There will be a lot to cover in this post so please bear with me. We are at a crucial time with planting just around the corner and a crop insurance coverage selection to make next month. We have an opportunity to make some grain sales now and I wish to explain why making some sales now would be a wise decision.
Lets begin by looking at the USDA balance sheet. I will start out with corn which is on the bottom left of this chart. The USDA has reduced their estimate of corn acres by nearly 4 million acres for this crop year which still makes this crop larger than the crop planted in 2016. At the bottom center column, you can see that the soybean crop is forecast to be enormous. At nearly 7 million acres more than last year, it is possible that soybean crop acres in the US will surpass corn for the first time. Despite the reduction in corn planted acres, the USDA still forecasts an increase in our domestic carry out. With the increase in soybean acres, the USDA is forecasting a 75% increase in our soybean carry-out this year. Along with the large carry outs, the USDA has lowered what they believe to be average corn prices by as much as 31 cents per bushel and soybean prices by as much as 77 cents per bushel from last year.
The weekly chart on the right which goes back 3 years shows that once the RSI and Stochastics reach over-bought levels, prices seldom stay there very long. Prices have just now reached over-bought levels.
Besides selling your crop you also have crop insurance decisions to make. Most growers still choose the RP crop insurance at the 80 and 85% levels. There are three events that can occur that could trigger an indemnity payment from RP insurance: 1) Low Yields 2) Low Prices 3) A combination of low yields and low prices. Because nobody knows how the weather will affect crop yields in Kentucky yet, I am going to focus on the price protection aspects of crop insurance.
The price gods have shown favor upon us this year giving us the best prices since last summer for the crop insurance price discovery period. The December corn chart below shows that the base price as of this past Friday is at $3.95. This means that given average yields, your price protection would not begin until corn prices fell below $3.36 with an 85% policy and $3.16 with an 80% policy. These levels are marked on the chart in blue.
I am going to ask that you follow along with me on the next two charts which show the same crop insurance information and floors in blue along with a layer of option protection. This is a spread strategy which works just as an add on insurance policy.
Let me address the big red letters and arrows before we go any further. These strategies do cap the prices on corn at $4.50 and soybeans at $11.00. These strategies also involve margin. As long as the prices are at these strike prices or lower you receive back all the margin. If prices go above these levels the crop you are growing goes up in value penny for penny as the margin call increases. You will make the most revenue by paying the maximum in margin because you will be selling corn for $4.50 and soybeans for $11.00. The margin you pay is a great thing to happen! It is simply the ante you pay to hold your position to help you manage your risk. At option expiration you receive all margins you paid in at or under the strike price ($4.50 corn $11.00 soybeans). Because your lender should happily fund the margin for a risk reducing strategy, funding the margin should not be an issue. The reason for the corn call (in red) is to make the floors more affordable. Sure you could just buy the $3.90 put, but at .21 per bushel most people would not buy it.
First lets look at the corn. The cost of the spread would be .10 per bushel. This spread involves buying the $3.90 put, selling the $3.40 put just above your crop insurance floor, and selling the $4.50 call. If you chose to use this strategy then your price protection floor would increase from $3.36 with an 85% policy to $3.90. The $3.90 put minus the cost of .10 means that your actual floor net of premium is still $3.80. That is .75 above the USDA price projection at the lower price of $3.05.
You could actually reduce your crop insurance coverage level to 80% and, depending on your APH, the savings on the crop insurance premium would nearly cover the cost of the spread. If you carry insurance at the 80% level I would recommend dropping the $3.40 put from the strategy which would give the spread a unlimited floor.
You could actually reduce your crop insurance coverage to 80% and, depending on your APH, the savings on the crop insurance premium would nearly cover the cost of the spread. If you carry insurance at the 80% level I would recommend dropping the $3.40 put which would give the spread a unlimited floor.
If you would like to learn more about this strategy, send me an email or call me.