Evergreen crop insurance grain marketing 101

Shay: Welcome back everyone to another episode of the Ag View Pitch. Today you have Shay Foulk with Jared Creed and Steve Johnson. And gentlemen, today I wanted to put together a conversation based purely around crop insurance, how it's used in marketing. So we're going to see some slides here that Steve, you've presented. Over the last several years, I know you've been doing this almost 30 years now. And Jared, I want to, you know, probe you on some questions specific to the revenue outlook of it. But really what I want to make sure is that we're answering questions here that are repeatable to the folks who listen so that they can maybe go back and review this year over year as they go through some of this information.

The spawn of this question came from a young farmer survey that I had done with Joe Vaclovic, our friend there, and I I had asked him, do you understand marketing on your 2025 crop production based on your insurance level guarantees? The long short of it was if you're in a room of 308 people, 177 people in that room didn't fully understand how to market using their crop insurance. And I guess I would ask you guys first, I'll start with Jared. Do you think that's a consistent number in the rooms and audiences that you're in? Knowing, you know, the Vacklovics crew that listens to— I mean, I would guess that maybe it's even a higher percent in some arenas than what this would indicate as well. What are your thoughts?

Jarod

Creed: I think there's some consistency that there's probably a lot more to be learned about the true marketing connection with crop insurance. But I dig a little bit deeper on that. Oftentimes when a producer is actually making their insurance selection, they're ultimately making a marketing decision right then and there. They just don't realize it. And in today's environment, it's not just about the guaranteed bushels. It's more so structuring a policy, you know, customizing what your farm exactly needs to provide a revenue stream that is guaranteed. And that's really no different than making a marketing decision to lock in a price to guarantee yourself a price. So I think there's just two answers to your question there. Yes, there's a, there's consistency out there in industry that there's a lot more to be learned. But it's more than just marketing with the insurance.

Shay: And Steve, you've been doing this a long time. What do you think the biggest hurdle or gap is when it comes to farmers, not just young farmers, although I think that'll be a vast majority of the audience listening to this. That they've struggled with, with how to tie in crop insurance decisions for marketing purposes?

Steve

Johnson: Well, typically crop insurance isn't taught as a pre-harvest crop marketing tool. And so I think that's— knowledge is the biggest challenge that I see. I think of the experienced farmers, this is 25 years for this crop insurance. And I think the one that learned— I think those farmers that learned how to pre-harvest market with a high degree of confidence, utilizing revenue protection, high levels of coverage, they've separated themselves from the rest of the field. So I'm not surprised by young farmers that are like, uh, I wasn't around for those, you know, 24 years, so I'm not sure exactly how this works. But the testaments coming from those farmers that have really figured it out have a high degree of confidence. In pre-harvest marketing.

And then on the backside, you know, they've got a crop insurance agent that's making sure they understand the revenue guarantee, and they probably got a commodity broker or green merchandiser that's helping with that confidence.

Shay: And so have they separated themselves because they're doing forward marketing when prices are favorable, or just because their overall risk management, they're more diligent about how they approach it?

Steve

Johnson: Their overall risk management, and a part of that is cash flow. They need cash in the fall. And I've hardly ever run into a farmer that needs cash in the fall. And those that don't pre-harvest market usually are storing crops and not generating cash flow.

Shay: Fair enough. So the picture I got on here is from It's Always Sunny in Philadelphia. I think many of us have seen this picture. But how often does a marketing plan go to plan? And so Steve, you had sent out a couple of slides here over to me. And this is looking at 2024. So I'm curious, you know, are you still sitting in the same position on 2024? And did this kind of pre-harvest marketing actually come to fruition from what you had projected?

Steve

Johnson: Well, I present annually to the Iowa Bankers Association Ag Conference. And this is what I presented last March. So take a look at that. I probably would have wrapped up sales of the old crop soybeans sure by now. And maybe I'm holding a few bushels. But yeah, I think, you know, taking crop insurance, pre-harvest marketing, and I think the trick is, you know, what we worked on with the University of Minnesota almost 20 years ago, having a plan of both a price target and a fallback date. That's what that is. I mean, that is winning the game. And we taught it with them for decades. And what I use is those price targets. I'm using the charts. So I put that together last March '24 for the '24 crop. And I'm out teaching on the '25 crop. But yeah, I don't know your cost. I don't know your cash flow. I don't know your grain storage capacity.

But I'm leveraging crop insurance, and I'm especially leveraging revenue protection crop insurance., and the spring rallies that we typically see almost every year, especially corn, and not getting caught with these bushels unpriced come September.

Shay: I think that's interesting. You said, you know, you don't know the producer's cost or the folks that you're speaking to. And yet you're just looking at the charts and looking at, hey, here's, here's some good targets that probably make sense based off of that information. You know, Jared, I guess I would ask you on that when you work with producers. Individually? Are you looking at target margins? Are you doing the same thing looking at, at charting, at revenue? Or how do you kind of handle that approach with, with producers as well?

