Even though she may wish it weren't the case, Julie Satterlie believes crop insurance is a necessity to run a profitable farming operation today.
Satterlie and her husband Randy farm 1,500 acres of primarily corn and soybeans near Evansville, MN, and revenue insurance provides the base from which they form their marketing plan for the season.
In recent years the Satterlies have been profitable mostly because of their marketing plan. “We can't live on loan price,” Julie says.
They are part of a local marketing club under the advisement of Bret Oelke that has achieved solid results for several years and tremendous results in 2005.
Oelke, a regional Extension educator in agricultural business management, advises six different groups across west-central Minnesota, and he says farmers in the clubs achieved nearly $100/acre more for corn and about $10/acre more for soybeans in 2005 if they followed the consensus marketing plan throughout the year.
“The key factor is to have revenue-based coverage so you have price protection if everything goes against you — short crop and higher price,” Oelke stresses. “That's why you need the harvest price option on RA (Revenue Assurance) and revenue products in general.”
“Just about everybody in this part of the world uses CRC (Crop Revenue Coverage) or RA with harvest price option,” Oelke says. “If they don't take the harvest price option they are really taking some chances. The two are pretty much identical, so look at the cheapest.”
Revenue products with a harvest price option utilize the higher of two price points during the season to establish indemnities. So if farmers are left without a crop and prices rise during the season, they're still covered because the policy adjusts to use the higher harvest price.
Satterlie says the marketing plan the group uses is relatively straightforward and simple enough to follow even if she misses a marketing club meeting. However, it's still in depth enough to be challenging, and it adds in a few variables, including technical analysis, to aid in decision making.
Emily Holte, a crop insurance specialist with Burd & Rise Insurance in Halstad, MN, also saw a need for a plan like Oelke's in her area. “I asked farmers to find out how many used revenue insurance with a marketing plan, and it didn't appear many were doing anything,” she says. She then asked Bill Craig, a University of Minnesota Extension educator, and Oelke to conduct a seminar.
After the half-day seminar, Holte says a local marketing group was formed, and she's been impressed with the results. “I think it's something everybody should consider, as any plan is better than no plan. You may not get the best price, but you'll do better more consistently.”
Even though revenue insurance plans pay based on lost revenue and not bushels, Oelke's marketing plan uses an expected yield and the coverage level (typically 65-75%) to establish the number of bushels of a crop they'll price ahead. Typically, the expected yield will be based on the farm's actual production history (APH).
To arrive at the total bushels to potentially market, multiply APH (or expected yield) by coverage level by acres planted. For example, a farmer with a 150-bu. corn APH, 1,000 acres and 75% coverage would look to price ahead 112,500 bu.
Because of the revenue insurance with a harvest price option, farmers can confidently price this amount knowing they'll be covered even if prices should rise going into harvest.
Each individual in the group determines how much will ultimately be marketed, however. Satterlie chose the 70% coverage level and marketed that full amount during the season. Because her operation did have a good crop this year, she ended up with 30% of her production left to market after harvest.
Oelke's groups received such solid returns in 2005 because of a disciplined system of realistic price targets and default sales dates.
Breakeven levels for each individual operation determine price targets, and Satterlie says under-standing that breakeven number is crucial to setting price triggers. “We know where our bottom line is and that's where we start,” she says.
Satterlie adds that the consensus price target for the group is fairly close for each participant because her group is made up of operations similar to hers.
A minimum acceptable price target is established and scale-up price triggers are set from there. Each time a target price is reached, the plan calls for selling a certain amount of the crop.
If price targets aren't being met, then decisions are made at default sales dates. These dates “force us to consider doing things based on seasonality and history,” says Oelke. Satterlie records these dates in her calendar to make sure they don't slip by.
Oelke's groups base key sales dates around the following events or time frames:
Using this system, the consensus plan for Satterlie's marketing club set a minimum price of $2.40 (using CBOT December futures). They successfully priced the crop over six sales at an average price of $2.48/bu., using tools such as futures and hedge-to-arrive contracts.
Next, they rolled their positions forward to the March, May and July 2006 CBOT corn contracts to capture a large carry in the market and manage an unfavorable local basis, adding 20¢/bu.
Finally, at points in mid-October and early November, the group captured LDPs averaging 48¢/bu. In the end, the consensus plan captured an average price of $3.15 less local basis.
Satterlie says her marketing group is successful in part because its participants are around the same age and have similar operations. “We pretty much have the same crops and management experience,” she says. “We are by far no experts. But we do a lot of homework, and we feel comfortable (when we set up our plan) that we made good things happen.”
Oelke says the insurance products used in this marketing plan go a long way toward providing the level of comfort farmers need to take such an aggressive stance with their marketing plan.