What is in this article?:
- The USDA Hedge: Put a Floor Beneath your Prices
- Price volatility vs. policy
Price volatility vs. policy
Price volatility makes it impossible to know the price if and when a policy goes into effect. “We won’t know the prices until they are set the end of February,” says Good. Even the best ag economists and analysts won’t make tight price predictions. But this example uses a $5/bu. spring price for an Ohio farmer. His average yield is 170 bu./acre and he selects the 85% coverage rate.
“That will provide a minimum of $731 coverage with a revenue protection (RP) policy (170 bu. x 85% = 146.2 bu. x $5/bu.),” says Gerber. “The preliminary cost is $58.27/acre each for individual units. However, that cost is reduced to $31.68/acre if he requests enterprise units, which combine two or more individual units (in a county for which he buys insurance).”
Since the grower is guaranteed 146.2 bu. at $5/bu., he’s free to market those bushels on a cash contract (or other sale). “If he prices 146.2 bu./acre on the local market, he’s guaranteed the revenue from the policy to pay for those bushels if his yields are reduced below the 146.2 guaranteed,” says Gerber. “If he raises his average of 170 bu. he’ll have the 146.2 bu. available to meet his sales contract and have an additional 23.8 bu. to sell.”
If it’s a bad production year and he raises 120 bu./acre, he’ll only have 120 bu. available to meet his sales contract. But the RP payment for 146 bu. would enable him to make up the difference. If production is above the 146 bu., then he’ll have additional bushels to sell to add to the guaranteed $731.
Using $11/bu. as a sample soybean price, Gerber says an Ohio farmer with 55 bu. yields who selects 85% coverage will buy a minimum of $514/acre RP coverage (55 bu. x 85% = 46.75 bu. x $11). “Preliminary cost for this coverage is $38.58/acre for optional units,” says Gerber. “That cost will be reduced to $21.85/acre if he requests enterprise units.”
Since a grower is guaranteed 46.75 bu./acre of soybeans at $11/bu., he’s free to market those bushels. “If he prices 46.75 bu./acre on the local market, he’s guaranteed the revenue from the policy to pay for those bushels if his yields are reduced below the 46.75 bu. guarantee.
If yields make only 40 bu., the RP policy will provide payment for the additional 6.75 bu. needed to fulfill his contracted beans. If production is above the 46.75 bu., then he’ll have additional bushels to sell and add to the guaranteed $514 in the RP policy.
Gerber notes that the $514/acre soybean RP or $731 corn RP will rise if the harvest price (the average CBOT price of November soybeans or December corn in the month of October) is higher than the February planting price.
The RP insurance will provide price protection for soybeans and corn if market prices fall this year after the strong rally prices have experienced. So insured growers will have the “hedge” in place.
Gerber adds that marketing over and above RP coverage certainly enables producers to enhance their profit capabilities, depending on their individual farm situations. Gerber himself has charted 100 years of corn and bean prices to identify dominant market cycles.
“Remarkably, prices have repeated similar cycles for decades,” he says, adding that those predictive cycles of high prices are what he bases his marketing on and insurance customer advice on.
Good says that with the price rallies seen in the fall, he has encouraged growers to get some of their 2011 crop forward priced. “We suggest that even though they hadn’t seen insurance prices, we’ve seen opportunities to marketing some of 2011 production,” he says. “They may not get too aggressive (because of price volatility) but there have been some pretty good prices.”
The cost of insurance is similar to what a grower may spend on a futures options program, Good says. “But they are very different products,” he adds. “With options, you can’t protect your yield. And with the insurance, you can’t protect 100% of your price.”
He adds that in Illinois, growers are recommended to use the full 85% RP provision. “It’s very rare that the lower coverage levels ever pay out,” he says.