policies by March 15 and take comfort they can forward contract the tractor seat bounce without concern of not producing the crop. Any revenue shortfall from lack of production will result in an indemnity check that will help settle the fall commitment to deliver the grain.
Economist Johnson says the spring months of March through June tend to have the highest prices for the marketing year. And he says those can be locked in with comfort, if revenue crop insurance policies are protecting your production revenue. Johnson is recommending incremental sales through the spring to capture a high average of prices. The February average or spring guarantee will be known, and if that exceeds your cost of production, then a policy such as Crop Revenue Coverage (CRC) will allow you to sell your new crop bushels when they are higher than the February price average.
Producers who select the harvest price option will pay more, but will get the choice of replacing their lost production revenue with the higher price of either the spring guarantee or the fall option. It will guarantee their APH bushels, multiplied by the coverage level, and further multiplied by the fall price, determined during October for beans and November for corn. If actual field revenue falls below the revenue guarantee, Johnson says an indemnity would be triggered.
The crop insurance payment is keyed from the performance of the futures prices, and Johnson says both a forward contract and a hedge to arrive contract would be covered, but the basis would have to be set on the latter. He says if the actual cash price exceeds the revenue guarantee, which means the basis is positive, then the insurance policy will not cover the total commitment. Such a circumstance would suggest a policy to not commit a volume that is 5% below your coverage level.
Summary:
CRC and RA crop insurance policies not only will cover production cost, but will allow a producer to aggressively pre-sell springtime market rallies without concern of not being able to deliver on the committed production. Such policies will replace any revenue shortfall, whether they are based on a spring guarantee price established during February, or established during the fall prior to the harvest delivery month.
Posted by Stu Ellis on 02/25 at 01:11 AM | Permalink
Comments
Posted by: Freeport, IL at February 27, 2010 1:01AM
The county yield product, GRP, may be the most underutilized product for pre-harvest grain sale protection. The need for pre-harvest price protection occurs when a farmer has a “short” crop and harvest prices are above the pre-harvest sale price. The indemnity provides cash to “buy back” over sold pre-harvest grain. The individual products, CRC and RA HO, provides this protection only when farm harvest yields fall below Actual Production History (APH) times the level of yield (revenue) coverage selected. The move to enterprise units for individual products makes them more like a county product (more general risk with yield spread over more acres) than the optional or basic unit choice. The strategy of using GRP is dependent upon making pre-harvest grain sales. This product is does not provide protection of a declining price environment like GRIP, CRC and RA does. The crop insurance selection, for most of us, needs to be made prior to March 15. The USDA’s March 10th report may provide an indication of the opportunity to make profitable pre-harvest sale, increasing the viability of GRP. (GRP only has a chance to protect individual farm yields when farm yields tend to follow county yields.) Crop Insurance agents, you are welcome.