Are you using the Put you are paying for?

 

Eric Erickson

Eric Erickson

Do you purchase Revenue Protection (RP) crop insurance?  If you do, you have essentially purchased a Put option for your grain prices.  Are you utilizing this within your marketing plan? All too often producers view crop insurance as a necessary evil to protect in case of a production loss and don’t use it in their marketing plan.  Let’s take a minute to run through how crop insurance can help you market your grain pre-harvest with peace of mind.

RP crop insurance uses the spring base price as an initial guarantee. The spring base price is the average December corn futures price or the average November soybean futures price in the month of February.  For 2014, the spring price has been established at $4.62 for corn, and $11.36 for beans. There are a few insurance companies that use a modified averaging period (at an extra cost) to try to enhance the base price.

Unless you have elected for the harvest price exclusion (which you must request when signing up) you will get the higher price of either the spring base price or the harvest price to calculate your new revenue guarantee. The harvest price is established the same way as the spring price but using the month of October to average instead of February.

Once the spring base price is established, there should be a comfort level in making pre-harvest sales when futures exceed the spring base price. Have you said: What if I don’t grow the crop?  If you are using RP insurance you are guaranteed your APH (actual production history) bushels times the level of coverage you elected times the spring base price. The coverage options range between 50-85%.  If you have a shortfall, you will receive an indemnity check to be able to purchase bushels to replace those you have forward contracted, or to cover the cost to cancel your forward contract.

With all this said, no one knows better than you that break-even cost of production (including cost of living for your family) needs to be figured into your “minimum” marketing price.  However, once prices exceed both cost of production and crop insurance base price you should have peace of mind marketing up to your coverage percentage knowing you’re continuing the legacy you work so hard to build and hopefully pass on to your children and grandchildren.

Please feel free to call your United Farmers Cooperative grain originator to discuss how you can incorporate your crop insurance program into your grain marketing plan.