Ray Grabananski: High crop insurance rates
While insurance prices finished forming during February, we were blessed to get some very high prices established for the 2011 crop year, with the highest prices ever for insurance price elections with $6.01 corn, $13.49 soybeans (beans in the teens), cotton at $1.23/lb, and spring wheat at $9.89 (only topped by 2008).
Cotton also came in with a huge price of $1.23/lb, with all these prices likely to attract acreage to the crop regardless of what prices do from here on out. That has to have farmers smiling when penciling out the 2011 crop this winter!
These high price elections essentially allow producers to lock in as high as 20-25% profit margins for the 2011 crop on these major crops - perhaps the first time in history that producers have that opportunity to do so in March - at crop insurance sign up time. Rarely can farmers lock in profits - let alone 20% or more - without any risk. But that indeed is what we have in 2011, in spite of the increase of crop input prices as well this winter. Buying at high levels of insurance, while using the new low-cost enterprise unit structures, can effectively lock in put options on grains at about $5.10 corn, $11.50 soybeans, and $8.40 HRS wheat. Perhaps the best 85% put option is in cotton, with a $1.05 price virtually assured for the equivalent of their past 10 year yield history.
This is indeed a rare opportunity, and one that creates an interesting dilemma for the marketplace now. Cotton last week formed what looked like a potential top, but this week roared back after some very negative technical formations (downside daily reversals), and instead finished today near the recent highs.
That is quite an accomplishment for a market that already has doubled in the past 6 months! Will prices go even higher, providing even more opportunity for farmers in 2011?
We seem to be at somewhat of a crossroads in cotton. While the price action is dictating a possible top, the timing of this top would indeed be unusual as we aren't even close to planting the 2011 crop yet. We need to attract acreage to cotton to take care of what is a short crop situation in cotton, one where supplies are tight and we simply need to attract more acreage to the cotton crop in 2011. We also need to allocate out what is a short supply of remaining cotton for this crop year 2010, and limit demand somewhat by doing some demand destruction in the cotton market via high prices.
We may finally be in the process of doing this, but that seems like an inopportune time for prices to drop, too, very far. So here we are at the crossroads, with prices already very high but also with the market having very little leeway in allowing prices to drop much, either.
So, the story marches on, with growers loving the high prices of today, enjoying what could arguably be the best situation in grain farming in a long time, or perhaps ever. While the projections look rosy this spring, it also seems like a time to reflect on the opportunities of the past, and to think about doing something to lock in these great prices.