Selling your crop insurance bushels
The March 15 deadline for making 2011 federal crop insurance decisions has passed. Farmers can still add coverage options such as hail or wind. With record new crop corn and soybean prices being offered this spring, consider combining your crop insurance coverage with a pre-harvest marketing strategy and the delivery of bushels.
Crop Insurance as a Risk Management Tool
Most farms utilize a crop insurance product that provides a revenue guarantee on a percentage of their actual production history (APH). The most common product used by Iowa farmers in 2011 will likely be Revenue Protection (RP). In speaking with many crop insurance agents, many farmers “bought up” coverage this year to the 80% or 85% levels.
The decision to increase the coverage level could have been in combination with the use of enterprise units to save on premium. There is a greater risk if you elect enterprise units, since you decrease your chances of collecting an indemnity. That’s because you combine all your farms together by crop across the county for determining loss.
Using policies such as Revenue Protection (RP) or Revenue Protection with the Harvest Price Exclusion (RPE) guarantee both yield and price using farm level APHs. However, RPE does not offer a higher harvest guarantee should the harvest price (futures price average in October) be higher than the projected price (futures price average in February).
The Yield Protection (YP) is also a farm-level product, but does not trigger an indemnity unless a yield loss first occurs. The indemnity for both RPE and YP are limited to the projected price only.
Pre-Harvest Marketing Strategies
The 2011 projected price is $6.01 per bushel for corn and $13.49 per bushel for soybeans, respectively. Use of RP or RPE guarantees the farm’s APH times the level of coverage. These are often referred to as the guaranteed bushels or the farm’s insurance bushels.
Let’s use an example to understand how the Revenue Projection (RP) product works. Say your farm’s average APH is 160 bu/A and you elect the 75% level of coverage; your guaranteed bushels are 120 bu/A. To calculate the revenue guarantee you simply multiply the guaranteed bushels (120 bu/A) times the projected price of $6.01/bu. to get $721/A.
Using RP in 2011 should provide a comfort level in selling bushels for delivery on a portion of your guaranteed bushels. Should a natural peril like drought, flood or hail occur; any shortfall in bushels below the 120 bu/A should trigger an indemnity payment calculated at the $6.01/bu projected price.
Now the proverbial question: “What if I don’t raise those bushels that I’ve committed to delivery?” Use the example and understand that the harvest yield estimated was only 100 bu/A, but your guaranteed bushels were 120 bu/A. Your indemnity will simply reflect those missing 20 bu/A times $6.01/bu or $120.20/A. If you’d committed all 120 bu/A to delivery, you’ll still need to work with your grain merchandiser to “buy back” those extra bushels.