Crop insurance is an integral part of risk management plans we put together for all our clients. Some farmers in irrigated areas, or in areas that seldom have weather-driven losses, have problems justifying the premium when they rarely collect on the insurance. However, being creative can make crop insurance a valuable risk management tool, even when a crop loss is unlikely.
Crop insurance can be used to protect gross dollars per acre in a marketing plan by allowing you to make forward sales. As you may recall, we key in on gross dollars per acre needed to make all payments, including paying operating, living and depreciation costs plus a $50/acre profit. In many areas, this is about $350-375/acre.
Unless you line everything up and have a farm sale, you'll grow a corn crop in 2002, 2003 and beyond. You may not know the exact acres, but you have a base of owned and rented land that allows you to estimate within 75% of the actual bushels you will produce.
Our clients have taken the opportunity to sell 2002 and 2003 corn on the Chicago Board of Trade. They'll sell 2004 corn futures when those contracts come on the Board soon.
Some buyers want to make commitments that far out, so why not take advantage of the sales opportunity? If the price meets your goals, you can guarantee the bushels of production with insurance.
Here's how you can structure a plan. A 24-year analysis of December corn futures shows that a contract high is put in shortly after it comes on the Board and is seldom exceeded. Often, December corn trades above $2.60. If you sell 75% of your actual production history with futures contracts, at or above $2.60 (we recommend selling 25% at three different time intervals), you can sell the last 25% of your crop at loan rate when you harvest and still meet your gross dollars per acre goal. (See table below.)
Over the last 24 years, there were only five years where the harvest price was higher than $2.60. Even with weather scares, those early highs are seldom taken out.
A backup plan would be to add calls or long futures to open the topside in those years, or just set tight and be satisfied with your price. The only years that wouldn't have worked are 1986 and 1987, when contract highs were $2.12 and $2.16.
Using this system, average sales for the 22 years when the December futures price hit $2.60 or better would have yielded a $2.76 Board price. The actual Board high averaged $3.10 for those years and the low $2.17. Our research shows there's a higher probability in certain months to make sales in the top 20% of the price range.
If you use 75% crop revenue coverage insurance, coupled with forward selling of your crop several years out, you can protect needed gross dollars per acre. Taking a marketing plan to your lender with bushels and price guaranteed to meet your gross dollars per acre looks much better when you're planning to expand.
Moe Russell is president of Russell Consulting Group, Panora, IA. Russell previously spent 26 years with Farm Credit Services as a division president. For more risk management tips, check his Web site (www.russellconsulting.net) or call toll-free 877-333-6135.