2023 risk management update: margin protection explained

Narrator: We are grateful that you are joining us for another episode of the Ag View Pitch, as we know that your time is very valuable. Our team at Ag View Solutions is always here for you for any questions or comments that you may have. Please feel free to reach out to us at cbarron@agviewsolutions.com. And now here is your host, Chris Barron.

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch. We are going to have an interesting conversation here on margin protection crop insurance, but before we get rolling on that, I do want to remind everybody about the Ag View Executive Business Conference in Florida, January 25th, 26th, and 27th. We're excited to remind everybody about that. We're getting quite a few people registered now, and the registration is open. So you just go on our website and click onto the conference tab, and you can go ahead and and get signed up. So again, uh, the Ag View Executive Business Conference, January 25th, 26th, 27th, and we are limiting that to 100 attendees, and once it's full, it's full. And we're getting some pretty good interest now, so if you are thinking about going, I'd recommend you go ahead and get signed up as soon as you can.

And with that said, we are super lucky enough to have with us Steve Johnson, who will be one of the presenters at the conference. Steve, how's it going?

Steve

Johnson: It's going great. I'll tell you, we need a little more rain to close out this crop, but we've got high kernel counts and looks like a lot of pods out there.

Chris

Barron: Yeah, yeah. So I'd like to introduce you as, as a retired ISU farm specialist, but you just don't, you don't retire, you just keep working, don't you?

Steve

Johnson: Well, I've always had an interest in the risk management around crop. And so this really complements well, uh, focused on crop marketing as well as crop insurance and government farm programs.

Chris

Barron: Yeah, and you, you've kind of been our go-to, um, for us at Ag View Solutions. It has been, you know, you've been super knowledgeable and, and do a lot of continuing education and stuff in that field. And so what we wanted to do today is just have you kind of talk through margin protection. It's one of those tools that is available to us as producers. I think there's not as much knowledge on it as, as I wish there was, and so maybe you can shed some light on, on margin protection and what people need to be paying attention to and looking at as an opportunity.

Steve

Johnson: Sure, and in fact Iowa State has a brand new publication called

Margin

Protection: MP Crop Insurance, and it's on the ISU Ag Decision Maker site. So if you just Google Margin Protection Crop Insurance, you'll find that new publication A153. Margin Protection has been around, this is actually the 7th year, and to me it's really a complementary product that you would add on to your base policy. So I'm going to call your base policy probably revenue protection, that's individual coverage. What margin protection is, it is area-based coverage, and whenever you hear area-based coverage you think county yields. So margin protection uses its expected county yield. But Chris, this is why we're talking about it now, is because for the '23 crop, we're in the price discovery period and we're also in the cost discovery period. So those are from mid-August to mid-September. You're making decisions before September 30th. For the '23 crop.

Again, the product is called margin protection, heavily federal— federally subsidized, but you need to make that decision with your crop insurance agent by September 30th.

Chris

Barron: Okay, so what's the— explain for those who don't know, the price discovery period is when to when, and, um, and roughly where are we at now?

Steve

Johnson: Yeah, well, most all your other crop insurance products uses a price discovery period of the month of February. But this product, Margin Protection, MP, starts price discovery in the middle of August and runs till the middle of September. So we're one week down, and that average price for December '23 corn is $5.87, and for November '23 beans is $13.36. So we're already at higher discovery prices than we had for last year's crop. But we also have a component in margin protection of variable cost. There are selected variable costs, primarily DAP, urea, potash, diesel, and interest. And we dropped that urea for the soybeans. But those costs— and that was the surprise from taking margin protection in '22— those costs increased 27% between last year's discovery period in April.

So I think there's going to be a lot of interest in margin protection, not only because we're going to come in at higher projected prices, because of— as a means of trying to protect against this lift in these selected variable costs. Again, margin protection, but you need to make that decision with your crop insurance agent. Before September 30th. It's an add-on to a typical base policy, probably revenue protection.

