February 28, 2023
Let’s look at some simple math for answers.
Let’s say we get through Feb. 28 and the spring crop insurance price is $6 per bu.; we take 85% RP coverage, and we have an APH of 200 bushel corn. This gives us a revenue guarantee of $1,020 ($6.00 x 85% x 200).
A lot of people will claim that they have a floor of $6, but we must remember to take 85% of that to calculate our actual floor. If we take 85% of $6.00, we get an actual price floor of $5.10 per bu.
Now, what happens if we raise a crop that comes in higher than the farm APH? What happens to our price floor? It continues lower.
If we are guaranteed a revenue of $1,020 and we raise 220-bushel corn, just 10% higher than our APH, where does that put our “price floor”?
$1,020 divided by 220 is $4.63.
Now that is a price floor that is way lower than the $6 spring price -- $1.37 to be exact. What happens if sometime during the months March-September futures rally $1.50 higher on drought concerns but then fall back to $6 when we catch rains? Shouldn’t that price floor move higher with the market?
With RP crop insurance in this example, your floor is going to stay at $5.10 on your APH, or $4.63 on a 10% higher yield.
Puts give us the opportunity to lock in higher price floors on projected production and to manage them throughout the growing season, without locking in physical sales. Recently we could buy a December 2023 $5.60 put for 30 cents; this would give a price floor of $5.30. We could lock that price floor in on our APH, or on that 10% higher yield we are expecting to produce.
What happens if we see that same $1.50 rally during the growing season? We would be able to manage puts to a higher level. Maybe we could pay another 30 cents and move our puts up from $5.60 to $6.80. That would give us a price floor of $6.20 ($6.80-.30-.30=$6.20). If we caught rains and the market fell back down to $6.00, we would still have a floor of $6.20, 20 cents HIGHER than the market.
These examples are not to say crop insurance isn’t needed. Obviously if a drought hits and our corn burns up, we are going to be very happy to have crop insurance. These examples are just to show that RP crop insurance does not replace the need for marketing tools such as puts. They are an invaluable part of our farming operations and are definitely not one of the areas we should be looking to cut costs.
Keske is an ag risk management advisor with Advance Trading, Inc. Contact him at [email protected]
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