Revenue insurance can help support use of grain marketing tools
Marketing tools and crop insurance are both useful to help farmers manage risk. Marketing tools help to secure favorable prices for farm production. Crop insurance helps cover production losses from a number of natural causes, including drought, excessive moisture, insects and disease. Revenue-based coverage helps protect against natural causes and market volatility. The inclusion of market protection is often why it gets confused as a marketing tool.
There are several marketing tools that help secure a cash price for your grain production. The cash price is based on commodity futures prices and basis cost on a date of sale. Some contracts allow you to lock in basis, other contracts lock in futures prices. Marketing tools will lock in both and set a cash price while revenue insurance does not affect any aspect of securing a cash price for your production.
In truth, revenue insurance offers support that helps ensure that prices set by marketing tools are actually received. This support is provided through a pre-set election called a “harvest price option.” Revenue policies use an initial base price to calculate a revenue coverage guarantee. The base price for corn and soybeans is set in February. The harvest price option is used when prices at harvest are higher than an initial base price. With a higher harvest price, both your revenue coverage guarantee and your harvested production value are increased. This insurance feature offers protection when you use marketing tools.
Consider an example of a 600-acre soybean farm with an actual production history (APH) of 40 bushels per acre. The farm manager decides to forward contract 18,000 bushels. The contract bushels equal 75% of their insurance coverage level (40 bushels x 75% x 600 acres). However, August turns dry and harvested yields end up being poor. Because of poor production, soybean prices rise significantly past the initial base price. The result is too few bushels to deliver on their forward contracts.
The revenue protection policy provides coverage in this scenario. The final revenue guarantee is re-calculated using a harvest price. The insurance payment then helps offset buying higher priced grain to fill the contracts. Table 1 illustrates this scenario further.
Table 1. Revenue protection with low yields and high prices
Marketed 18,000 bushels at $13.00 per bushel
Produce 13,200 bushels and have to buy 4,800 bushels at $14.40 per bushel
Crop Insurance payment based on futures prices at $14.73 per bushel
Gross Return (after purchasing 4,800 bushels)
Note: Gross Return would be lower with deduction of an insurance premium, which is not shown in this scenario.
It’s important to remember that crop insurance isn’t purchased to make money but to help manage potential risk. In times of higher prices, marketing tools can help make money by locking in favorable prices. Revenue policies offset risk concerns of volatile market prices and poor production up to your coverage level. Managing production risk helps provide confidence your marketing strategies can be successful.
The deadline to select or make changes to crop insurance is March 15. Visit with your insurance agent today!
For more information on crop insurance options, check out the Bulletin E-3415 Introduction to Crop Insurance for Field Crops.
Bulletin E-3415 Introduction to Crop Insurance for Field Crops
For recommendations on marketing strategies, check out the Grain marketing strategies to consider for 2023.