terry sweitzer

crop insurance consultant

GrainTracker Marketing

The drought has many farmers anxious. Yield and price (both of unsold and sold bushels) are at the forefront of many minds.  Listed below are some points to consider and actions to take to alleviate some of the stress that can be associated with crop years such as this is our goal.

First, familiarize yourself with what crop insurance product and coverage level you have. Once knowledgeable with the policy basics, you can begin addressing how that policy works in the current situation and how to then adapt your marketing plan.   For an example, we will assume we have for our corn crop:

  • 1. Purchased 80 %RP policy with the harvest price option.
  • 2. Our APH is 160 and we chose to have it trend adjusted (TA) and that, for our example comes, out to be 165. 
  • 3. Our cost of production per acre is $790 an acre.
  • 4. We have marketed 40% of our expected production equating to 66 bushels an acre at an average cash price of $5.35.
  • 5. Our coverage also allows us to safely sell up to 132 bushels of corn per acre.
  • We do want to make sure that we are aware of the buyback policies/penalties of any place that we have grain marketed.  Being prepared and knowledgeable ahead of time is always a plus.

The 66 bushels we sold at $5.35 were profitable and made good business sense as our expected break-even was at $4.94 a bu.   However, now that our yield may be lower our break evens are going up.  Since, our policy says that we have a bushel floor at 132, this is the yield we will use to determine the new break even. 

This gives a breakeven of $5.99 ($790/132). Since we have 66 bushels sold below our new break even, the remainder needs to be sold at a higher level in order for us come out profitable.  In this case, we would need to average at least $6.60 on the remaining 66 bushes we are able to sell to bring us to the 132 bushel crop insurance guarantee.

With the market rallying above $7, we could make a cash sale and cover our new break even. If however, we are fearful that we may eventually be buying some of our 66 previously contracted bushels back, it may be hard for us to pull the trigger on a new cash sale up here.  If that is the case, we should place a floor (buy puts) on the board to protect the current price against a decline.

This brings up another issue. When and if to buy back contracts. It is my recommendation that now is not the time to do so.  Now, we could be buying back at a high price and if the price falls:

  • 1. Have the bushels and end up selling them lower than what we paid for the buyback.
  • 2. Not have the bushels but end up with a lower fall price when the indemnity check is determined.  This will give us the money to buy back contracts if we needed.

These are some of the steps you should consider for your farm operation. Now is the time for you to be determining where your “new” break even is and preparing to take action in your hedge account to protect prices.  If you do not have a hedge account established with someone you are comfortable with, now is the time to get one open.  When this market turns, and at some point it will, it will likely drop as violently as it went up.  Be in a position to make sure that if it does you are coming through this year OK by making informed business decisions based on a plan…not emotions!

Terry Sweitzer
Integrity Ag