Jarod

Creed: Well, no matter how disciplined you want to be around your own revenue management, there's always the risk of letting some of your emotions and/or opinions in the marketplace cloud some of those decisions. But it all starts by understanding what that cost is, obviously. You know, our business— when I say our— Shay, you're in the same camp here— our business is predicated and built around understanding exactly what needs to be accomplished on a farm. So right now, in today's environment, it's unfortunately probably a little bit more of a one-size-fits-all, as in it's play defense where you possibly can and make sure that you got a seat at the table if things get better. Now I envision if the market provides some better opportunities in conjunction with insurance stuff, uh, those paths are going to start going down, uh, various directions.

Uh, it's not really a one-size-fits-all approach at that point, and everybody's price needs, everybody's yields are different. Uh, that's just why we bring it all the way back to understanding exactly what that worst-case revenue picture may be, uh, between insurance and some of those sales that, uh are being discussed here. I would just kind of summarize it this way. In the current environment, there's good risk and there's bad risk. We can remove a tremendous amount of bad risk on the table from electing the right insurance policies coupled with a few sales. But what we want to have happen is we want our risk to get bigger. And I'm not talking about bad risk, we want good risk. We want that to come around. And we can only have a chance at that if we take care of business on the front end. And I think that's the entire premise of this conversation.

Shay: We'll hit on a couple of those points here in some future slides. Steve, you had built out this slide looking at what we have coming into 2025. Any key differences that you want to hit on here?

Steve

Johnson: The only key difference is going to be the ECO subsidy moves. From 44 or 51 to 65%. These are the decisions that pretty much people have been making. Um, SEO was added in 2014, ECO was added in 2021. Um, enterprise units came in 2009. So it's— I'm not saying it's business as usual, but like I said, I, I think, um, making sure you've got a crop insurance agent that can explain this and understands your desire to pre-harvest market. But no, I, I think you start in the lower left-hand corner and I'll have you build. There's a There's the supplementals. I mean, I probably need HAIL if I'm in enterprise units. If I'm staying in optional units, I don't know, that's up to you. But I think that there's an interaction between enterprise and, and HAIL that is really key. And then another build on the right-hand side, you know, the government gave us these county-based endorsements.

They use county yields rather than your yields.. And they've got cute acronyms like SCO and ECO. And then one more bill, though. This was the change that was announced in August. The subsidy rates for ECO went up to 65%. So if you're waiting for the government to send you a check, it's every October they subsidize your crop insurance and then they don't send you a 1099. It's kind of cool.

Shay: What if, what if that subsidization goes away, Steve? You know, there's a lot of change going on in the current administration. Do you foresee any risk of that after having seen this program for a couple of decades?

Steve

Johnson: No, I don't see any risk of that. I think ARC PLC would go away before we'd ever see subsidized crop insurance go away.

Shay: How about subsidization decrease? Obviously, there's an increase here for a reason. I, you know, I've heard you talk elsewhere of wanting to make sure that the farmers are reducing some of that risk from like a national standpoint, you know, what happens when the subsidy goes back down? I mean, is that going to affect people's decisions? Or do they need to be about their consistent elections here year over year?

Steve

Johnson: Absolutely. If we'd ever lose crop insurance subsidies at these levels, we're going to have a farm crisis of the 21st century. I mean, we're going to have people self-select, larger farms are going to self-insure. A lot of farms that are required to have crop insurance are really going to struggle without these subsidies. So no, I high degree of confidence that we're going to continue down this road. Again, we've seen RMA try to create other products for non-commodity crops, and I'm fine with that. I'm fine with what they're doing. But like I said, when you're in year 25 of these types of crop insurance products, we change the names every, you know, 15 years, but it's solid. And I just think lack of knowledge of understanding these tools is the concern that I have, especially for the young farmers.

Shay: Jared, do you see many people not electing supplementals of hail, wind, greensnap anymore?

Jarod

Creed: On the hail, wind, greensnap, that's very regionalized, Shay. And quite frankly, in the far western Corn Belt, where that is one of the more dangerous perils that the producer faces outside of revenue, the approved insurance providers, the insurance companies have been getting beat up pretty badly in the last couple years. So those rates are increasing quite dramatically, which eventually leads a producer going down a different path of, you know, restructuring exactly their insurance elections in replacement of carrying some of that greensnap and hail. Now, just so in one other thing here, what you're asking, Steve, about subsidies going away. I mean, a good thing for the farmer, never say never, but they're going to go— subsidies are going to go up before they go down..

And in the event we get a new farm bill passed, there is a new program that's going to roll out this next year called MCO for insurance. But in addition, the expectation is that ECO, SCO coverage levels will change, but the subsidy is going to go up even further.

