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Spring rallies and insurance bushels

STEVE JOHNSON 04/26/2013 @ 10:01am Farm Management Specialist with ISU Extension housed in Polk County, Iowa. Areas of expertise include crop marketing, grain contracts, government farm programs, crop insurance, farmland leasing and other crop risk management strategies. Reach Steve by e-mail at sdjohns@iastate.edu.

In most years during March and April, weather uncertainty that influences new-crop futures price focuses back on the Northern Hemisphere. That’s where the majority of the world’s corn and nearly one half of the soybeans are produced. Futures prices tend to become more volatile than those witnessed during the winter months.

A rally in the new-crop December corn futures price happens nearly every year in March and April. The December futures contract tends to move higher and remains relatively high until at least mid-June when more is known about the planted acreage and yield prospects. New-crop November soybean prices often rally in the late spring or early summer months. These higher new-crop futures prices during the spring and early summer months are referred to as the Seasonals.

Determining your insurance bushels

Because most Corn Belt farmers take revenue protection (RP) crop insurance, they have the ability to tie preharvest marketing of their insurance bushels for delivery. That’s because RP guarantees a farm’s actual production history (APH) times the level of coverage elected (65%, 70%, 75%, 80%, and 85%).

These insurance bushels are guaranteed at the higher of two prices: the projected price determined in the month of February for the average December corn futures and November soybean futures. These prices are used to determine the revenue guarantee for each insured crop as well as the premium to be paid in the fall. The key to RP is that if the harvest price increases (October average for those same futures contracts) the revenue guarantee reflects the higher of these two prices. That’s a real advantage if there’s a shortfall of contracted insurance bushels because that higher harvest price will be reflected in the final indemnity payment.

The conclusion might be that new-crop December futures price highs in the seven-month period of March to September provides an opportunity to make some sales of a portion of these insurance bushels. The highest December corn futures prices on the chart occurred on June 27, 2008; August 29, 2011; and August 10, 2012. In most years prior to 2008, this seasonal high for corn occurred in the months from March until June.

New crop pricing opportunities

Remember, with the use of RP crop insurance, both yield times price or revenue is guaranteed. These insurance bushels are guaranteed at the higher of two different futures prices: the projected price or the harvest price. Combine this understanding of RP annually with the sale of guaranteed insurance bushels after March 1 and before harvest. March 1 is the date that projected prices are known, thus a preharvest sales objective could be established.

Since in most years, new-crop December corn and November soybean futures prices tend to rally in the spring and summer months, the ability exists with RP crop insurance to sell for delivery all or a portion of your insurance bushels. The goal in 2013 might be to sell some guaranteed bushels when futures prices are at least above these projected prices, which are $5.65 per bushel for corn and $12.87 per bushel for soybeans.

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