Welcome back to another edition of Moline’s Musings! March 15th, marks the sales closing date for revenue protection crop insurance. It has been a couple of weeks, but we officially established the Spring crop insurance price at the end of February. Now that you have purchased Revenue Protection and have a decent grasp on your cost of production, you may be asking yourself, “What should I do now?” Many of you have probably forward sold some new crop or implemented hedging strategies for this timeframe. The goal of this blog post is to give you a look at our updated profit/loss matrices now that the spring crop insurance prices have been established as well as some strategies that could be implemented to help protect vulnerable portions of the matrices for both producers who haven’t begun forward marketing new crop as well as those who have.
The Feb average for corn ended up at $5.90 (near the record of $6.01 set in 2011). The Feb soybean average set a new record of $14.33. I personally recommend 85% revenue protection year over year, but would also advocate looking into add-on products such as ECO/SCO. Please, take some time to review how you can leverage crop insurance to confidently use forward marketing to manage the profit per acre on your farm.
Now it’s time to dive into some risk management strategies. The example below shows a producer who has an APH of 210 BPA, a cost of production of $980/acre, and purchases 85% revenue protection. The top matrix shows crop insurance as a standalone. If the producer were to grow their APH, their revenue floor starts to kick in at 85% of the Feb avg (right around $5.00). Below that, the chart reflects a producer that has a revenue floor locked in of $73 profit/acre.
An easy way for a producer to improve the profit/acre below $5.00, is to forward sell/hedge some corn. If the producer sold ½ their APH at the current price level ($6.23), you can see how that drastically improves profit per acre below $5.00.
The same exercise with soybeans is below. This producer has an APH of 65 bpa, a cost of production of $738/acre, and purchases 85% revenue protection. With revenue protection alone, the producer is able to establish a revenue guarantee of $792/acre; above their cost of production ($738). In lower price environments, this producer starts to see that their profit per acre fades to a floor level of $54/acre, below $12.18.
To enhance his/her profit per acre outcome in lower price environments, the producer sells ½ of their APH at the current futures level of $14.66 (as displayed in the bottom matrix). This does wonders to improve/smooth out the profit/acre possibilities this producer could face come fall.
Now, the reality is that most producers have already forward sold a significant portion of new crop. Let’s walk through a simple strategy a corn producer could implement to help improve the portion of the matrix that the producer is vulnerable to. If this producer was already forward sold on 50% of his/her APH at an average of $5.00, they are most vulnerable in the price range between $7.00 and $4.50.
To enhance this portion of the matrix, a producer could sell call options to collect some option premium (close to at-the-money). In this case, we are going with the Sep SD NC $6.60 Call (ref CZ22) and selling 35% of our APH. Take a look at how the collection of option premiums helps this producer to smooth out the profit/acre scenarios in the price range near our spring crop insurance price.
While we are all operating underneath the same spring crop insurance prices, every producer is different. Our costs of production are different, our existing forward sales are different, our risk tolerances are different. And, our experiences using a variety of hedging strategies are different.
In this complicated world filled with an overwhelming amount of news and infinite opinions, we are better off managing risk through the lens of profit per acre rather than dollars per bushel. To get the complete picture of where you stand and the risks your operation faces, you need a tool that combines the crop insurance you’ve purchased and the marketing decisions you made. You need to be able to evaluate how future marketing decisions impact your profitability across different price and yield scenarios and, as I’ve mentioned before, Farmers Risk gives you this ability.
Kick the tires for yourself at Farmers Risk.Ag
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.