Shay: Interesting. I think that'll be a conversation for another year. But appreciate the insight on the supplementals. So I have some questions here specific from that new farmer survey that I thought would be really good to ask. I'm third-year first-generation farmer and understand nothing about insurance for farming. I've never bought any form of crop insurance because I don't understand it enough. One problem I believe I have is the county APH is a lot lower than my average production and the FSA APH data for my rented fields are almost half of my 3-year average on those fields. Start with Steve, what are your thoughts on this?

Steve

Johnson: Well, my first question is, if you're the third generation, those people that went before you, did they not have crop insurance? Did they not turn in production evidence to a crop insurance agent so it could be entered into the RMA database? Because I say the best thing that you can give a young and beginning farmer is your APH. As we see farmers exit, I mean, you want to make sure you're transitioning, your APH, uh, back to, uh, that young and beginning farmer. So I think I'd start there. Yeah, I don't want to take the county transition yield, the T yield, if I don't have to. But, you know, let's not make, uh, the same mistakes that previous generations made, that, uh, now I don't have good yields that I can use to determine revenue protection decisions.

Shay: Yeah, that's awesome. Jared, any comments there?

Jarod

Creed: I mean, I hate to make too many assumptions, but that last sentence, FSA APH data, I'm afraid there could be a little confusion there. You might be talking about your base yield for farm programs such as ARC-CO and PLC. Ultimately, your APH is, yeah, it's inside the government database and it makes its way to the FSA office in one way, shape, or form, but you're probably talking about two different things there. And to, to build on it a little bit more, I 100% agree with what Steve is talking about, that you want to start off with the best APH you possibly can. But a lot of these supplemental products that are available to the producer today, you know, they still have a benchmark factor to increase or reduce the coverage that the producer receives from those supplemental products based upon comparison of their APH versus the county, what we call expected yield.

So you have a county APH, all the farmers together, and then you have the individual farmer APH. And then like I said, the PLC and ARC County base yields, those are something completely different. And those yields are going to be dramatically less than your APH.

Shay: I had seen something recently, I don't remember if it was base yield or base acres, maybe change on a large amount of acres being able to switch there. Was that, Steve, was that something that you had talked about, or did I read that elsewhere?

Steve

Johnson: No, I think some, uh, hopes were that some of the farmers in the western states wanted to update their base acres, and that's not going to happen anytime soon. And those base acres for corn probably go back to '81 to '85, and for soybeans go back to '98 to '01. So Jarrett's right, um, if you've got any sort of yields associated with that, that's a problem. But there's a complete different set, RMA data, crop insurance data, and those yields are going to be much higher than anything that you probably would see at the FSA office.

Shay: And if anybody that's a younger farmer or is, you know, taking over acres has any questions on that, I've done that several times here over the last few years on making sure that that gets transferred. So feel free to reach out on that. Okay, so crop insurance and shallow loss products. I have a, I have a question here that kind of loaded on the front end, Steve, but maybe have you talk through this quick and then we'll talk through this question.

Steve

Johnson: Yeah, my, my pre-harvest marketing is all associated with revenue protection. And I'm leaving the harvest price on. I am not out here trying to promote SEO, ECO, MP, and I'm going to pre-harvest market those bushels. If you're collecting indemnity payment and you're getting that indemnity payment, you know, 8 months after you harvest crop, that's not good. So pre-harvest marketing is all associated with revenue protection and multiplying my approved APH times my level of coverage for revenue protection.

Shay: So the additional products here, ECO and SCO.

Steve

Johnson: Again, there are add-ons, they're at the top of the pond. They're probably going to trigger much earlier than ever the revenue protection likely would. And that's the advantage. I mean, they're called shallow loss for a reason, is that they cover those losses that might occur that aren't deep enough to trigger revenue protection. I want to answer that second question that I saw. Does the premium impact your decision on sales? Yes, but indirectly, and, you know, mostly in February and March, and then you move on, and then you'll see the bill in August. But I think revenue protection is where it's at. And my concern is farmers are trying to use area plans to substitute revenue protection, and I'm not in that camp.

Shay: Gotcha. Last, we have margin protection here, 70 to 95%. I'll have you explain it. And then how many— what percent of people do you think are using that, Steve?

Steve

Johnson: I don't think it's a large percent. I'm sensed that product came out of Iowa State as a pilot in 2017. It's over 22 states now. Has a different projected price because it's using mid-August to mid-September. You're making decisions for the '25 crop much earlier than you typically would make for revenue protection, SEO, ECO. I think it has a place, and I think some of the advantages is that you use a different projected price. That projected price was $4.40 last September 30th when you had to make a decision. So I don't think so. I, I think when we're at this lull of these low prices, I just don't think farmers are jumping out there trying to lock in a different projected price. So MP has a place, but if you bought MP, then you can't buy SEO/ECO. And so I— that was my opinion in the fall. Let's wait, and we can still make an SEO/ECO decision.

And we knew the discount was coming, uh, 65% subsidy for the ECO. So I think they all have a place, but they're sitting at the top of the pond. That's that visual. It's easier to catch fish at the top of the pond.

