What is in this article?:
- Using Your Crop Insurance To Manage Price Risk In A Volatile Grain Market
- Calculating revenue guarantee
How many times in the past six weeks has the volatility of the grain market caused you to reach for the stomach pills? There have been some very significant price reversals, both up and down, that should have caused many farmers to lose sleep over their lack of either a marketing plan or some form of risk-management plan for protecting their rent payment, production investment and potential profit. If you are in that category, and are wondering how to use your crop insurance to protect your new crop revenue, read on.
Have you looked at a chart of the December corn contract to closely examine the price volatility of the new crop? It is not as volatile as old-crop corn, but you may not have much of the old crop left to sell, so we will focus on the new crop. Look at the December corn chart and identify the days where you said to yourself, “Self, I’d better get something on the books at the elevator.” Then you said, “But I don’t know how much I am going to raise; I don’t have it planted/pollinated/watered/harvested yet.” That is the reason you committed all of that cash to buy crop insurance, so let’s make that decision pay off for you.
If you bought crop insurance for the 2011 crop, it probably was revenue protection, and you probably purchased 80% or 85% coverage, and for the new crop, your guarantee for corn is $6.01/bu. Look at the examples provided by Iowa State University Farm Economist Steven Johnson. Your numbers will be different than his examples, but plug in your actual production history (APH) yield and your level of coverage and work through his calculation. If your APH was 150 and your coverage level was 80%, you have 120 guaranteed bushels worth $6.01, or $721 revenue/acre that is guaranteed. If you are late getting planted, or the summer dries out, your crop insurance will cover your preharvest sales up to $721/acre if you can’t deliver the 120 bu. you already sold.
Your insurance will allow you to manage your revenue risk today as a result of the market volatility, and be comforted that you have your cash rent and production expenses paid (or thereabouts). If you have the harvest price option and the fall harvest price climbs because the crop is short, then you will benefit from that higher price. If it reaches $7.50 as an average for the December contract during the month of October when it is calculated, then multiply $7.50 by the number of bushels you produced, 110 for example. Your calculated revenue would be $825 ($7.50 x 110), but since your guaranteed revenue was $900 ($7.50 x 120 bu.) you will get an indemnity check for $75 for each acre insured. You can plug your own numbers into this example or the one that Johnson provides.
One factor to check is whether you purchased revenue protection with the harvest price option (which was a higher cost) or with the harvest price exclusion (which was a lower cost.) The harvest price exclusion will not allow you to take advantage of any price rise, but you know that your guarantee equates to the $6.01 multiplied by your APH multiplied by your coverage level, such as 80% or 85%.