Taming the Bulls and Bears

Marketing and Crop Insurance

For CRC to be fully utilized, you have to combine it with forward sales

By Betsy Jensen
Ag Commodity Instructor, Northland Community and Technical College, betsy.jensen@northlandcollege.edu

It takes a lot to impress me.  I have high standards, and I’m not a person who gives out compliments very often.  So it might come as a surprise that I say “Bravo USDA, bravo.”

A compliment for USDA? I do believe their Risk Management Agency hit one out of the park when they began selling Crop Revenue Coverage insurance, or CRC. This product is outstanding, and if you are not fully utilizing the coverage on your farm, you could be leaving substantial dollars on the table. 

I know many of you have purchased CRC insurance, but that’s not good enough.  In order for CRC to be fully utilized, you have to combine it with forward sales for your commodities.  Buying CRC coverage on wheat, and then not forward contracting your wheat, is like stopping at second base when you’ve hit a homerun. Hey, a double hit is great, but not when you could’ve scored a home run.

What does CRC do?
Instead of guaranteeing bushels, CRC guarantees you revenue. If you have a 40 bushel proven wheat yield, and you take 70% coverage, you are guaranteed 28 bushels. The Multi-Peril insurance stopped there: Bushel guarantee. CRC takes those bushels, multiplies them by the CRC price election, and guarantees you dollars.  If you harvest 20 bushels in the fall, and prices have rallied, you might not collect under CRC because your guaranteed revenue is still the same. 

Why not just stick with the old MPCI?
It’s no secret that spring commodity prices are typically higher than fall prices, and that many times during the summer farmers have an opportunity to sell at profitable prices.  Unfortunately, there is always the risk of a crop failure, which makes farmers nervous about selling before the crop is in the bin. This is where CRC provides a cushion.  If your crop is destroyed, you’ve forward contracted at $4.00, and prices have rallied to $5.00, now you have to write a check to the elevator to cover your undelivered bushels. If you have CRC insurance, it will give you extra money to help write the elevator that check.

Why isn’t it enough to just buy CRC insurance?
CRC insurance is more expensive than MPCI, so you need to get more out of it. I think most of you will agree that we have had some pretty decent spring and summer crop pricing opportunities over the past few years, especially in soybeans.  If you are purchasing CRC insurance and not forward contracting your bushels, then you are 1) Spending too much money on insurance and 2) Missing out on potentially $.25/bushel by not contracting, or even as much as $1/bushel in the case of soybeans.   Those numbers can begin to add up fast, especially in a year that we’re already suffering from rising fuel, fertilizer and interest expenses. 

Can I sell more than my insurance guarantee?
You can do whatever you want, but there is no way I would ever sell more than my insurance guarantee. I’ve seen a few crops destroyed by late summer rains, and having to write a check out to the elevator would just rub salt in the wounds.  It was difficult to sit by last year and watch soybeans hit $7.70, and my insurance guarantee was already sold, but I cannot stomach the possibility of selling more bushels, and then watching the crop disappear. There are other marketing strategies you can use to sell more bushels, but CRC insurance is not enough to protect you from rising prices.

Is there any scenario where I would not contract my guaranteed bushels?
Yes. I would not recommend contracting bushels below the loan rate. It does not appear that we need to worry about that in 2006, but for future reference, never forward contract bushels below the loan rate, and then count on a big LDP to bail you out.  It might not work that way.

It’s no secret that there are some decent pricing opportunities before the crop is harvested, and CRC insurance is there to protect you from a crop failure and rising prices. This is one tool that was designed to make you money, by allowing you to forward contract.  It’s an outstanding product, and if fully utilized, will help your operation become more profitable. 

Jensen puts her marketing strategies to work farming with husband Brian near Stephen, Minn.  Her market education activities including this column are supported in part by the Minnesota wheat checkoff, directed by the Minnesota Wheat Research and Promotion Council.