Shay: You know, Jared, what are your thoughts on MPA? I think it's been a pretty big discussion here the last 2 years for sure.

Jarod

Creed: Well, we obviously use the heck out of it. And again, we use it more as a marketing tool than anything. And I, you know, there's a lot of different ways to skin this cat, but Shay, with your farmer hat on, what time of the year are you typically starting to procure some of your inputs for the next year's crop?

Shay: July, August, late summer, July, August, those decisions are being made.

Jarod

Creed: So not saying it's an end-all be-all saving grace, but it does kind of align when an individual is locking in price of some of these high-price inputs that we're exposed to today. It's going ahead and allowing a safety net to be established. And this is again, where it comes into a marketing tool that You know, revenue protection, as Steve is talking about, is critical for bushel guarantee to the farmers. But in today's environment, the revenue guarantee isn't squat. Okay, it's not going to help us much.

So when you start thinking about like a margin protection policy, or even an ECO for that matter, I always encourage the producer, since it's still a revenue product, take 95% of the projected base price, you know, the spring price, and start doing math from that price and lower to understand exactly what the yield offset would have to be in order to start generating an offset on that loss of revenue. Now, we're not ever trying to make an insurance decision based upon the probability of it paying out. That's a very, very slippery slope. But there are enough our abilities to once again market around the subsidized put option that you have been able to purchase from the government. That's probably a deeper conversation than for this Zoom call. But I'll leave one example.

The last several years, price moves enough during the growing season that the yield thresholds to offset that drop in revenue flat out become unattainable. As in it's physically impossible for the yield to ever be that high. So what does that mean? The product has now created a hedge for the producer across every single acre that they planted. And at all times, the producer has ownership of that position leading up to the October average. So my point there is, a lot of times with these add-on products, the producer might find themselves in a position that their bad risk is that the market actually goes up. And defining exactly where that is, defining exactly to the downside of where truly their risk can diminish, and structuring a marketing plan all around that once again.

Shay: Yeah, so I think the first question, do you pre-sell bushels differently based on these elections of coverage? The answer for a lot of people is going to be yes.

Jarod

Creed: And, uh, if you're extracting the most out of the program, you're darn right you are.

Shay: Gotcha. Steve, any comments on that before we move on here?

Steve

Johnson: Always start with revenue protection, though. If you're gonna pre-harvest market, always start with that decision that you made of revenue protection. And I don't disagree with Jared. I think there's a play, you know, for all three of these shadow loss products. But we've got to build our knowledge. We've got to understand how they work. And every year is different. And so it's not like, well, because that's what I used last year, that's what I got to do. And I think way too many farmers are doing that with crop insurance.

Shay: Gotcha. Okay, so we have a build-out here. This example is Winnesheek County, Illinois, and then the next slide is going to be a reference to Story County that I actually grabbed from you today, Steve. But walk me through this slide here.

Steve

Johnson: Well, I knew that this whole idea of subsidized ECO at 65% was going to create a whole level of coverage. And Jared, I'm not licensed to sell crop insurance, so I just use quoting software. And this is how I'm teaching this winter. I was in Rockford a couple weeks ago doing a comp here meeting. So what I did was I used quoting software from crop insurance, and I was at $4.41. Boy, I think we're going to be much higher than that.. And I used a 100-acre farm at 192 bushels per acre APH. It's approved APH. And so what I'm trying to help people understand is this revenue guarantee is going to be nothing compared to 2 or 3 years ago. I mean, we've got lower projected prices and hopefully your approved APH is going up. But what I'm adding on is this. The green bar is revenue protection premium. At the 85% level, and that little sliver is SCO premium.

That's just covering that coverage between 85 and 86, and then the ECO is sitting on top of that, and that's the premium, um, again, for a 95% trigger. So if you flash through these, I'm trying to create this image: how much revenue guarantee do I want? Am I going to get it from revenue protection alone? Am I willing to add on the shallow loss products? In this case, if I add SEO, you know the story, blue bar, I got to be in the PLC program and that creates that, you know, whole can of worms. But what it allows me to do standing in front of 3,000 farmers is I can walk through the decision process that they're going to be walking through, hopefully in the month of February, and try to compare the total revenue guarantee and then this interaction of revenue protection at the 85% and 80%, and also should I add a 90% or 95% ECO.

So it's a really— it's a different way to layout premium, and it's coming from quoting software from an AIP. So I've had to build some other slides to show the subsidy levels, but that's it. That's what I'm teaching for the next 4 weeks is this whole interaction.

Shay: Yeah, I had made a note here, Steve, 3 bushels difference in price on premium between some of these different elections here. On the wide end of the spectrum. But when you think about it from a marketing, a pre-harvest marketing in particular, what's that actual variance on the comfort level that a producer might have between these levels of coverage? So it's going to be that approved APH times their level of protection. How do you think about that from a bushels marketed per acre standpoint or from an overall risk? And, you know, either, either Jared or Steve here.

