Revenue insurance has become extremely popular with producers in recent years. But experts ranging from university economists to insurance company representatives warn against using these products as stand-alone marketing tools.
“I'd tell a farmer that if he's not putting a marketing plan in place in conjunction with revenue insurance, he's wasting some premium dollars,” says Gene Grimsley, senior vice president of marketing for American Agrisurance.
Tim Witt, deputy administrator for the Risk Management Agency, the governmental body that oversees federal crop insurance programs, adds that there should be goals and objectives for using all kinds of instruments.
“Revenue insurance is one form of risk management. It does give some price protection, but we certainly encourage people to look at all of their options.”
Still, a Soybean Digest annual survey shows producers have been going against the advice of Grimsley and Witt in the past three years. In each year, the number of farmers who said they purchased revenue insurance increased. At the same time, the number of those who said they developed a marketing plan or used forward pricing decreased.
According to Iowa State University Economist Robert Wisner, the past several years show that producers who purchased revenue insurance without also using marketing tools to protect against price declines missed out on opportunities to realize thousands of extra dollars for their crops.
That's because revenue insurance uses a formula that multiplies yield by price to calculate losses, he explains. In other words, if prices fall but a farmer's yield increases or remains relatively stable, then revenue remains constant and a farmer is not eligible for crop insurance payments.
Grimsley agrees and says revenue insurance provides some level of protection, even though, in most years, a farmer will not have losses high enough to trigger an indemnity payment. However, “If a marketing plan is in place with a product like CRC (crop revenue coverage), they (producers) can be more aggressive.” He points out that forward pricing a crop typically results in a better price than selling at harvest in eight of 10 years. This scenario has been especially true in recent years.
Revenue insurance plans are most effective when used as companion tools with a marketing plan, stresses Wisner. These plans help producers market more effectively by raising their comfort level when forward pricing grain.
Jim Baldonado, owner of the Home Insurance Agency in Elwood, NE, concurs. “We believe you don't make money by having a loss,” he adds. “You make money by using insurance as a tool. Crop insurance is the tool that gives producers the confidence to market a crop before harvest.”
To capitalize on the benefits of revenue insurance, Baldonado encourages his customers to set up insurance plans and then begin work on marketing plans. His agency has an arrangement with OSA Crop Marketing, which shares space with the Home Agency, and he encourages his insurance customers to speak with OSA about marketing. “I don't do anything with marketing, and OSA doesn't deal with insurance,” he explains.
Troy Nielsen, of OSA Crop Marketing, says once the insurance is determined, a producer can aggressively sell up to his guaranteed production any time during the year. “The old rule was you can't sell something you haven't raised. Our new rule is you can't sell something you haven't insured.”
Nielsen adds, “They may not have even planted yet, but history shows farmers can get the best prices for their crops well before harvest.”
Steve Ackerman, who farms near Gothenburg, NE, began pairing marketing with revenue insurance for the first time in 2001. He's pleased with the results. “I look back at what I would have done, and I wouldn't have done the things it (OSA) did. I'd still be holding crop and would have forward contracted very little.”
Nielsen's strategy is to use the cash markets to price ahead. “What we do is price grain in the cash markets at the elevator or feedyards, or wherever they (producers) typically deliver their grain. We do some futures and options when it works within our plan, but we don't do any speculating.”
One key to Nielsen's program, he says, is he actually executes orders for the producer. He explains that many producers may receive advice from consulting firms through a newsletter or some other vehicle, but “if they don't execute, what good is it?
“We write an annual marketing plan,” Nielsen adds. “When we get to price levels where we need to put in orders, we call the farmer, get permission and then we place the order at the elevator for the farmer. That's one key to our success. When we execute we know it's getting done.”
Nielsen says his company's goal is to sell ⅔ of a producer's grain in the upper ⅓ of the price range. “In the last four years we have done that,” he says. “The opportunities are there, but producers are not taking advantage of them. We help determine the entire cash price, not just futures.”