george vandevorde

crop insurance consultant

GrainTracker Marketing

I have been getting a lot of phone calls from my crop insurance customers lately. The weather has gotten hot and the grain market has gotten hotter. Many are concerned with how their crop insurance will work if this dry spell turns into a crop failure.

The majority of my customers have some type of Revenue Protection (RP) policy. The RP policy is designed to pay for a loss of crop regardless of price with a 200% price limitation. We established the price of corn and soybeans by taking the average daily close of December corn and November soybeans during the month of February. The established price of corn for 2012 is at $5.68 and $12.55 on soybeans. The harvest price is determined using the average daily close during the month of October for December corn and November soybeans. . The maximum price a RP policy will pay on corn is $11.63 per bushel and $25.10 on soybeans. Could we exceed these numbers? I would suggest that historically it has never happened. But you can't get me to say we will or won't. I'm just stating the facts.

So what happens if we end up in October with $9.00 corn and a 100 bushel yield? Here is an example of one of my customers who has a trend adjusted 85% policy. His trend adjusted yield is 200 bushels per acre and has a 170 bushel guaranty. His initial revenue guaranty is $965.80 ($5.68 x 170). If we have a $9.00 fall harvest price, his guaranty goes to $1530.00 ($9.00 x 170). If he harvests 100 bushels per acre it is worth $900 per acre and he receives an indemnity of $630 per acre ($1530-$900). Some of my customers use their RP policy as a marketing tool to allow them to buy back bushels they have sold if they don't produce them. It is important to make sure you do not market more than your bushel guaranty when forward pricing if you want the insurance to mitigate any production loss when the price is higher in the fall. I also think it is very important to know what to do if you cannot deliver bushels to fill your contract if you run short on yield.

If you are a cash marketer you need to ask the elevator you are selling to if you have a poor crop and can't deliver on your contract will you be allowed to buy out of your contract in October. If the elevator says no or wants you to roll the contract into next year I would advise you to look for someone else to market your grain to. I had a customer back in 2003 that had a 50 bushel proven yield on his soybeans. He took out an 80% revenue policy with a 40 bushel guaranty. That year soybeans established their price at $5.26 per bushel. He sold his bushel guaranty at $5.00 per bushel. That year we had aphids and his actual yield was 20 bushels per acre. He called me in late September concerned with how things were going to play out and what he should do. I told him to call the elevator he sold to and buy back the 20 bushel shortfall immediately, because in October he would be compensated for those short bushels based on the average daily close of November soybeans.

Here is how it all played out. He didn't ask the elevator initially when he sold beans about buying back short bushels and it took him a couple of days to get them bought back. He was allowed to buy beans when someone was selling cash beans at the elevator. He paid $6.80 per bushel on the 20 bushel shortfall. As we went through October the average daily close on November beans was $7.32, which more than offset the buyback at $6.80. He actually gained on the buyback, netting out another 52 cents a bushel. The important thing is that he didn't wait to buy back those short bushels. If he had waited until January or February he would have paid substantially more than $6.80 per bushel for those beans and still only received a check for $7.32 per bushel on the shortfall.

I have other customers who use futures to hedge November beans and December corn. If they are short bushels they basically close the short position and are compensated with crop insurance based on the average daily close during the month of October. I think it is important to have an understanding banker, commodity broker and crop insurance agent when you are using this strategy. Don't be afraid to have them talk to each other. You may be able to avoid some aggravation later on if margin calls start kicking in.

If you lack confidence in any one of the three you may want to consider replacing them. George Vande Vorde, Vice President BankIowa Crop Insurance P.O. Box 120 Lamont, Iowa 50650 Office: 563-924-2241 Cell: 319-440-8681 george.vandevorde@bankiowa.com

BankIowa Crop Insurance is a department of BankIowa. This agency is an equal opportunity employer The views of the author are his opinions, examples may be hypothetical in nature. You are encouraged to seek advice from your own advisors regarding the impact on your own situation.