It’s crop insurance decision time again—are you prepared? It’s another year where the market is expected to provide low prices for corn and soybeans, which means you’ve been scrutinizing every expense and input cost for your operation as you prepare for your 2018 crop. Likely, your crop insurance decision has been no different. When it comes to insurance coverage, it might be tempting to drop your coverage level to save on your premium, but is this the best risk management decision for your operation? The GrainBridge Matrix can help make this decision easier by illustrating what crop insurance decision is best for your operation.
The reason crop insurance is purchased is to help limit risk exposure in the case of unforeseen circumstances that cause a change in yield and/or prices. However, a benefit many overlook when purchasing a higher coverage level is the confidence and ability to forward market your expected production up to that insurance level. Without insurance, or high enough coverage, you’re forced to be a conservative marketer knowing there’s always a chance of a crop failure and you don’t want to be stuck with contracts you can’t fulfill. In the six years from 2012 to 2017, 2012 was the only year where prices at harvest were higher than the spring price. When you consider this—isn’t it better to have the ability to market a majority of your production during the time of year with historically higher prices? While purchasing insurance coverage is a good first step in managing risk, be sure you’re taking advantage of what you’re buying by executing a marketing plan in conjunction with your crop insurance coverage.
Take a look at the scenarios below to see the impact that both the insurance coverage level you select and the level to which you forward market against that coverage can have on your bottom line. Since Revenue Protection (RP) crop insurance is the program used on over 90% of the crop acres insured in the corn belt, it’s the insurance program used in the example below.
You are farming 900 acres with an APH of 170 bushels/acre. You’ve decided to insure using RP, but are trying to determine if 60% coverage at $8/acre is worth the savings compared to 80% coverage at $27/acre. Assume the spring price (February average) for crop insurance is $3.90 in 2018.
Since insurance is purchased to protect against the worst cases, let’s look at a potential scenario where the market falls $0.80 from February to harvest and your crop only produces 110 bushels/acre. See Figures 1-4 and Table 1 below.
Scenario 1: Using Revenue Protection (RP) with 60% coverage, projected spring price of $3.90 and forward marketing 10% of production at $3.70 cash. Premium for crop insurance = $8/acre. Est. Yield= 170. Breakeven= $3.2725/bu
Scenario 2: Using Revenue Protection (RP) with 60% coverage, projected spring price of $3.90 and forward marketing 60% of production at $3.70 cash. Premium for crop insurance = $8/acre. Est. Yield= 170. Breakeven= $3.2725/bu
Scenario 3: Using Revenue Protection (RP) with 80% coverage, projected spring price of $3.90 and forward marketing 10% of production at $3.70 cash. Premium for crop insurance = $27/acre. Est. Yield= 170. Breakeven= $3.3843/bu
Scenario 4: Using Revenue Protection (RP) with 80% coverage, projected spring price of $3.90 and forward marketing 80% of production at $3.70 cash. Premium for crop insurance = $27/acre. Est. Yield= 170. Breakeven= $3.3843/bu
Table 1: RP Coverage Scenarios
In summary, whether investing in 60% coverage or 80% coverage, it was best to have forward marketed up to the coverage level. In the 60% coverage examples, you lost $65.24/acre less if you forward marketed 60% rather than forward selling only 10% of your expected crop.
While increasing your coverage to 80% and doing minimal forward selling was still better than the 60% coverage due to the higher indemnity payment received, the best case scenario by far, was to purchase the 80% coverage for a $27/acre premium and forward marketing to the coverage level. Taking advantage of the insurance coverage and limiting risk exposure allowed for a profit of $37.45/acre, where all the other cases resulted in a loss.
With historical data pointing to lower harvest prices than spring prices in 5 out of the last 6 years, I’d argue that spending the money for a higher insurance coverage level is money well spent.
It’s easy to run these scenarios in your GrainBridge account using the Matrix! Simply change a few variables to see how changes in your crop insurance coverage and forward marketed contracts will impact your bottom line.
