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Marketing decisions, crop insurance critical in bull market

Marketing decisions, crop insurance critical in bull market

The decisions grain crop producers make in marketing their 2011 crop and purchasing crop insurance could be extremely important in ensuring profits.

Spurred by factors such as a smaller-than-expected 2010 crop, a cheap U.S. dollar, shrinking global supplies, strong investor interest and high demand, commodity prices have strengthened.

The decisions grain crops producers make in marketing their 2011 crop and purchasing crop insurance could be extremely important in ensuring profits, said Cory Walters, agricultural economist with the University of Kentucky College of Agriculture.

While new crop grain prices are very favorable now, that does not necessarily mean they will be this good at harvest. Developing a proactive marketing plan now, Walters said, can help alleviate adverse price changes.

“With new crop corn prices so high, producers can protect against adverse market shifts by locking in today’s prices with small sales over time. Keeping in mind that you hope these sales are the worst you make all year, while planning that they may be some of the best,” he said.

Crop insurance is also an important consideration for producers this year, especially if they forward contract some of their crop.

Growers can choose from many different insurance options and coverage levels. Premium costs will depend on a producer's selected coverage level, insurance type (yield vs. revenue) and insured unit type (optional, basic, enterprise or whole farm) with higher coverage levels and optional units equaling more expensive premiums.

“There’s no single correct insurance policy,” Walters said. “But producers may want to look at the trade-off premium costs compared to potential payoff in going to a higher coverage level. Revenue protection is recommended because of the price protection and switching to enterprise units significantly reduces premium costs.”

Revenue-based crop insurance does not just protect against declines in yields, it also protects against changes in price. For corn, the Risk Management Agency will determine the base price for 2011 crop insurance during February by calculating the monthly average of December corn futures, which is now around $6 a bushel. If this price holds, producers will have a high price guarantee, meaning that for every 5 percent change in coverage level the price floor would change by 30 cents per bushel, Walters said.

For example, with average yields, a grower with an 85 percent coverage level will receive a crop insurance payment if the harvest price (October average of December corn futures) dropped below $5.10. For a producer with 80 percent coverage, prices would have to fall below $4.80 before they would be eligible for a payment.

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