Use insurance to advance grain marketing, analyst says
The rally in December corn and November soybean prices throughout February had December corn futures averaging $4.58 and November soybeans $11.87, some of the highest levels in recent history.
These average futures prices are what the crop insurance industry uses to establish revenue coverage. Depending on the level of insurance purchased, you will establish a revenue guarantee per acre. That revenue guarantee is a function of production history and the average February futures price, also known as the “spring price.”
Crop insurance sets the tone for guaranteed revenue, yet we need to point out that insurance is simply that — insurance. Insurance guards against revenue loss through either lower price, lower yield, or both. Do not confuse insurance with marketing. It is critical that farmers continue to monitor the market, execute strategy, and shift risk. Let marketing take care of selling your crop, and let insurance take care of, well, insuring your crop.
Insurance premiums are derived, in part, from risk the insurance company assumes. Therefore, when there is a higher spring price, premium is higher to reflect risk or potential liabilities to the insurer. While higher spring prices do provide a higher flooring mechanism for revenue, it is important to note that even strong coverage levels still leave a significant gap between the average prices in February and where your true revenue floor exists. As an example, if you purchase 75% revenue coverage and the average December price is $4.58, and you have an average yield, your true pricing floor from a revenue perspective is $3.43. At 85% coverage and an average yield, the revenue floor is $3.89. It might be best to assume your insurance would not likely pay an indemnity unless the market really collapses. Instead, recognize that higher spring prices allow for stronger revenue protection which, in turn, should allow for more aggressive marketing by you.
Be aggressive and balanced in your approach when marketing, especially when spring prices are higher than you would expect at harvest. You plant assuming average or higher-than-average yield. Market your crops with the same assumption. In more years than not, the nation will produce bigger crops. With continuously improving tillage practices, genetics, and farmers, it is difficult to bet against big production. By incorporating insurance into your marketing, you can create a balanced marketing approach using forward sales and options. Buy puts against bushels you do not forward sell and buy calls to retain ownership of the bushels you do forward sell. As summer weather unfolds, you have created an environment where you are prepared for price rallies or declines with the backdrop of guaranteed revenue from insurance.
If you have comments, questions, or suggestions, contact Bryan Doherty at Total Farm Marketing. You can reach him at 1-800-334-9779, extension 300.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.