Key 2013 crop profit protectors
After a volatile year in the crop sector, 2 respected ag economists look at ways to protect and maximize your profit potential in the coming year.
Watch the margins
"Keep your focus on proﬁt margins for 2013. Trying to pick the highest price and sell all your crops at that price seems futile after this past summer’s experience," says Iowa State University Extension farm management specialist Steve Johnson. "Besides, it’s net revenue that will determine if you made money from your corn and soybean crops."
Line up pre-harvest sales
Johnson advises arranging pre-harvest sales with input costs and those profit margins. "While input costs are expected to remain fairly ﬂat, plugging in 2013 harvest prices available today is already providing attractive margins," he says.
"Growers should forward-contract only a portion so that if prices go up they still have money to gain," says Purdue University Extension ag economist Chris Hurt. "It's common to forward-contract 25% to 30% of expected production for new crop delivery." If you contract more than that, an out-of-the-money call option is a good idea, Hurt adds.
Consider other options
Put options and hedge-to-arrive (HTA) contracts can also prevent losses in forward contracting. "A strategy might be using forward cash contracts or HTAs for some of your early 2013 sales this fall and winter, then buying put options next spring on bushels you’d prefer not to commit to delivery," Johnson says.
Keep a close eye on demand
"As corn cash prices approached $8 per bushel in August, demand for corn fed by U.S. livestock producers declined. This demand will be slow to return in the short run and will have a negative impact," Johnson says. "Demand will be a key factor as to whether corn and soybean prices can climb to the extremely high levels in 2013 some analysts believe is possible."
Invest in insurance
The value of crop insurance heading into 2013 can't be overstated, Hurt says. "Sometimes growers are hesitant to sign up because the premiums have to be paid regardless of whether coverage is used. But I think a lot more people understand the value after the drought this year. If not for crop insurance, it would be depression in many farming communities right now."
Picking a coverage level
As it stands now, a 75% revenue protection level is a good bet, Johnson adds. "While the projected price will not be determined until the month of February, the use of a Revenue Protection policy at higher levels of coverage (75% or greater) is a likely choice for many farmers along with the use of the Trend Adjusted APH Yield Option," he says.
Watch for a farm bill
A big crop insurance variable will be nailed down with the next farm bill. "Both House and Senate versions of the bill stop direct payments to farmers but instead withhold that money to give farmers an enhanced safety net in the form of 8% to 10% more financial protection," according to Hurt, essentially adding that much on top of the coverage level you buy.
Keep these ideas on the top of your mind heading into the 2013 marketing year, 2 respected economists advise.