Steve

Johnson: Well, I guess I'll go first. And I think about is, are you going to pre-harvest market bushels using revenue protection? I mean, I'll ask farmers that. And, you know, when I get that blank stare, it's like, I don't know how to do that. Well, that was that survey that we just discussed. But I think, and you're going to see another slide where I think what I'm trying to understand farmers, they are pre-harvest marketing. And they're using primarily revenue protection, but they could add on these shallow loss products as part of that decision process. But I think this is where you're kicking the tires the next 4 weeks. Am I going to higher level coverage, lower level of coverage? Am I adding these shallow loss products? It's just a different way to see it. And Jared, I'm going to turn it to you. I mean, you're more invested in the crop insurance industry than me.

Does it help or hurt that they see it this way?

Jarod

Creed: Uh, I wouldn't say that it helps or hurts. I mean, the most unfortunate piece in the industry here is, uh, call a spade a spade, the national farmer doesn't forward market enough on a percentage base anyways that their multi-parole is going to, um, sign in a challenging spot. Don't get me wrong, it happens regionally and it happens very rarely across the nation in that fashion. To— when it comes to asking a farmer, like, are you going to pre-harvest market something, I think the traditional answer is probably going to be yes. But somewhere in the growing season, their emotions get high, and they don't go revisit what their actual multi-peril insurance policy has now become worth.

And what I mean by that is anytime the market has moved above and beyond the spring insurance price, those are bushels that are now able to be managed by the farmer via a variety of different strategy, whether that be forward marketing grain, whether that be using a hedge account. Again, lots of different ways to skin that cat. But ideally, they want to be able to see those guaranteed bushels times the price reflect an amount of revenue that is above and beyond the cost of production. The entire goal in all of this, right? And Steve is right, your supplemental products don't necessarily give the producer the ability to have extra bushels to forward market. It does start and stop on their own revenue protection, multi-peril policy. Um, but we have a big hill to climb right now to even think about getting prices times guaranteed bushels, uh, to a break-even.

But it's something that needs to be understood, that the value of that insurance policy moves penny for penny as the market goes higher because the farmer has control to make those decisions.

Shay: Great commentary, Steve. This is the second slide that I had stole, and this is, uh, an example you have from Story County, Iowa, but similar, similar analysis just presented in a different way that I think a lot of people will like as well.

Steve

Johnson: Yeah, I just realized that people were not into the bar graphs and seeing the numbers, so I just recreated the bar graphs with the number again. We're not using the same county, but it's that issue that you're looking at and you're down to less than 6 weeks. Am I changing levels of coverage? Am I interacting the SCO but requires the PLC? And then this whole idea of what's it really going to cost me? I mean, everything else that you're buying, what's this going to cost me, you know, per acre? I'm just trying to bring crop insurance and those shallow loss products into a play that's in the ballpark. I think this happened to be a 200 bushel an acre, and this is, uh, $4.55 projected price. It's just, I'm trying to help farmers interact with their crop insurance agents so it's not deer in the headlights. It's like, yeah, I saw those slides and, you know, I think that is interesting.

The poor crop insurance agent trying to explain SEO and ECO, and it's like, uh, you need to understand when you go in.

Jarod

Creed: Steve, one of the biggest myths in the industry as well is that, well, that product doesn't work here. It's the biggest hocus-pocus, you know, explicit words ever. Multi-Peril premiums, definitely regional. I mean, it's— your premiums are based upon your history. The more volatility you have in your yields, the higher your Multi-Peril premium is going to be. But however, when it comes to these ECO and SCO products, for the overwhelming majority of the corn and soybean and wheat producing areas in the US. When I say overwhelming majority, I'm talking about pretty much everything east of the Nebraska Panhandle. Okay. It's very simple. On the corn side, for every $10 of additional coverage the producer is going to receive, the premium is going to be ballpark $1.50 to $1.75 per ton of coverage. On the soybean side, closer to $2 to $10.

And you can, in generalities, you can say that it's not going to cost a producer more than $2 per ton of coverage on the corn side, and it's not going to cost more than $2.50 on the bean side. And the math is the same process, whether an individual is in a county that raises 30-bushel soybeans, or if an individual is in a county that raises 250-bushel corn. The product is the exact same. And we have to— the quickest way to get a disengaged conversation around insurance is when that assumption speaks to somebody's head that, well, that's not a fit. That's, it's just, it's a lie. And when an agent might tell a farmer that, they're lying to their face, because they don't understand the product themselves.

Shay: Any comments, Steve?

Steve

Johnson: I call this slide Jerry Maguire.

Shay: Okay, so this is another slide that you had built out, Steve, and I have a question posed here. But if you wanted to run through any additional conversation, this is for that 192 out of Illinois.

