Your Profit: Marketing success begins with insurance
The mood at my winter seminars changed dramatically after the bearish January USDA Crop Production and Supply-Demand reports. The most common question that came up was "can the USDA corn production number be right?" My answer is that it is expensive to bet against the USDA numbers. I have watched the grain markets for 35 years, analyzed the USDA reports during that time and I have traded commodities for those 35 years. The USDA track record is not perfect but it has been very accurate most years and is our best source of fundamental information.
Now back to the seminars. A young farmer at a Kansas City seminar had this statement and question. "I need to generate at least $750 per acre on every acre of corn I grow and $600 per acre for every acre of soybeans. How can I lock in the revenue I need and still capture a rally if futures turn higher?"
That is a complex question, no guarantees, but I have an answer that can help you in 8 out of 10 years. The answer is to use my 3-step risk management strategy plan.
Step 1: Meet with a qualified crop insurance agent and figure out the best crop revenue insurance policy for your farm. I am not an agent, and do not work for a crop insurance agency or company, I do have a lot of customers who use crop insurance to protect farm income. Another huge benefit of buying a crop insurance policy is that it reduces your financial risk if you get a large portion of your crops sold ahead. In my company we call it the "license to sell."
Step 2: I encourage you to categorize your corn and soybean crop into what I call the A and B bushels. The A bushels -- the insured bushels are the bushels that I will aggressively sell ahead by hedging or putting hedge to arrives on 50% to 80% of that production.
Step 3: The B bushels are the bushels that I will get price protection on using put options. The question that many producers work with their agents on is what policy level to buy. The cost difference can be as much as $15 per acre for corn and $10 per acre for soybeans.
These are 7 questions that will help you evaluate which policy is right for you.
- What is the price guarantee that you can lock in for December 2010 Corn futures and November 2010 Soybean futures when the average February price is computed on February 26, 2010? The higher the price -- the more revenue you can lock in on your A bushels.
- How high is your actual production history (APH) vs. your farms productivity? Again higher APH allows you to lock in more revenue with the policy you buy.
- What is the price level of the CRC guarantee compared to the actual price of December 2010 Corn and November 2010 Soybean futures on the March 13th sign up deadline? A higher market on March 13th makes putting on more hedges a possible better alternative than buying a higher percentage CRC policy.
- Does your farm quality for the lower cost enterprise discount? This can again be a huge savings or allow you to buy a higher guarantee.
- What are your yield prospects for 2010? If you still have your 2009 corn crop out in the field as you are reading this it may make getting a bumper crop very difficult this year.
- Are you comfortable using hedges or hedge to arrive contracts to get the crop forward sold? The most profitable farms I worked with this year had a lot of corn and soybean sold ahead by mid summer.
- Can you use puts to get price protection on the B bushels?