The following is an excerpt from The Brock Report printed with permission.
With the recent downturn in the commodity markets, this is a good time to review crop insurance risk protection that was purchased prior to March 15 for 2023. This year, in particular the past 60 days, has provided extreme market volatility and, unfortunately for producers, that has come with downside risk. Now the market has producers scratching their heads and hoping for “one more rally” to get to sell or hedge this 2023 crop on, but what if that rally never comes? What if we have a year in front of us that presents us with a peak early on in the marketing year, and then we spend the next 6 months chopping sideways and grinding lower. Now is a good time to review coverage that we took, and see where our uncovered risk lies when it comes to marketing.
For this case study we are assuming a farm has a 200-bushel approved yield on corn and 60-bushel approved yield on soybeans. Using this information, let’s look at the following scenarios.
Revenue Protection (RP) — This is the policy that most producers are probably most aware of when it comes to selecting crop insurance coverage. Revenue protection simply goes off of the approved yield of the producer’s operation and has price discovery periods of February and October. Assuming the fall price is lower than the spring price, the producer that purchased the 80% coverage level can count on a guaranteed gross revenue per acre of $945.60 on corn, and $660.48 on soybeans. This would be assuming the fall insurance price is lower than $5.91, these numbers would hold and be valid if we had an average price lower than $5.91 in October, or if the producer purchased RP with harvest price exclusion. In this scenario, the producer can relax a bit knowing they will be covered at this price level per acre, either through higher price, or better than APH projected yield.
Using average costs of production for 200-BPA corn production, producers are more likely in that $1,000- $1,200 per acre area depending on land cost. This equates to between $5.00-$6.00 per bushel cost of production. Hopefully, as producers bought inputs, they were pricing grain when it was still above $6.00, to help cover some of those higher priced inputs they were purchasing. Some people hesitate selling months out at a time, however, whenever those original sales were made, you made them for a reason. I find most of the time when people are selling far out, it is because they have inputs locked in and are selling in the black.
The question now becomes how to get above breakeven value in today’s marketplace given the prices we currently have available to us, and as we approach the bottom side of those breakeven values. There are a few things producers who are in this position can do.
- Set a floor!! The last thing you want is for prices to continue to grind even lower. That makes the pain even worse, especially if already at below, break-even market levels. Consider put option strategies. With all of the strikes and expirations to choose from, you’ll find a strategy that works for your budget and protects the bottom line.
- Make the cash sale, buy calls. This option is very simple and can be very affordable as producers have many different option products to utilize today. This locks in the cash value, and still allows participation in upside potential.
- Don’t forget to market those bushels insurance doesn’t protect. Sure, 80% RP policy on 200-BPA corn covers 160 bushels, but that other 40 bushel is still worth $200.00 an acre with today’s prices. Don’t forget to market those at profitable levels or, at the minimum, get a floor underneath them.
In general, producers are sitting in a great position, with a whole summer growing season ahead, but markets can and will change quickly just like we have seen in the past several weeks. Be sure to take steps to protect these price levels and have a profitable 2023.
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