Chris

Barron: So one of the resistance things I've seen, you know, like you said, this has been a 7-year program and we've been familiar with it most of those years, and we've seen a lot of resistance to the premium for various reasons. Talk a little bit about that. I mean, how should a producer look at that, you know? And, you know, we're all guilty of, you know, how, you know, we start looking at how much we got to write the check out for instead of what it is in terms of cost per bushel or cost per acre. But I like the cost per bushel, you know. And when we looked at it last year on cost per bushel, for a lot of producers it was in the 20 to 25 cents per bushel to just have that peace of mind and that having those variable costs covered and having that that, you know, that price discovery, price layered in there. So talk a little bit about that.

Steve

Johnson: Yeah, I think you're taking the right approach. Um, again, I think we focus too much on dollars per acre and we don't ride this back. This is a risk management tool and it's focused on margin, and probably no other crop insurance product that you've ever bought is focused on margin. Most of the products are just revenue products, yield times price. This one has a little piece that also focuses on cost, and I really believe that that is the underlying value. That and the fact that it's a different discovery period for the projected price. You've got all your eggs in one basket, the month of February, and we know with all the geopolitical issues that are taking place and weather in South America, maybe this is a way to diversify, waiting until the month of February to establish the projected price. I think those are the two big components.

I think it's going to be a grower that already buys up revenue protection at 85%. They're looking at adding on a little more coverage because they're kind of capped at that 85%. They might buy a proprietary product that they're going to pay more, and it's not subsidized. The federal government is subsidizing your margin protection product If you buy it at only 70%, they're paying 59% of the premium. And if you buy it up at 90%, 95%, and that's what I'm going to recommend, the government's paying 44% of the premium. So, I really believe it's that idea that the government's subsidizing the premium cost for this product and I'm adding it on to my base policy that I won't even make those decisions until March. So again, margin protection been around, but I think it's more interest now because of this concern for the uncertainty of market prices as well as higher cost projected for 2023.

Chris

Barron: So I know you do a lot of continuing ed with crop insurance agents and that kind of stuff. Talk to me, or to us as producers, a little bit about what our expectations from our agent should be. With regard to margin protection? What, what should we ask them? What should we expect from them in terms of information to help us make that decision?

Steve

Johnson: Sure, I think a grower probably needs to go do a little of their own discovery. There's websites, of course, the ISU publication A153. There's a website, marginprotection.com. They could go in, they could actually see what these prices— and cost discoveries are during this period. But I think be knowledgeable. Don't just go in and say, "How much is this going to cost? How can I add margin protection onto my existing base policy? If I'm already buying revenue protection at 80 or 85%, how would this product work?" I think maybe those that bought it last year are going to find out if that if you're sitting in a county in the Corn Belt that probably isn't going to have trend yield, then I think there's a likelihood you're going to trigger if you bought that up at 90 or 95% and you also bought up the protection factor.

So there's a lot of moving parts that I don't think every grower is going to buy margin protection. I think it's going to be the grower that already understands revenue protection, buys it up, probably at 85%, and they're looking at adding additional coverage because they know these costs are going to be higher, probably higher than they've ever seen their crop cost. I think it's going to be a true risk management tool, and again, it focuses on margin, just not on revenue.

Chris

Barron: Mm-hmm. One, one thing I think is, is there could be some people out there that did purchase 20 or purchased it for 2022. And I think in our operation we might fall in that category. We're going to have a pretty good yield. And, you know, I'm, I'm concerned that, you know, if somebody bought it and then didn't collect and they're like, well, I don't collect— well, you don't want to collect in the first place. You hope you don't. And if we take our yield, which, you know, we happen to be in a garden spot and, and we feel blessed by that right now, and, and the crop's not in the bin yet though either.

