Insure Your Revenue Guarantee

By Marcia Zarley Taylor
DTN Executive Editor

Most Midwest crop producers fixate on February futures prices. That's the month when market averages set the bulk of federal crop insurance guarantees for the coming growing season. But Luke Smith, a partner in his family's Rochester, Ind., grain operation and commercial elevator, thinks outside that February timeframe. The past two years he's bought private insurance riders called Price Flex up to seven months ahead of the standard February pricing period, just to "insure" his insurance covers his production costs. Early pricing gave him the courage to hedge 100% of his 2014 corn crop -- before bear markets sent prices spiraling to four-year lows in late August.

"We aren't at a time in agriculture where you can pick one month's price and say that's as good as we'll get for the year," the 27-year-old says. While he's too young to recall $2.50 a bushel corn, his father, grandfather and uncle all experienced those cycles. So Smith, a licensed commodity broker, markets conservatively and habitually sets price floors through crop insurance and options strategies.

Smith's Price Flex rider from Hudson Crop Insurance Services offers additional intervals outside the traditional Risk Management Agency price discovery month for revenue crop policies, including Revenue Protection (RP) and area-risk plans.

Except for hail insurance, no new product has had a more successful launch than these flexible pricing riders, says Dan Gasser, president of Hudson Crop Insurance Services. NAU pioneered the concept in 2012, but Hudson expanded the plan starting in 2013. Now additional private insurance competitors are offering customers the chance to price outside February this season.

"It's changed the whole complexion of crop insurance," Gasser says. "A few years ago, who'd have thought we could start setting price guarantees in July 2014 for the 2015 crop?"

Falling prices are prompting growers to consider ways to buttress their 2015 RMA price guarantee.

Most insurance providers are offering some kind of multiple price discovery periods this year, says Jason Alexander, a vice president for crop insurance for Louisville-based Farm Credit Mid-America. "Without a doubt, we're highly encouraging our customers to consider that alternative," he adds. "Make sure you're getting a full explanation and look at more than one company's offering. You might still have an opportunity to lock in another 20-cent- to-40-cent higher price on your spring-planting guarantee for corn."

For the 2014 season, Smith bought a Price Flex rider in July 2013 that insured corn at $5.24/bushel -- versus RMA's $4.62/bushel planting price set March 1, 2014. At the time, that rider cost Smith a mere 11 cents/bushel, comparable to what he'd have spent on a futures option at the same level.

In effect, that move bought a typical 1,000-acre farmer with a 140-bushel APH about $90,000 of additional revenue protection, Gasser notes. So even with potential for an above-average 2014 yield, markets have plunged so much since spring there's a good chance growers such as the Smiths could trigger a claim this year.

"The great thing is you don't have to pay for Price Flex that day, you pay at harvest, so it's like 1-1/2 years of free coverage," Smith says.

For the 2015 season, Smith locked his crop insurance corn price at a minimum of $4.21 and soybeans at $11.00 during the month of July 2014. At the time, he sensed markets were turning bearish. "Many farmers have a $4 breakeven on corn, so if you could prevent a potential disaster, why wouldn't you do it?" Smith says. "Why wouldn't you spend a little money to guarantee yourself a margin?"

With a floor set at $4.21 -- and the potential to substitute a higher price if February averages are better -- Smith sees no reason to buy options lower than that. However, he may sell a put option where he believes the trigger price will start paying or he could lift some of his hedges. Profits from those moves help pay some of the insurance premium.

Smith Farms is actually a recent convert to insurance. The family irrigates about 60% of its acres, so Luke admits they made the common mistake of thinking crop insurance would never pay. When crop insurance's corn price guarantees jumped above $5 in recent years, the irrigators changed their mind.

"Since 2010, crop insurance has really been more about revenue coverage than yield," he says. "We will always grow at least 85% of our APH on 200-bushel irrigated corn," so yield alone won't trigger claims. But Revenue Protection policies offer coverage such as prevented planting. And given the volatility in prices, it's not unusual to see a 15% or greater swing between spring and harvest prices, which puts his policy in the money.

Prices have dipped since Smith locked in his 2015 production, but in early September there was still opportunity to capture $10.75 soybeans and $4 corn with Price Flex, says Cameron Silveus, Smith's Warsaw, Ind., crop insurance agent. An Iowa farmer with a 195-bushel APH and an 85% RP policy spent 10 cents per APH bushel to guarantee $4 corn on Sept. 5. That's equivalent to a strike price of $3.60 on a put, he says.

"Four or five months from now, that might sound like a pretty good price," Silveus adds.

Marcia Taylor can be reached at marcia.taylor@dtn.com

Follow Marcia Taylor on Twitter @MarciaZTaylor

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