Life doesn't offer many second chances. So when commodity markets first offered Nebraska farmer Les Albrecht $6 and better corn, he didn't hesitate. He is not only done pricing old-crop corn and soybeans, he's been pricing 2012 corn since last summer, when futures hit $7.
He now has close to 60% of expected production priced at an average of $6.25, mainly in futures. He's priced 10% of expected soybean production at $12. "I could go as far as 65% to the contracts or hedges. It is pretty easy to lighten up on futures if the market breaks through what you think is important resistance and maybrns against us, we are not afraid to pull our hedges or at the least, do a call strategy kind of opposite our put strategy -- buying a call, selling an out-of-the-money put."
"I feel I can go up to my crop insurance protection, then use options on the rest" because they don't carry any need to deliver, he explained. "I like to buy put options with a strike price near cash bids, then I may sell an out-of-the-money call option to cheapen the cost. Generally, at that point, I'm expecting prices to fall and I'll pull [offset] the short call before the long put."
Selling too much, too soon can pose problems if a grower doesn't know what his crop insurance revenue coverage will be. Terry Jones, a farmer, grain elevator owner and consultant in Iowa, told DTN, "At this point, he [Albrecht] is ahead of the market for the February crop-insurance guarantee period, so his plan looks good right now. From this point, I would look at prices in the $6.25 to $6.50 area as places to add to sales. The key is to not exceed his crop-insurance-guaranteed bushels. And if weather or something else becomes a big issue, I'd want to have in mind a plan B to re-own the crop or offset some of the contracts or hedges. It is pretty easy to lighten up on futures if the market breaks through what you think is important resistance and maybe fundamentals have changed. Or you could add a call purchase for summer weather risk. If I have a shortfall, I don't like using my crop insurance to pay off delivery contracts or the offset. I want my crop insurance to pay my inputs so I don't have a loss year. I find it interesting the November bean/December corn ratio is back to 2.13 or so -- it looks like maybe the market feels there will be enough corn acres."
Contracting before crop insurance protection is known opens you to the risk that the price guarantee will be lower than your contract, added Matt Diersen, South Dakota State University agricultural economist. Then, if you have a production problem, the insurance payout might be less than what you need to buy out of your contract. Prevented planting also is a danger to consider, he said. "As some Northern Plains producers who forward contracted learned last year, the crop insurance coverage and payout on prevented plantings is much lower than the percentage of crop you thought you had covered." On the positive side, "you know you didn't get the crop planted months in advance of any resulting harvest supply tightness or higher prices, so have a contingency plan in place to settle contracts. If the problem isn't widespread, then prices may be lower than your contract and you could buy out of it. A call option is one way to guard against higher prices."
Diersen also noted that there is a 200% price change cap on crop insurance. So say the corn guarantee is $4 and there's a disaster in major producing states that sends prices over $8 by the fall guarantee period. Your coverage would be capped at $8, leaving you exposed to any amount over that if you have to buy out of a contract.
Learn more about how crop insurance and marketing work together (Terry Jones) and how to choose the right pricing tools in the context of this crop year (Darin Newsom) at the DTNUniversity "Master Marketing" short course, Friday, Jan. 20, in Ankeny, Iowa. Register at http://www.iasoybeans.com/…
Linda Smith can be reached at linda.h.smith@telventdtn.com
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