But if we do in fact yield, you know, 20% higher, or we have a record yield, and again you take that cost and divide it on a cost per bushel, it actually is costing us— costed us quite a bit less than what we were originally figuring when we made the decision to buy it in the first place. So I think we still, you know, I don't think we can emphasize enough how you need to analyze the value of anything we buy, whether it's insurance or fertilizer or whatever. We need to be looking at these investments in our crop in terms of cost per bushel. Any other comments on that?

Steve

Johnson: Yeah, I like the strategy of a cost per bushel, but I believe the grower that buys margin protection for the '23 crop is already focused on their budgets. What's it going to cost? They're probably already buying fertilizer, probably already buying anhydrous, they're thinking about booking seed. So I really believe it's that grower that's looking out ahead, understanding I've got to manage the cost side of the equation and I need to start now, and I also should consider booking some bushels ahead. I think those that use margin protection, even though it's an area-based plan, it's using your county yield, I think that group is probably the group that's also selling ahead of the '23 crop, not waiting. They're buying inputs, they're starting to sell some '23 crop ahead because they're focused on margin. And that is that underlying theme, is managing '23 margin, right?

That is the challenge in front of us, right?

Chris

Barron: Yeah. And it's, it's one of those things where if you sell, or, you know, if you purchase a product and you spend $100,000 on it, doing 1-to-1 on sales is, is a really key way to do that because You know, as we look at, you know, we've been aggregating the '23 cost of production. As we look at that for our clients, you know, on, on the corn side of the equation, we're seeing, you know, in excess of 20% margin potential right now with what most producers are estimating for their expenses that we have dialed in numbers for. And on the soybean side, we're seeing it about 15%, not quite as good on soybeans on average, but on corn, I mean, those are margins that you typically don't see that far out You know, it's—

Steve

Johnson: Yeah, I remember teaching a couple years ago when we were focused on 5% margins. If we can capture 5 to 10% margins, that was in '17, '18, and '19. And now we're in a different spot. But that idea, Chris, that I'm gonna buy my inputs low and I'm gonna sell the product high, that's pretty antiquated. That's pretty tough to do. We've got these tools that have been developed and they're mature and their crop insurance agents are knowledgeable. I think we need to have those conversations and let's have these conversations early, not the last week of September. Let's figure out how would margin protection work on my farm. Again, we're adding it on to my existing base coverage and that in all likelihood is revenue protection.

Chris

Barron: If a producer gets a hold of their crop insurance agent, say here now, I mean, we're— as we record this here today, what's the date today? I'm very— 22nd of August as we record this. So if they get a hold of their agent, say, sometime this week or next week, you know, they got to do it by the end of September. If they do it during the price discovery period, can they get a quote so they can kind of see where it's at, or is that quote going to be wrong until we get to that date?

Steve

Johnson: Yeah, the quote's not going to be correct until we get past mid-September, but I want to go ahead and ask questions. It's just like your base policy. Don't wait until March when you know what the premium is. Be framing up what are those questions, especially cost and how do costs work. Maybe I've not added on one of these area-based coverage because If you've just been using SCO, Supplemental Coverage Option, or ECO, Enhanced Coverage Option, that's a decision that you made in March and you added it on to your base policy. If you buy Margin Protection, then you're not going to be able to buy SCO or ECO, but you're in a whole different price discovery period. And I really think that might be the advantage, is we need to get our heads around margin protection, and we really want to look at it when we've had— when we have these high futures prices for the next year crop.

I really believe it's going to be a year like this '23 crop that we want to be well in tune with margin protection and work with our crop insurance agent early.

Chris

Barron: That's a good pointer because I think, you know, sometimes— I don't know, I think you're the one that said this to me one time— you give a farmer a deadline and they'll show you how close they can get to it. I haven't forgotten that quote that I think you said that last year sometime or another. And, you know, so I think we just need to be getting a hold of these guys because there's, there's some of the agents, at least in my experience, that maybe aren't as educated on it as they should be. Are you seeing some of that yet, or are most of the agents getting pretty well up to speed now?

