You are here
Spring rallies and insurance bushels
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.
For corn and soybeans in 2013, many missed the opportunity to sell new-crop bushels last August or September at high prices. A new goal might now be to sell a portion of your guaranteed insurance bushels in the spring and summer months. Cash sales can be made using forward cash or hedge-to-arrive (HTA) contracts. Both contracts require the delivery of a specific quality and quantity of bushels. The forward cash contract fixes both the futures price and the basis when the contract is initiated, thus the cash price for delivered bushels is known.
However, the HTA contract leaves the basis open, but fixes the futures price. If a farmer thinks that the basis might improve prior to delivery, then an HTA contract is preferred. The farmer will still want to pay attention to the basis being offered for that delivery period. The basis should be set well in advance of delivery of these bushels. This involves discussing with your grain merchandiser plans for setting that basis on HTA contracts and the specifics for delivery of those bushels and cash settlement.
The decision to take RP crop insurance in 2013 now provides the ability to preharvest sell for delivery a portion of your guaranteed new-crop corn or soybean bushels.
Selling these insurance bushels between March and September is often complemented by the seasonal highs occurring in those months. A goal in 2013 might be to sell some of these guaranteed bushels when futures prices are above the projected prices, which are $5.65 per bushel for corn and $12.87 per bushel for soybeans.