Steve

Johnson: Yeah, I, like I said, it's just simple math. It's not that, you know, there's not some mystery. You turn in your production evidence by farm every year to your crop insurance agent. They put it into the RMA database. And then when you meet with them now, then they have this approved APH and they can show you by farm or across county about what that is. But I'm a big proponent. I mean, I've been doing this for a long time. And I'm not saying that you've got to do this. I had, you know, Shay, I was teaching up in Rock Falls in November and I had a farmer come up to me and he says, my son and I are having an argument. You've got to settle it. And I said, what's the argument? He says, my son says we need to build a grain bin. And I said, we need to buy a truck and take these bushels to the river. And he says, what do you think we should do?

And I said, I think you need to be pre-harvest marketing. Yeah. Start there. Quit trying to make these decisions in September, in October with a tractor and a wagon that you just locked yourself into the local co-op. So the fact is, is that I'm a big proponent of pre-harvest marketing. I just utilize the bushels. I'm— you don't have to use 85% level, but I'm trying to, to prove to people why I can do this. Uh, as long as I've got that harvest price on, I'm guaranteed the higher of the two. And I'm not saying you gotta forward cash or you gotta, gotta use HTAs. I'm not saying you can't use hedges and options. There's lots of tools.. But I think year in and year out, we need to be pre-harvest marketing, and we need to leverage crop insurance, and we need to take advantage of the subsidies that are available. I mean, we've got risk management tools that no other farmers in the world have.

Let's learn to use them.

Shay: So one thing that I had highlighted here was from a delivery standpoint, you know, I highlighted this, you said delivery of up to 163 bushels an acre, and a question that we we get all the time. And this is one of the main points that I wanted to have this conversation with you guys. I use this question as an example: my yields are highly variable. Some years a field averages 240, some years 140. What if I fall short on those bushels to deliver? And Steve, I know you've done some work on this over the years, but this is one that if people are listening and they're going to listen to it year over year, how do you answer this question and drive this point home?

Steve

Johnson: Well, if it's a futures hedge, all right, then likely you can manage that futures hedge. If, if it is grain that you're delivering, you've got to have a relationship with your merchandiser. And so by August, you're having this conversation. I don't think I can deliver those bushels. I don't think I'm going to have those. At least let the merchandiser be a part of that process. I think of the derecho of 2020. I mean, I had farmers that had way too many bushels committed to delivery. And I encouraged them, and they, these were HTA bushels, and I encouraged them to buy them back. I'm not going to buy them back. I sold them once. I'm not going to buy them back. And I had a case study farm that, you know, this farmer would have lost 38 cents if he would have bought them back. And instead he rolled that HTA to the '21 crop.

I think you really got to be on your game, but I don't, I don't, I'm not as worried about overselling as long as we know we've got that guarantee of the higher of the projected price in February or that harvest price. I'm either going to have the bushels or I'm going to have a crop insurance indemnity claim because of how revenue protection works. Leave the harvest price on if you're going to be aggressive in pre-harvest marketing.

Shay: Jared, what are your comments on this?

Jarod

Creed: I just try to encourage the farmer to keep it very, very simple. Um, you got a bushel that you sold, you can value to the penny what you might be upside down, or you might be ahead as well, and you do not produce that bushel. Well, if that bushel was guaranteed to you, the government's going to pay you whatever that higher harvest price is come harvest. And the odds are relatively high that if you don't raise it and the market's higher, that's when the emotions are going to be the highest. That higher price bushel that you didn't raise that the government's going to pay you for, there is a portion of that that has to go offset the, you know, backwardation of the contract that you have in place, you know, the negative equity associated with it.

And one other myth in the industry too is that I sell, you know, say I sell $5 corn and the market goes to $6 and I don't produce it, I don't owe the elevator $6 a bushel. I owe them a dollar, and they were going to probably charge a cancellation fee for some type of replacement cost. But you have to understand that getting into that situation as well, you know, communication is key there. There's a lot of different ways to possibly handle, you know, a shortfall of production, but it just starts with the core blocking and tackling. That's the most important piece about crop insurance. You are guaranteed a bushel at the higher of a spring price or a harvest price. And if you don't raise it, and you happen to sell grain at a cheaper than a harvest price area, you are still going to net on that guaranteed bushel the same price you forward sold it for that you're not able to deliver.

Shay: Excellent.

Steve

Johnson: We're gonna say I'll never, I'll never forget the year 2012. Because I was doing all sorts of webinars and meetings with, uh, William Edwards, who we probably had at Iowa State as a farm management instructor. Nobody went out of business in 2012. They work with their merchandisers. I think, George, you remember, I think the crop and harvest price was like $7.05, and it's like everybody came out of that thing. And, you know, people made this big deal about, oh, I'm never going to sell again. Well, Yeah, that happens about, you know, once every 20 or 30 years. But the fact is, is that crop insurance is whole. And everybody came out of a year like 2012 because they had revenue protection and they left the harvest price on.

