Options on Crop Insurance Revisited

In February, it was my opinion that we could have a difficult year as far as price goes.  The crop insurance guarantees were being set at a low that we had not seen in a very long time, and it was my opinion that if we had an average crop year yield wise with low prices that we would see some farmers have to exit farming. 

Because I am also a broker, I was able to design a strategy that only cost a few cents per bushel that raised the guaranteed price floor substantially over what the crop insurance guarantees were going to be.  My crop insurance customers were shown this as we discussed insurance for this year, and I wrote about it on this blog back in February.  ​On Friday, October 27, the soybean spread expired.  This is the chart from February that diagrams the strategy.

In hindsight, the strategy performed wonderfully!  If you participated with this strategy, you had price protection all year at $10.12 net after the cost of the options.  The strategy only cost .08 per bushel, but yielded .345 per bushel after the cost was factored in.  If you used this for 50 bushels of soybeans, you  added $17.25 per acre in revenue to your farm.  The strategy actually protected $1.32 per bushel or $66 per acre in revenue that the crop insurance would not touch had we had a major price event.  Don't tell me back in June you weren't a little worried.  Note that the Fall Harvest Price for crop insurance is being set this month.

​The chart below shows the actual outcome of the strategy.  The area shaded in yellow depicts the above chart and the time since the strategy was created in the unshaded area to the right.  The November options expired Friday with Nov Beans at $9.7675.  The horizontal purple line shows where the price floor was set.  The blue horizontal line shows where your crop insurance floor was if you had an 85% RP policy.

The Harvest Price Guarantee for corn is also being set this month, but there is still a month to go before the corn spread expires.  If prices were set today, the corn strategy would perform even better than the soybean spread on a per acre basis.  The spread is worth .36 today.  Take that times 150 bushels of corn and the spread is worth $54.00 per acre today.  This strategy only cost .057 per bushel or $8.55 per acre.

When we are at a place with tight margins, we really need to consider strategies that give you more protection than your crop insurance does.  Most of the farmers in this region of the country are enjoying record yields.  If that was not the case this year, it would have been tragic for a lot of farmers.  Our yields bailed us out.  We cannot always count on out yielding low prices.  A strategy such as this does not cost much, and allows you to take control of price risk you face.

Give me a call or an email if you have any questions which I did not address in this post.