No Yield Loss Necessary

By Marcia Zarley Taylor
DTN Executive Editor

ST. LOUIS (DTN) -- All signs point to the largest-ever corn crop in history this fall and the third year in a row of plunging farm incomes. But with prices potentially tumbling to $3 by harvest, corn growers with high levels of revenue-based crop insurance could buffer some of the price damage. In fact, many corn growers could trigger 2016 crop insurance payouts with no yield loss.

Producers sometimes forget revenue-based crop insurance protects against a growing-season price collapse as well as sub-par yields, pointed out Jason Alexander, vice president of crop insurance for Louisville-based Farm Credit Mid-America. Since the Risk Management Agency set the spring guaranteed price for corn at $3.86 per bushel on March 1, prices have fallen to about $3.40 and could bottom near $3 by harvest, many commodity analysts now say.

"There was 2012 when people had big claims because the price went up. Don't forget you have price protection both ways with revenue insurance. When price comes down like this, this is when it comes into play," Alexander said.

This is a good time of year to be in contact with your agent and assess your coverage, he added. Some isolated parts of Kentucky, Ohio, Tennessee and Michigan could suffer yield damage. "But even if you expect an average crop year or even a decent crop, and prices are heading lower, ask what will it do to your bottom line," he said. "Will you have a claim or not?"

DTN Analyst Todd Hultman noted Dec corn closed at $3.41 1/4 Monday, not very far from $3 and certainly within striking distance this fall, especially if the weather continues to provide good crop conditions. "Rains in July have been widespread and will likely give us a record crop this fall, possibly near 15 billion bushels," Hultman said. "With that much production likely, corn prices will have difficulty finding support, at least until harvest time. That just makes Dec corn prices near $3 a reasonable guess this fall."

University of Illinois economist Gary Schnitkey echoed that assessment. "Right now the market is expecting trendline corn yields, which would produce the largest crop ever in the U.S. and Dec corn futures are running about $3.40. Anything above trendline yields could send corn to $3 at the time RMA is setting that harvest price."

Should Dec futures prices average $3 harvest price this fall, that would represent 78% of the March 1 projected price, Schnitkey added. In essence, that means growers with 80% or 85% products would trigger revenue indemnities. In fact, their yields could run 10% to 15% over their average yields and still trigger some payment, he said.

"So a pretty key period looking forward is when USDA releases its yield estimates in mid-August," Schnitkey added, as that will indicate price direction.

The last time revenue crop insurance paid largely on price rather than yield loss was 2013, but such volatility is rare, both Schnitkey and Alexander told DTN. In 2013, the crop insurance spring guarantee was $5.65 per bushel, but futures plunged to $4.39 when averaged at harvest. That also represented only 78% of the projected price. RMA calculates the harvest price for corn based on average closings for the Dec corn contract during the month of October.

Growers who took advantage of private insurance riders that set alternative months for planting price guarantees could see even larger crop insurance payouts, Alexander pointed out. For example, instead of averaging the February closing prices for Dec corn, some companies offered "price flex" riders that averaged guarantees as late as spring planting season. That allowed growers who chose to set crop insurance prices in May or June to see guarantees at $4.31 per bushel "or a tad higher" this year, Alexander said.

Revenue crop insurance is not a complete substitute for farm safety nets, since year-over-year reductions in commodity prices can whittle federal price guarantees, Schnitkey said. This year's $3.86 corn price, for example, ran below cost of production for many Midwest producers.

In such low-price environments, growers need to closely monitor how they market insured crops. "After that spring crop insurance projected price is in place, whenever you see Dec futures markets moving above that level, you should think about locking in some of that crop with futures or puts," Schnitkey said. "We had some of those opportunities earlier this spring. We had some four-ish dollar prices on the Dec contract." Now the corn market seems to be hitting reverse.

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

Follow Marcia Taylor on Twitter @MarciaZTaylor

(Cz/SK)

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