Shay: So this second question, or the next question is a little bit like what Jared was talking about there, but adds in a late harvest. So explain what happens when you sell your insurance guarantee and you fall short while the market is ripping higher. Let's say it's $5 corn in February, it pencils, so you sell your guarantee. Come October, the fall price is $6. You're forced to harvest late. Now it's early November and your corn is out, but spot is $7 and the funds are buying. Talk of $8 plus. Aren't you exposed or basically a naked short on those bushels since the crop insurance price protection has expired? Your co-op won't just tear apart a contract that's in the money. What do you do? Eat the difference? Roll? All options seem worse off than selling less aggressively. Jared, you want to take a look at this?

Jarod

Creed: I don't see anything in here that suggests that the farmer didn't raise the crop though.

Shay: Yep, just late.

Jarod

Creed: If you— okay, I'm sorry. And you fall short while the market is— okay. Yes, you do run a period of assumed risk. You're at harvest price, going to be established, yep, in the month of October. And if you do not know that you're going to have a shortfall on that production until later, yeah, there is a risk associated with that. I can't say that I've ever seen that exact situation play out, especially a running market higher like that. But yeah, there's a valid point there. There's no dismissing that, that you have to take some of those matters into your own hands if you have that concern. To maybe manage some of your price risk outside of the, you know, outside the co-op and outside of your crop insurance.

Shay: What do you— have you ever seen this or come across a scenario like this?

Steve

Johnson: Never. I've never seen it. I mean, I saw a higher harvest price, you know, in 2020, 2006, 2010, '11, '12. I've just not seen it. And there's the importance of leaving that harvest price on. So you've got some coverage. But hey, come November 1st, yeah, you've got exposure because you don't have that harvest price to fall back on. So, you know, I look at the last 2 years, Shay, and, you know, we had rallies in September and October, well, October of this year, and we still never got higher than the projected price. This is 4 years in a row with the projected price being higher than the harvest price and much higher in '22. And so the fact is, is that I've never seen this. Like I said, it's possible. It's just not highly probable. And I'm like Jared, I might have to reown these bushels and take advantage of that higher futures price.

Shay: So that's one of the reasons that I wanted to include this is I think people come up with these scenarios, worst-case scenarios in their head. Either out of nervousness or fear of the unknown. And, you know, the likelihood is you've both been around for a long time experiencing this, and neither one of you have come across a scenario like this. So if people have these types of questions, I think you just need to ask it, get it out there to the insurance agent that you're working with or seek someone out in the industry. And I would say, or I guess the question that I would roll back to you guys is the end part there, all options seem worse off than selling less aggressively. Do you think that's true or do you think that—

Jarod

Creed: Absolutely, absolutely not. Yeah, I do not think that's true. I was going to bring that up myself. I'm glad you did. Oh, it pencils. So you do it and then all of a sudden you don't do it because you've got this fear and, you know, you're talking about a rally of $3. Well, how about a sell-off of a dollar, right? That dollar reduction is going to hurt a heck of a lot more than not selling what you need to be selling.

Steve

Johnson: Well, and I use the example of 2020 on the Derate Show. I had people that rolled their 2020 contracted grain to '21. That wasn't a good strategy. Settle up. I call this pull the knife out and reset. But again, I think it's an exaggeration. And this is what a lot of people are looking for, the extremes.

Shay: I think the final comment that I would add on this is, if that market is ripping higher during harvest, personally, from my perspective, I see that as a great opportunity to forward market into the next growing season and take advantage of the opportunity there.

Steve

Johnson: Absolutely. I mean, we've seen that rally in September, October the last 2 years.

Shay: Jared, I've been calling this a simple crop insurance worksheet. I think some people would argue that it's not simple or it's going to hurt their brains a little bit. But I was wondering if you can maybe run through kind of what you built out here. And I have this in two different parts for those of you watching on video.

Jarod

Creed: Sure. So the entire goal here is just to prove how it's just one math equation. It's kind of an algebra math equation. You know, on the insurance side, you start with the revenue guarantee and your only other two variables are the final yield and the final price. And you can make the assumption of either or of those to identify what the other has to be. Because again, you understand what that final guaranteed revenue is. And obviously insurance is going to change in value as the market moves up and down, no different than the physical grain. So insurance does not care about what you have or haven't sold. And your, you know, your elevator to a certain extent doesn't care about what insurance you have. However, they both change in valuation as the market goes up and down. And so I would like to tell people that we're looking at these multiple different buckets.

I have a bucket of sold grain, I have a bucket of unsold grain, I have a bucket of this insurance policy, maybe another insurance policy on top of it. And then, you know, other revenue that might be coming into the farm, but all of them adjust in value. As the market goes up and down. And you're just combining at the end of the day, what's the best case situation for them. So this sheet is just a very, very simple example of starting at a spring insurance price, and calculating out how things will play out should the market be higher or lower come the harvest timeframe, and being able to throw in all sorts of different yield proponents, what bushel and acre are left to sell. You know, just, just cutting out the BS. How about that? I want to know what the cold hard number is going to be.

