Kub's Den

One week remains until March 15, the annual deadline for agricultural producers to sign up for "safety net" programs from USDA. This is true for both the Agriculture Risk Coverage (ARC) and Price Loss Coverage (PLC) programs administered by the Farm Service Agency (FSA), and it's also the sales closing date for buying federal crop insurance implemented by the Risk Management Agency (RMA), at least for most spring-planted crops in most of the major Corn Belt states.

Now that we've got most of the three-letter acronyms out of the way, let's consider how this relates to the markets and to marketing decisions.

Crop insurance should be considered the most important first step in any annual grain-marketing plan. I suspect most crop growers in most regions of the United States already believe this and have either already signed up for this year's contracts or have their appointments pending with their favorite local crop insurance agent. But, if not, here's a refresher of why crop insurance is worth it -- even if it may initially add $15 to $20 per acre to your overall cost of production.

The revenue protection products are directly comparable to a classic financial hedge product -- a put option, which gives its purchaser the right but not the obligation to sell an asset at an agreed-upon price by an agreed-upon date. For example, anyone with a brokerage account could use the Chicago Board of Trade's corn options market to purchase a put option based on the December 2023 corn futures contract, with an at-the-money $5.70 strike price, which will expire on Nov. 24, 2023, and today will cost $0.42 per bushel. To hedge 95% of the value of one acre's expected 2023 production (assuming it would yield about 200 bushels per acre), these basic put options to cover the downside risk of the corn market falling between now and harvest would cost a producer $84 per acre.

Meanwhile, protecting against a market loss by using a crop insurance policy instead of this options strategy would cost maybe a quarter of the price, depending on an individual operation's geography, yield history and choices about how much coverage to buy. On top of that, a crop insurance policy may pay out not only if the market price falls, but also if the individual operation experiences yield losses. Crop insurance policies are the single most cost-effective form of financial risk management a producer can use.

Nothing is free in this world, especially not risk protection. The reason crop insurance is so much cheaper than market-based risk management is because the federal government subsidizes some of the cost of the insurance premiums. On average, according to estimates from the Congressional Budget Office, the federal government pays about 60% of total premiums and farmers pay about 40%.

By taking that foundational first step in their annual grain marketing plan, farmers can go forth with the confidence that they will receive at least a certain amount of revenue from each field, no matter what the weather and the crop yields do and no matter what the volatile markets do. This is the confidence that they can remain in business through the end of the year, making good on their loans and purchases throughout the broader rural economy, and be in a position to plant another crop next year, keeping the overall national supply of calories stable from one year to the next, no matter what drought or disaster comes our way. This, crucially, is the justification for why the federal government subsidizes this form of business insurance while it doesn't offer equal risk protection opportunities to hardware store owners, dentists or freelance graphic designers.

Every year grain producers will face unique weather risks that threaten their ability to provide some of society's most important goods, but thanks to farm bill provisions we should all be determined to protect, the risks don't have to be insurmountable. By March 15, 2023, farmers can get started with the crucial first step in locking in this year's income.

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Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.

Elaine Kub, CFA is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at masteringthegrainmarkets@gmail.com or on Twitter @elainekub.

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