Welcome to Moline’s Musings of Risk Management, where I will dive into some really practical things that farmers can do to increase their profitability long term. My goal with this blog is to share practical grain marketing tips that any farmer can take advantage of, so without further ado, let’s jump into this week’s topic, understanding the risk with spring crop insurance pricing.
We have experienced a fantastic run-up in corn prices over the past year. While it may feel as though the risk of prices falling is limited, given the current inflationary environment and the sky-high input landscape producers face heading into the next growing season, I assure you there is downside risk.
For those producers who have locked in some of those high-priced inputs for next year, there is significant risk if corn prices fall. We are, after all, trying to manage the margin between inputs (land, fertilizer, chemical, seed, machinery, labor, etc.) and outputs (corn, soybeans, etc.).
As we enter the critical month of February, I want to look at two scenarios with differing spring crop insurance prices to help understand the risk that is present. In order to do this, we will need to establish a cost of production. There may be differing opinions on the cost of production, but I have included my version of a breakeven analysis for corn/soybeans for the 2021 growing season and a forward projection for the 2022 growing season.
By my estimates, the cost of corn production is up almost $200/acre with fertilizer the largest culprit behind rising costs. Are we still making money at these prices? There are absolutely opportunities to make money. But I want to showcase two examples to illustrate the significance of changes in crop insurance price on your price risk.
Example 1: What Does Our Profit/Loss Matrix Look like if Feb Avg = Current Price ($5.70)?
Example 2: What Does Our P/L Matrix Look like if Feb Avg = $5.30? Not so good
If December corn falls to average $5.30 in February, that moves our revenue guarantee to $946/acre, below our cost of production ($980/acre).
As a farmer, it is critical to understand the role of crop insurance in your marketing plan and how you can use futures, options, and physical grain contracts to complement Revenue Protection. In the tables above, we can visually show the risk a farmer takes if futures prices fall. As a farmer, I’d be asking where am I vulnerable on this matrix? The answer is in lower price environments, especially if corn prices come under pressure during the February averaging period. Crop insurance is not meant to be your marketing plan as a farmer. Crop insurance is meant to give you the confidence to take action.
If you do not have tools to forecast these types of insurance or cost of production situations, take a look at Farmers Risk. It’s a simple tool that will really help you “up” your risk management game. You can kick the tires on it at FarmersRisk.ag Next time, I will share some practical tips with you about some strategies you can employ today to reduce your risk in lower-price environments.
Next time, I will share some practical tips with you about some strategies you can employ today to reduce your risk in lower price environments.
This material should be construed as the solicitation of trading strategies and/or services provided by Farmers Risk Inc. These materials represent the opinions and viewpoints of the author, and do not necessarily reflect the viewpoints and trading strategies employed by Farmers Risk Inc. The trading of derivatives such as futures and options involves substantial risk of loss and you should fully understand those risks prior to trading. Farmers Risk Inc. is not responsible for any redistribution of this material by third parties, or any trading decisions taken by persons not intended to view this material. Information contained herein was obtained from sources believed to be reliable, but is not guaranteed as to its accuracy.