Beef up your grain plan

Do you use crop revenue insurance in your grain marketing plan? “You should,” states Steve Johnson, an Iowa State University Extension farm management specialist. At meetings this winter, he has been explaining what you need to understand to get started. He encourages farmers to develop a better understanding of how to work crop revenue insurance products into their preharvest grain marketing strategy. Johnson estimates only about half of Iowa farmers who buy crop revenue insurance use these products to sell grain preharvest. He’s referring to revenue assurance, or RA, and crop revenue coverage, or CRC.

What’s unique about these products is they use your farm’s actual production history, or APH, to determine annually the revenue guarantee (bushels times crop price). These revenue insurance products use the spring base price as the initial price guarantee. The spring base price is the average December corn futures price or the average November soybean futures price in February.

Key Points

• You can use crop revenue insurance as part of your grain marketing plan.

• RA and CRC products guarantee annually the revenue, or bushels, times price.

• Pay attention to how many bushels you commit to delivery for preharvest sales.

Develop a comfort level

Once the spring base price is known, about March 1, and when the fall harvest price is determined (October or November for corn, and October for beans), new-crop sales can be triggered. When the futures price exceeds the spring base price, you should have a comfort level in making preharvest sales.

Some farmers reject doing this because they might not produce enough bushels. But if they’re using revenue products, farmers are guaranteed their APH bushels times the level of coverage they elect multiplied by the spring base price, says Johnson. Should fall prices be higher than the spring base price, they get to use the higher price to calculate their new revenue guarantee. If they have a shortfall of bushels contracted for delivery, they’ll receive an indemnity check that reflects the higher futures price and be able to buy bushels to replace those they’ve contracted ahead.

The use of crop revenue insurance complements preharvest sales using forward contracts or hedge-to-arrive for harvest or postharvest delivery.

But isn’t this too risky?

Isn’t it risky to use crop insurance in a marketing plan? What if you have a crop failure? The guaranteed price from crop insurance wouldn’t be enough to purchase grain at harvest to fulfill your contracts — would it?

“This is pretty much just an old wives’ tale,” says Johnson. “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 the spring or fall. A farmer should not commit bushels 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,” he advises.

Aggressive preharvest marketing works best with an optional unit election as part of crop insurance. This is because each farm can be insured individually. Additional hail coverage might be another consideration, especially if you elect to use enterprise units.

Source: Iowa State University

This article published in the February, 2010 edition of WALLACES FARMER.

All rights reserved. Copyright Farm Progress Cos. 2010.