Rethink Risk Management

A continued down market requires farmers to scrutinize crop insurance costs and grain marketing moves.

Byron and Hank Kelly say they do not count on crop insurance to reach breakeven when a disaster occurs, Image by Des Keller

There is a tough irony in that, at a time when most producers could stand to carry the maximum crop insurance coverage possible, many may be at a point where they can scarcely afford any of the additional expense.

“The reality is it does sometimes come down to cost,” says Chip Nellinger, founder and risk-management consultant with Morton, Illinois-based Blue Reef Agri-Marketing Inc. “The crop insurance policy that provides 75% coverage might be $20 per acre cheaper than the one with 85% coverage,” he says.

That $20 example may make all the difference for someone short on capital after several years of low commodity prices.

That said, Nellinger believes the beginning of sound risk management is to have substantial portions of your corn and soybean crops sold before harvest. He recommends about 50% of bean and corn crops be forward-contracted, especially if prices are at profitable levels.

Some go well beyond that. “We’ll generally have 75% of our corn crop forward-contracted prior to harvest,” says Byron Kelly, who farms 3,200 acres of cotton, corn and soybeans with his father, Hank (K and K Farms), near Tchula, Mississippi.

“We’ll sell in small increments, starting before planting, 10,000 to 20,000 bushels at a time during the season,” he says. The Kellys can store all of their corn for sale later if need be. They sell a significant portion of their soybeans ahead but do sometimes simply haul some beans to the elevator for sale at harvest.

WORTH THE COST? Crop insurance isn’t something the Kellys count on to even break even in the event of a disaster. “We can’t really justify the premium at coverage greater than 70%,” Byron Kelly says. “And, if conditions are bad enough to file for crop insurance with coverage at 70%, we’re in big trouble anyway. That coverage doesn’t even cover our expenses.”

This is in contrast to the highest production areas of the Midwest, where many farmers have gotten used to coverage at 85%, the highest level.

“If you have a fair amount of operating and land debt, then you are going to gravitate more toward a higher percentage, because you need to cover that revenue gap potential,”
Nellinger explains.

Whatever your circumstance, Nellinger says you have to have a plan, otherwise, you can end up in situations he’s heard about in recent months where farms still had 2017 crop in storage as the 2018 harvest approached. “People waited for a rally, but whatever price increase occurred wasn’t big enough to cause them to sell.”

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Crop insurance can help set the floor for your crop, which can allow a farmer to focus more clearly on capturing any price increases on the market, Nellinger says. At the end of September, soybeans had risen 20 cents the previous day.

“At that time, nearby beans were $8.20 with July 2019 futures north of $8.50,” Nellinger says. “So, if you get a 30-cent rally to get beans to $8.80, and your basis is 30 cents under, you can net out $8.50.”

In a wide swath of the Midwest, it’s not unusual for more than 80 or even 90% of producers who buy crop insurance to also include--for a premium--a harvest price option. This option, as part of Revenue Protection policies, allows buyers to use the projected market price when the insurance was purchased or the actual market price at harvest in figuring their guarantee, whichever is greater.

In 2017, Revenue Protection was used to insure more than 8 million acres, representing 88% of acres insured.

“Some critics of Revenue Protection want to eliminate the harvest price option,” says Art Barnaby, an ag economist at Kansas State University. Federal Crop Insurance premiums are subsidized by the government, and cost-cutters would like to whittle away those subsidies. In some proposed scenarios, the harvest price option would essentially be replaced by farmers purchasing a put derivative that would be used to offset the cost to the government while giving farmers a lesser version of harvest price protection.

NEW TRADE PAYMENTS. Particularly in the case of soybeans, operations now need to factor in government payments coming their way as a result of lost trade because of the recent tariff trade war with China and others. Soybean producers, for example, will receive $1.65 per bushel on 50% of their 2018 soybean production at harvest.

Depending on how successful, or unsuccessful, trade negotiations are this winter, farmers may receive an additional payment on the other half of their production--sometime in 2019. “At the moment, county [FSA] offices are uncertain of some things as to how this will actually work,” Nellinger says. “We don’t know when the checks will come and details surrounding that.” There are also subsidy payments available for corn, cotton, dairy products, pork, sorghum and wheat, although those are much smaller than those for soybeans. (See “Trade-Aid Payments” below.)

Trade negotiations will play a role in anyone’s risk-management plan for 2019. Kelly believes the administration’s actions are a way to seek the opening of markets for the long-term.

“Yeah, I understand why the trade stuff is happening right now,” Kelly says. “Something needs to be looked at in my opinion, and I think we know China hasn’t been playing fair.”

As for Nellinger, the advice he gives for 2019 is similar to the advice he has for any upcoming year: “You still need to be willing to sell rallies for the ’19 crop,” he says. “Don’t do anything out of your normal pattern, or plan but be ready to sell rallies when the prices are profitable.”

Trade-Aid Payments:

The legislation is officially known as the Trade Retaliation Mitigation Package, and the part about cash payments to farmers is the Market Facilitation Program (MFP). The estimated $4.7 billion in payments are compensation to farmers who have lost markets because of the ongoing trade and tariff war with China and other countries. Rest assured, though, the soybean trade battle with China is the 800-pound gorilla in this scenario.

The trade-aid payments are for growers of soybeans, sorghum, corn, wheat, cotton and dairy and hog producers. There is one guaranteed payment with the option for a second. The application period for the first payment started Sept. 4 through Jan. 15, 2019, with a second period that may occur in December. The second payment will depend on trade conditions at that time, as well as market prices for these commodities.

The first payments will be for 50% of a farmer’s production for 2018. The MFP rates by commodity are:

Cotton: $0.06 per pound

Corn: $0.01 per bushel

Dairy: $0.12 per cwt (payment based on the Margin Protection Program historical production figure)

Pork: $8 per head for 50% of the pigs owned asof Aug. 1, 2018

Wheat: $0.14 per bushel

Sorghum: $0.86 per bushel

Soybeans: $1.65 per bushel

The MFP will be determined using Farm Service Agency (FSA) production records that may include receipts, ledgers of income, income statements of deposit slips, register tapes, invoices for custom harvesting or production diaries that FSA county offices deem appropriate

Caps on the payments for any one producer will be $125,000 for dairy and hogs and a combined $125,000 for corn, cotton, sorghum, soybeans and wheat.

To use this program, producers must meet several conditions:

> have an ownership interest in the commodity and be actively engaged in farming

> have an average adjusted gross income (AGI) for tax years 2014, 2015 and 2016 of less than $900,000 per year

> comply with provisions of the Highly Erodible Land and Wetland Conservation regulations

> have a crop acreage report on file with FSA for the commodity for which one is requesting an MFP payment.

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