What is in this article?:
- Using Your Crop Insurance To Manage Price Risk In A Volatile Grain Market
- Calculating revenue guarantee
Calculating revenue guarantee
Regarding his example, Johnson says, “Where many farms struggle in utilizing crop revenue coverage and preharvest marketing of bushels for delivery is the ability to recalculate the revenue guarantee. The example includes two extreme harvest price estimates. The high harvest price is $8/bu. and generates an indemnity of $160/acre. The low harvest price is $4/bu. but creates a much larger indemnity totaling $321/acre. That’s because in the example, the actual harvest yield is multiplied times the higher of the projected or harvest price to create the calculated revenue. To determine the indemnity, subtract the calculated revenue from the harvest guarantee.”
So here is what you need to do, according to Johnson, “If you choose to preharvest sell bushels for delivery, consider timing those sales when December corn futures or November soybean futures are higher than the projected price. This way you’re guaranteed that if you come up short of bushels, you can collect a minimum of $6.01/bu. for corn or $13.49/bu. for soybeans, respectively.” Watch your local elevator bids, which are what you will use to make your preharvest sales, not futures prices.
You do not have to sell everything that your insurance might cover, but you can spread your price risk and sell at various times, up to the coverage of your insurance. For those bushels you do not want to commit to delivery, Johnson suggests protecting the price of those bushels with either a futures hedge or a put option to lock in a floor price.
Periods of market volatility are expected to continue as long as the supply and demand are about equal, which USDA reported they are. While volatility can provide potential profits, it can also provide potential losses, should a marketer sell more grain that is being produced. Your crop insurance was purchased for that reason, and a good risk manager will not only have crop insurance, but will use it to manage price risk with the protection it provides for profitable market prices.