Steve

Johnson: Well, we're in much better shape than we were last year. I'm doing webinars this week for rain and hail, so I think A lot of those improved insurance providers are more in tune with margin protection than they ever have been. I think opening up the lines of communication because your agent doesn't know you're interested in margin protection unless you contact them first. Mm-hmm. I think the agents are much further ahead than they were last year. I think they see that it's more than just the premium and that premium— Again, you're not paying the premium until next October, but if you do trigger an indemnity claim on March protection, you don't collect until after mid-June of '24 because it's using county yields and we don't know the final county yields, and those are RMA yields. Those aren't the old yields that we used to use. So again, understand the nuances.

Lots of moving pieces. Of Margin Protection, but definitely a product that I think most growers in the Corn Belt want to take a look at.

Chris

Barron: And just to kind of wrap up, so if they want to look that up, they can go on to marginprotection.com, um, and, and again, talk to your agent. Um, you know, you talked about the price discovery, um, from August 15th to August— or to September 15th, correct?

Steve

Johnson: Yeah.

Chris

Barron: And then the variable costs, they fall on weekends. Yep. Yep. And then the variable costs are DAP, urea, potash, diesel fuel, interest rates, right?

Steve

Johnson: Correct. And so that we make comparisons of those— what were those costs from that discovery period mid-August and in September? And then we compare what those costs actually were roughly in April. And we used a different month for interest, but yeah, I think it's really a type of crop insurance product, not the easiest to understand, but that's why we're starting early, and that's why I want to encourage you, work with your crop insurance agent.

Chris

Barron: Yeah, and just because it's not easy to understand doesn't mean it's something that is worthwhile to do the due diligence on. Any final thoughts, anything that producers— any final thoughts you'd like to leave producers with?

Steve

Johnson: Well, I think the fact that, you know, we're already simple average in price discovery period is $5.87 for corn December '23 futures and $13.36 for soybeans. I think the fact that we're starting with margin protection at the highest projected prices that we've seen since this product was launched in 2017 tells me that I'm going to be able to create what we call a high trigger So calculating the minimum trigger margin. So there's that moving piece. What is my trigger margin going to be? These costs are going to be higher for that '23 crop, so I'm going to be able to create a high trigger margin using margin protection, buying it up probably at the 95% level and buying up the projected price. I think it's a good tool. I think it's a tool that a lot of growers will be looking at the next few weeks.

Chris

Barron: One last question too on that marginprotection.com. Will that show like a map of where— because there's some counties it's not available in, is that right? In some states?

Steve

Johnson: Yeah, it's— but it's available in 22 states. So the fact is, in corn, soybeans, and spring wheat, so we're pretty covered in the Corn Belt. I don't think there will be any exception.

Chris

Barron: Okay.

Steve

Johnson: So yeah, take a look at that website, take a look at the new publication A153. We'll go through an example. In that publication on the Iowa State Ag Decision Maker site of how to calculate that trigger margin and how to calculate that potential indemnity. I think that's important. We're adding it on to our base policy, likely revenue protection, and we don't pay the premium until we pay that premium for the '23 crop again October 1st. Awesome.

Chris

Barron: Steve, uh, as usual, you're, you're, uh, a lot of knowledge, a lot of information, and people may have to listen to this one a couple times or take some notes. So again, thank you very much for, for your time and your expertise in this area. Really appreciate it.

Steve

Johnson: Yeah, my pleasure. And let's do one of these again as we get closer to that mid-September price discovery.

Chris

Barron: Yep, that's an absolute necessity. So yeah, everybody pay attention and stay tuned because there'll be some more information. We'll have Steve back on again and and get more information out to y'all. And so with that said, Steve, thank you very much.

Steve

Johnson: Yeah, my pleasure.

Chris

Barron: All right, and thanks everybody for listening, and we appreciate your attention, and we will catch you again next time on the iViewPitch.