Jon Scheve with weekly market commentary made on October 18, 2024
Great Yields Can Offset Low Prices
Some farmers may “grow” their way out of marketing trouble this year. An Illinois farmer, who usually averages 230 bushels per acre on corn, told me he is forecasting 260 bushels per acre this year, which would be a record for him.
We went on to discuss his breakeven price. If he averages a 230-bushel yield, he will need $4.75 futures to cover all expenses to raise that crop this year. However, if he raises 260, that breakeven point drops to $4.25. Extra yields can definitely help “take the sting” out of low values.
Crop Insurance and Marketing
Some farmers think they have a floor guarantee with their crop insurance. This leads many of them to be hesitant to sell grain when prices run under the spring value, because they think they have price protection. Unfortunately, crop insurance doesn’t work that way.
For example, the spring guarantee this year is $4.66. Some farmers mistakenly think this is the guaranteed price per bushel they will receive. However, they need to consider the percentage of protection they purchased. It seems that the average farmer buys 80% coverage, which means their real guaranteed price is $3.73 ($4.66 x 80%), assuming they only raise their proven ten-year average yields.
But crop insurance is a revenue protection because it is based on both the price AND yield. So, the farmer above who usually has 230 bushel per acre yields must also account for the sudden increase in yield to 260. This means his insurance guarantee is 230 x $4.66 = $1,072 per acre x 80% coverage, or $857 per acre of revenue protection. However, assuming he produces a 260-bushel yield, his price floor would change from $3.73 to $3.30 per bushel.
So, he is left with prices that are now trading nearly at his current breakeven point, but still much above the $3.30 per bushel insurance price guarantee he now has with the higher yields. Insurance will be of no help for this farmer in marketing his crop this year.
To be clear, crop insurance is a great risk management tool, and I think every farmer should have it. It helps ensure a farm operation can continue operating when large scale unexpected events happen, and yield suffers. But that doesn’t mean that a farmer shouldn’t also have a sound marketing plan in place as well.
If a farmer is using risk management tools such as forward contracting with cash or futures sales, crop insurance provides a safety net if the farmer does not grow an average yield. Obviously, there are gaps between full coverage and every bushel that is sold. This is where its very important that a farmer understands the risks associated with both their crop insurance and their marketing plan.
Jon Scheve
Superior Feed Ingredients, LLC
9358 Oak Ave
Waconia, MN 55387
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