FAQ: How can I use crop insurance as part of my pre-harvest marketing strategy?
Answer: Provided by Steve Johnson, Iowa State University Extension farm management specialist.
Do you use crop revenue insurance in your grain marketing plan? You should. At farmer meetings this winter, we've explained what you need to understand to get started. We encourage farmers to develop a better understanding of how to integrate crop revenue insurance products along with their pre-harvest grain marketing strategies.
Only about half of Iowa farmers who buy crop revenue insurance use these products to sell more pre-harvest bushels. 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 use your farm's Actual Production History (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 the month of February.
Develop a comfort level in making pre-harvest sales
Once the spring base price is known, about March 1, and when the fall harvest price is determined (the months of October or November for corn and October for soybeans, new-crop grain sales can be triggered. Whenever the futures price exceeds this spring base price, you should have a comfort level in making pre-harvest sales.
Some producers reject the thought of making pre-harvest grain sales because they are afraid they might not produce enough bushels. However, if they're using crop revenue insurance products, they're guaranteed their APH bushels times the level of coverage they elect times the spring base price.
Should fall prices be higher than the spring base price, the producer gets to use the higher price to calculate his or her new revenue guarantee. If they have a shortfall of bushels contracted for delivery, the producer will receive an indemnity check that reflects the higher futures price and be able to purchase bushels to replace those they've contracted ahead.
What pre-harvest crop marketing strategies should you use?
With which grain marketing strategies does crop insurance work best? Should farmers use crop insurance alongside futures and options or use it with the more traditional type of contracts that commit delivery of the grain offered by most elevators and ethanol plants?
The use of crop revenue insurance is a method that compliments pre-harvest grain sales using forward contracts or hedge-to-arrive contracts for harvest or post-harvest delivery. Both contracts commit delivery of the grain to an 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.
Regardless of which contract is used, they both require the commitment to deliver bushels. Futures and options strategies can be added, and don't require delivery of bushels but can protect futures price.
But isn't this too risky—pricing your crop before you harvest it?
Farmers often ask me, "Isn't it risky to use crop insurance in my grain marketing plan? What if I have a crop failure? The guaranteed price from crop insurance wouldn't be enough to purchase grain at harvest to fulfill my contracts."
They ask me if I've ever seen this situation arise before? This is pretty much just an old wives tale. I'm not aware of a grain merchandiser who didn't work with a farmer in this situation--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.
Summing up: keep these key points in mind as you put together a plan
- You can use crop revenue insurance as part of your grain marketing plan.
- RA and CRC products guarantee annually the revenue, or bushels at the farm level time price.
- Pay attention to how many bushels you commit to delivery for pre-harvest grain sales.
- Aggressive pre-harvest marketing works best with the optional unit election as a 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 for your crop insurance coverage.
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