January 18, 2010
FAQ: I want to develop a better understanding of how to use crop revenue insurance in pre-harvest marketing. How do I start putting revenue insurance in my grain marketing strategy?
Answer: Provided by Steve Johnson, Iowa State University Extension farm management specialist.
I've been saying in meetings this winter that only about half of the farmers in the Corn Belt who buy crop revenue insurance use those products to sell bushels pre-harvest. When I say crop revenue insurance, I'm talking about revenue assurance (RA) and crop revenue coverage (CRC).
What's unique about these products is they guarantee annually the revenue (bushels times price). These products use the spring base price as the initial revenue guarantee. The spring base price is the average December corn futures price or the average November soybean futures price in the month of February.
Then when the spring base price is known, which is anytime between March 1 and when the fall harvest price is determined (the months of October for corn and November for beans) new-crop sales can be triggered.
The fall price reflects the average December corn futures or November soybean futures price. You need to have a comfort level for beginning the pre-harvest sales when the futures price is higher than the spring base price. That's because the price guarantee for crop insurance has already been established during the month of February.
Q: What marketing strategies does crop insurance work with best? Should farmers use it alongside futures and options or use it with the more traditional type of forward contacts—such as through an elevator or ethanol plant?
A: Use of crop revenue insurance compliments pre-harvest sales using forward contracts or hedge-to-arrive contracts after harvest. Both contracts commit delivery of the grain to a grain elevator, feedlot or processor. The forward contract locks in both the futures price and the basis. The hedge-to-arrive contract locks in only the futures price. The basis can be established prior to delivery.
The revenue portion of crop insurance guarantees the Actual Production History or APH on a farm, multiplied times the level of coverage times the spring base price. If the fall price determined by the average December corn futures or November soybean futures in the month of October (CRC corn and both RA and CRC soybeans) and the month of November (for RA corn) is higher than the spring price, the revenue guarantee adjusts to this higher price and a new revenue guarantee is calculated.
Q: Isn't it risky to use crop insurance in my marketing, should I have a crop failure? The guaranteed price from crop insurance wouldn't be enough to purchase grain at harvest to fulfill my contracts. Have you ever seen this situation arise before?
A: This is pretty much just an old wives tale. I'm not aware of a grain merchandiser who didn't work with a farmer to help buy the neighbor's bushels to cover a forward contract commitment.
Since crop revenue insurance products use futures prices rather than cash, it is rare that the actual cash price received would exceed their futures price guarantee established in spring or fall. A farmer should not commit to delivery on forward contracts or hedge-to-arrive contracts more than their guaranteed bushels (APH yield times the percent level of coverage). Thus, if you use the 80% level of coverage and an RA or CRC product, you should not commit to delivery more than 75% of your APH yields.
If you have specific questions or need details regarding USDA farm programs, contact your local USDA Farm Service Agency office. You can also get news and information about DCP, ACRE and other USDA programs at www.fsa.usda.gov.
Two Iowa State University Extension Web sites have farm program information and analysis. They are ISU's Ag Decision Maker site at www.extension.iastate.edu/agdm and ISU Extension Specialist Steve Johnson's site at www.extension.iastate.edu/polk/farmmanagement.htm.
And be sure to read the regular column "Frequently Asked Questions about the Farm Program" that appears in each issue of Wallaces Farmer magazine and at www.WallacesFarmer.com
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