Competitive Advantage from Marketing, Selling Ahead

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Buying crop revenue protection (RP) this year is a no-brainer on the heels of last year’s drought. But RP policies pay best when yields are reduced substantially and not so much when yields are about normal. That’s why marketing ahead is so crucial. Consider this simplified example.

The crop insurance projected price based on the average of December (corn) and November (beans) futures prices during February are $5.65 and $12.87, respectively. Let’s assume your trend-adjusted actual production history (TA-APH) yield is 160 bu. and you buy 80% coverage revenue protection (RP). Your covered bushels would be 128. Multiplied by $5.65 = $723/acre.

Suppose yields this year come in 160 bu. and December futures average $4.25 (midrange of our estimate on page 3 of The Brock Report). Your revenue to count would be 160 x $4.25 = $680. Your RP plan would bring you up to $723 by paying $43.

Now suppose you locked in the $5.68 available in December futures on 160 bu. Your actual revenue would be $909, minus, say, 30¢ basis = $861. Plus the RP payment = $904. Who would have the competitive advantage in cash rent wars next year – you or your neighbor who doesn’t sell ahead?

We know most farmers won’t sell 100% of their expected crop, and we know it’s unlikely you’ll grow exactly your APH. In this greatly simplified example, we just wanted to make the point that your marketing job isn’t done when you buy your RP. Yes, it does offer some protection against lower prices, but given the yield deductible, even with prices down from last year, you can see a better outcome using marketing than those who do not.

 

Editor’s note: Richard Brock, Corn & Soybean Digest's marketing editor, is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report.

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