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Marketing

Sandrock / Mickley Insurance does not give marketing advice. We focus on the insurance business so that we can provide you with an unmatchable knowledge of products at an unparallel level of service.

However, we firmly believe that matching a pre-harvest marketing plan with an individual protection plan (CRC, RA, MPCI, IP) can enhance your farm revenue. All of these products guarantee bushels, if not revenue, which can be sold prior to harvest with minimum risk involved. This page will focus mainly on CRC and RA w/ HPO, since they protect revenue even when prices increase.

Think of it like this: CRC and RA w/ HPO have a built-in put and a built-in call option for the bushels they protect. The guarantee is initially formed from the spring price. If the fall price is lower than the spring price, the guaranteed revenue is still calculated with the spring price. The final price will not be lower than the Spring Price. (Put feature). However, if the Fall Price is higher than the Spring Price, the guarantee is automatically refigured to the Fall Price, which adds more revenue to your guarantee. (Call feature) Should you have to buy any contracts back that you are unable to fill from a lack of production, you have the extra money needed to do so.

Question: How many bushels can I forward market safely from my CRC policy?

Answer: The amount guaranteed on the policy.
Let’s take a look at a theoretical example.

APH: 165 bu/acre
Coverage: 75% CRC
Spring Price: $2.30

165 bu/acre x 75% = 123.75 bu/acre would be guaranteed at $2.30
This gives you $284.63 / acre coverage

Should prices increase to $3.00 in the fall, that same 123.75 bu is now going to bring $371.25 / acre coverage. (123.75 x $3)

Let’s take a look at how fully utilizing a CRC or an RA w/HPO as a protection and marketing tool can enhance revenue:

Assumptions:
-600 acres corn
-160 bu/acre APH (actual production history)
-75% CRC coverage
-CRC premium cost: $9.50/acre
-Spring Price $2.40/bu. (Feb. average of Dec. futures)
-Any pre-harvest sales are accomplished by a simple cash forward contract
-Any grain not pre-harvest sold, will be sold at harvest
-No LDP’s for these examples
-Basis will be $0.25

Guarantees & Premium Cost Calculations:
-160 bu APH x 75% coverage level = 120 bu/acre
-120 bu/acre x 600 acres = 72,000 bu guaranteed
-120 bu/acre x $2.40 Spring Price = $288/acre minimum revenue guarantee
-Premium Cost: 600 acres x $9.50/acre = $5700

Scenario #1: High production, Low price
Assumptions:
-Pre-harvest price on June 2 for new crop corn, fall delivery = $2.55/bu
-Producer A sells full bushel guarantee (72,000)
-Producer B sells half of the guarantee (36,000)
-Producer C sells no bushels pre-harvest
-Actual production for the year was 170 bu/acre
-Fall cash corn falls to $1.85/bu at harvest
-Fall Price for CRC is $2.10 (Oct. average of Dec. futures)

Calculations:
Final Revenue Guarantee: 120 bu x (higher of Spring or Fall Price) $2.40 = $288
Actual Production Value: 170 bu x 2.10 = $357
*No Indemnity Payment because actual production value is more than guarantee

170 bu/acre x 600 acres = 102,000 bu total production

Producer A:
Pre-sold 72,000 x 2.55 = 183,600
Sells remaining at harvest 30,000 x 1.85 = 55,500

Producer B:
Pre-sold 36,000 x 2.55 = 91,800
Sells remaining at harvest 66,000 x 1.85 = 122,100

Producer C:
Pre-sold 0 bushels
Sells at harvest 102,000 x 1.85 = 188,700

Scenario #2: Low production, High price
Assumptions:
-Pre-harvest price on June 2 for new crop corn, fall delivery = $2.75/bu
-Producer A sells full bushel guarantee (72,000)
-Producer B sells half of the guarantee (36,000)
-Producer C sells no bushels pre-harvest
-Actual production for the year was 95 bu/acre
-Fall cash corn rises to $2.85/bu at harvest
-Corn buy-back price if short bushels is $2.85
-Fall Price for CRC is $3.10 (Oct. average of Dec. futures)

Calculations:
Final Revenue Guarantee: 120 bu x (higher of Spring or Fall Price) $3.10 = $372
Actual Production Value: 95 bu x 3.10 = $294.50
Indemnity Payment = $372 - $294.5 = $77.5 /acre x 600 acres = $46,500

95 bu/acre x 600 acres = 57,000 bu total production

Producer A:
Pre-sold 72,000, Delivers 57,000 (total production) x 2.75 = 156,750
Has to buy back 15,000 bu to fulfill contract: 15,000 x 2.85 = -42,750

Producer B:
Pre-sold 36,000 x 2.75 = 99,000
Sells remaining at harvest 21,000 x 2.85 = 59,850

Producer C:
Pre-sold 0 bushels
Sells at harvest 57,000 x 2.95 = 162,450

**Only twice within the last ten years has the harvest price been above the spring price. So the premiums gained the other eight years from forward marketing more than compensate for the losses on the two years of high fall prices. Plus, keep in mind that you gained more than $40,000 from the insurance indemnity, once the premium was paid. This illustration was designed to show you how the bushels you forward market are protected in the event of having to buy them back at the elevator.

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