What if I don't grow a crop is the key reason crop farmers balk on forward pricing before harvest. Corn prices rising into the 2006 harvest and shortly after the 2007 harvest further discourage forward pricing.
Ethanol plants have little onsite storage. They tend to book corn needs way out in front. The best time to sell to an ethanol plant may be a long time before you have the crop.
Farmers who are reluctant to forward price because they may not have a crop may miss out on the best ethanol plant bids.
Deere offers protection. John Deere Risk Protection is offering the industry’s first-ever Ethanol Policy. It provides coverage to corn producers who have contracts to deliver corn to ethanol plants.
"The ethanol coverage works with the Multiple Peril Crop Insurance revenue products Crop Revenue Coverage and Revenue Assurance with Harvest Price Option," explains Dennis Daggett, John Deere Credit - John Deere Risk Protection, Senior Vice-President. "If farmers want the ethanol policy, they must have an active MPCI, CRC or RA-HPO policy with John Deere Risk Protection."
This new policy insures yield shortfalls below contracted volumes in the event the price to replace the corn rises above the federal crop insurance coverage.
An example. Suppose a farmer has 1,600 acres of corn. He buys a combination of CRC yield coverages that result in an aggregate yield guarantee of 171,650 bushels. He contracts those 171,650 bushels with an ethanol plant for $5.10.
Next suppose bad weather strikes. The farmer only harvests 128,000 bushels. He's 43,650 bushels short of enough corn to fill his contract.
Further suppose the fall MPCI price is $5.45. The price to replace the 43,650 bushels the producer is short is $5.85. The replacement price is 40 cents higher than the MPCI harvest price. The ethanol contract would pay the farmer $17,460 (43,650 bu. X $0.40).
The indemnity payment rate per bushel is calculated as the replacement price minus the higher of:
* The MPCI spring price
* The MPCI fall price
* The ethanol contract price.
Alternatively suppose the replacement bushel price is less than all three of those other prices, in spite of the producer's crop shortfall, the indemnity payment would be zero.
“We're excited to introduce this new Ethanol Policy, a crop insurance industry first," says Don Preusser, president of JDRP. "We will do our best to continue providing solutions to producers who are supporting renewable energy initiatives.”
The new Ethanol Policy provides additional protection for those bushels of corn contracted for the purpose of ethanol production in the event a producer has a harvest shortfall and the price to replace those bushels exceeds the producer’s underlying insurance coverage.
Late purchase deadline. Growers can buy the ethanol replacement coverage on MPCI policies they have with JDRP up until the acreage reporting date. That deadline varies by state. But it falls between June 30 and July 15 in many locations.
“The new policy is a simple tool that addresses an industry-changing sector of agriculture," says Travis Keister of Minn-Iowa Crop Insurance Services in Blue Earth, Minn.
Ethanol plant to find replacement bushels. As another benefit to producers, the policy requires that the facility offering the ethanol contract to procure replacement bushels. Growers will not need to find the replacement grain themselves.
Ron Kibble, a John Deere dealer, farmer and strong supporter of the ethanol industry says, “This policy is a win-win for growers and ethanol plants alike. JDRP’s new Ethanol Policy provides more security for everyone involved.”
JDRP intends to make the Ethanol Policy available in Iowa, Illinois, Indiana, Kansas, Minnesota, Missouri, Nebraska, Ohio, South Dakota and Wisconsin. All states are subject to approval. For more information, contact your local John Deere Crop Insurance Agent.