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Tuesday, October 29, 2013

Corn prices are dropping, the insurance is set, and you think, Oooops!



 

As of Thursday the October price discovery period for crop insurance on corn and soybeans will be complete, and the harvest price option will be known and in the history books.  Will you benefit from that?  Yes, if your crop insurance coverage level is 80% or more, but not if it is less than 80%, and you are harvesting an equivalent to your APH yield.  But the critical factor is that the harvest price period is just about concluded and once the price has been set unpriced grain is at the will of the market, which may not be friendly.

 

Throughout the Cornbelt, piles of corn are stacking up beside grain elevators as an indication that yields were good and supplies are large.  While the next USDA estimate of the size of the crop will not be released until November 8th, the market is satisfied that sufficient supplies exist and is awaiting confirmation of an expected 2 billion bushel carryover for 2014.  That could easily push cash corn below the $4 mark and move December futures rapidly in that direction.  And the prospects for lower income from corn are getting higher.  And once the crop insurance guarantee is set, you are not protected from any further drop in corn prices.  It is lonely out there.

 

University of Illinois marketing specialist Darrel Good says, “Anecdotal reports suggest that a relatively small portion of the 2013 crop was forward priced and that producers are choosing to store a large portion of the newly harvested crop. If that characterization is correct, there is a lot riding on the direction of corn prices over the next several months. To avoid lower revenues, prices will have to increase more than the cost of owning and storing corn.”

 

Good says that corn prices will be dependent upon consumption.  Yes, China is buying corn, but don’t depend on the Chinese being the key to success.  Yes, ethanol is proving a stable demand, but don’t depend on ethanol to consume the surplus.  And when Cornbelt planters are in the field next spring, Good says it will take high prices for soybeans to keep corn from going even lower.

 

That is then.  This is now, and your harvest is in the final stretch with your yields and your father’s prices. If you have a revenue crop insurance policy, Illinois ag economist Gary Schnitkey  says the way harvest prices have been shaping up for corn, you may get an indemnity check from the crop insurance company.

 

The spring guarantee was $5.65, which were the average closing prices of December corn futures during the month of February.  The fall harvest price is nearly complete, and will be approximately $4.40 per bushel, which is 78% of the spring guarantee.  A farm which produces a yield that equates to its actual production history will be getting a crop insurance check if your coverage level is 80% or more. At a 180 bu. APH, a 180 bushel average yield would get $22 per acre; and 85% coverage would gain a $72 payment.  Lower yields would draw higher checks.  Higher yields would see the check quickly diminish to zero.

 

If your soybeans have revenue coverage also, the calculation will be the same but the outcome will be different.  The spring guarantee is $12.87, which was also established in February, based on November soybean futures’ closes during that month.  However, the fall harvest price that will be concluded Thursday is shaping up to be the same value.  If both are the same, and they are less than a penny apart now, there will have to be a yield loss in soybeans to get an indemnity check from crop insurance.  If you have 80% coverage, your yield will have to drop more than 20% below your APH for a payment to occur.  On a 50 bushel APH that would be 40 bushels as the threshold for a payment on 80% coverage.

 

Summary:

Corn and soybean prices continue to weaken as the glut of harvest show there is an abundant crop headed for storage.  However, storing grain will have to pay in the form of higher prices later on.  Now, crop insurance indemnity payments may be issued to many farmers with coverage of 80% or more, even with good yields.  That is because the harvest price for corn is 80% below the spring guarantee.  For beans the spring and fall guarantees are equal, so any payment will have to be generated by a yield loss.

 

 

Posted by Stu Ellis on 10/29 at 10:43 PM | Permalink

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