RUN SCENARIOS ON MY OPERATION
Matrix Report in GrainBridge:
Contact your GrainBridge provider or firstname.lastname@example.org.
By: Britany Seda, GrainBridge Account Manager
Which of your farms are the most profitable? I can venture to guess you know exactly which acres are your highest yielding. High yields are exciting to see on the combine monitor, but those high yielding fields may not be the ones providing the most to your bottom line. Each field rarely requires the same prescription for inputs, irrigation, dirt work, farm practices, etc. If you aren’t tracking your expenses by individual farm, you may be missing valuable information to help you make decisions on the fields you’re farming.
If you rent ground, understanding your profitability by field is especially important this time of year as rent negotiations take place. For the last two years, some farmers have continued to rent at high levels in hopes the market would turn around and they could make it work. Rents have failed to lower in relation to the market in recent years, which has caught many in a hard place—either continue to rent at high levels and potentially lose money or refuse to pay the high rent and lose the ground to someone else who is willing to pay, leaving you without those acres if the market rallies. As banks scrutinize operations and you start feeling the impact of a couple of years of expensive ground and low prices, it’s time to determine exactly what you can pay for rent and still make a profit in the current market.
Having hard numbers to provide your landlord on projected expenses and projected revenue on specific fields may be exactly what you need to renegotiate rent to a level you’re comfortable with—and able to be profitable at. Additionally, you should feel confident in how different market prices and yields will affect your bottom line. But how do you get this level of financial clarity? That’s where GrainBridge comes in—which is exactly what helped these producers go into their lease negotiation armed with the profitability information to make the right decision for their business.
Click the following link to read the article: http://www.cornandsoybeandigest.com/precision-ag/improve-financial-clarity-farm.
If you’re overwhelmed thinking about tracking your farm by individual field instead of by commodity, don’t be! GrainBridge makes it easy to set up your 2018 operation by farm, even if you previously had your 2017 profiles set up more broadly by commodity. The ‘Copy Expenses’ function is where you are going to save the most time, either setting up your operation from scratch or using it to bring in expenses from your 2017 profiles.
View this article for instructions on how to set up your GrainBridge account by individual fields or contact your local GrainBridge provider or email@example.com.
The “Carry-Basis” feature within the GrainBridge cash section helps visualize what the potential value of carrying grain out to the summer months is worth.
For a quick visual in GrainBridge, select “add basis” levels for future delivery months to illustrate the bottom line value per bushel. The carry from DEC 17 futures to SEPT 18 futures of $0.33 today plus a $0.25 potential gain in basis appreciation provides a total value of $0.58 per bushel. A $0.58 gain against a harvest price of $3.00 today is a return of 20%.
Take some time to run your own scenarios and understand how you might benefit from carrying a percentage of your grain into the spring and summer months. In the current Ag economy, every penny helps. This could be your way of making a profit in a tight margin year!
Contact your local GrainBridge provider or firstname.lastname@example.org.
Will we get the acres planted?
Will we plant more corn acres or fewer corn acres?
Will Mother Nature help or hurt this crop during pollination?
No one knows the answers to these questions, but to help relieve the anxiety, take advantage of the GrainBridge “WHAT-IF MATRIX” to understand how potential price swings might affect the profitability of your operation. Preparing for the “unknowns” will give you confidence in making the right decision when executing a plan!
Connect the columns between the futures price and yield to view the net value per acre for your entire operation including, sold/unsold grain, gain/loss from futures, options and any potential indemnity payment (expressed with an umbrella). At today’s price of $3.96 and a current yield estimate of 180.45 bushels, there is a $2.75 per acre gain above my target goal. Creating scenario’s for your operation is as simple as selecting:
- the commodity,
- price & yield increments,
- your crop insurance program,
- “Run Report”
Take the stress and anxiety out of the potential “unknowns” and run your own scenarios to help understand your potential risk exposure.
For questions about the “What if Matrix” tool, contact your local GrainBridge provider or email@example.com.