And to a, to an extent, I don't know, it's easy for us to talk about it, and I get that, uh, but I don't— I've succumbed to the idea that the majority of U.S. agriculture does need somebody to be tracking this for them in some fashion because it's not something that's on the top of their mind starting every day is what's my marketing and insurance look like combined and what happens if XYZ strategies play out. That's not a, that's not a, you know, a call out for our business, for anybody's business. The fact of the matter is I've just come to the idea that Crop insurance continues to change, markets are volatile. It's hard to expect somebody to stay right on top of that all the time.

Shay: Yeah, absolutely. There's tractors that break down and livestock that need feeding and a lot that goes on in a lot of these operations. I really like how simple this overview is. And I think the best part about this is for those producers who want to get more connected to the marketing and how it ties into their insurance and run their own assumptions, that's what this calculator does. It lets you play around with the numbers. And then, you know, second, second part of this here to kind of details a little bit more the layout between a lower market and a higher market, Jared.

Jarod

Creed: Yes. Yep. It's a stress test, right. And so on that situation on the right, you can obviously see that I have sold my grain under where the market is presently. And at that point in time, I'm either valuing the balance of the crop that I have left to sell, Or if I didn't raise it, I'm valuing the balance of my guaranteed bushels. So you get assigned that higher harvest price by the government. Um, and quite frankly, if you think about 2 years ago, just the struggling crops in the western Corn Belt, um, as the prices continued to decline, it— the individual who didn't have to sell their bushels because the government sold them for them probably came out a lot better financially than those who were on the opposite side of that boat. And this type of, you know, these type of math practices right here will just prove that.

Shay: Steve, any comments on this? I'm sure you've seen a lot of different worksheets over time.

Steve

Johnson: Yeah, I really think a part of the discipline is make sure you're working with somebody that can help you keep that thing updated. And the group that to me is missing in this is the lenders. We need to be educating the lenders. That group just seems to be nervous as cats when we have any sort of weather problems whatsoever. And so unless that lender is involved in the crop insurance industry, they need to know how this works. So I'm gonna— Jared, I'm gonna go ahead and let you call this one Jerry Maguire 2.0. 2.0.

Shay: I like it.

Jarod

Creed: All right.

Shay: So a few more questions here and then we'll wrap up, guys. Going over marketing on your crop insurance guarantee is a big one that young farmers want to know about. And then also how the spring discovery price and fall price play into setting the guaranteed price. I think you can probably answer this one pretty quickly between the two of you.

Jarod

Creed: How it gets calculated?

Shay: I think what they're looking at is just, you know, which one ends up getting settled with and ultimately that's going to come down to the election. Policy.

Jarod

Creed: It's a higher, it's a higher of situation. Your insurance policy will recalculate using the higher of, uh, in a situation that the market is lower, you can have a yield or revenue claim or both. Uh, in the situations that the harvest price is higher than the spring price, there is no such thing as a revenue claim. It's only a yield claim at that time if you fall below your guaranteed bushels. And I don't know if this has anything to do with this question or not, but for the majority of the US Corn Belt, February is when a very simple average of new crop futures contracts are calculated on a daily basis at the close, average them all together, and that's the guaranteed price.

Shay: Anything to add, Steve?

Steve

Johnson: Well, just two words: projected. That's that February simple average. We used to call it spring, but trust me, it's not spring this February.. And I think harvest price, you know, I go on the radio and I give the harvest price, you know, here in Iowa, and the farm director's like, why does it matter? Well, for crop insurance purposes, it's important. You multiply your actual production evidence times the harvest price. And so sometimes people just need to see how that calculation— so work with your crop insurance agent. They've almost got always have a spreadsheet that they can show you. And that's why they sit there waiting for you to turn in your production evidence. And they sit there waiting for you to turn in your production evidence. Crop insurance indemnities are payable in the year they arrive. So again, it's that year-end tax strategy.

Well, quit using your year-end tax strategy. Income tax isn't probably the problem it used to be.

Shay: Yeah. Excellent. Okay, and then this kind of open-ended. What exact— I like how they said that— what exact marketing strategies do most successful farmers employ? Puts, calls, fences, saddle forward, crop insurance programs, list goes on and on. I'll let you guys swing at this one.

Jarod

Creed: There's a lot to unpack there. There is no golden ticket. Every year is different. Volatility in the market, the unknowns, crop production, it all changes, input costs, it all changes. I would argue that the most important thing out of probably that question is trying to identify the right tools in the environment that you're in. And when I say any environment that you're in, I'm not talking about just a 30,000-foot view. I'm also talking about what your farm needs. What your farm wants. Those are a couple different things.

Steve

Johnson: Steve? Yeah, one of the biggest trends that I saw in my 30 years at the universities was the fact that farmers are using a lot more forward cash contracts and HTAs than ever. And that's why you see these large processors offering all these contracts that, you know, they'll determine, they'll use an average, you know, they'll, you know, put these months together. I think it followed the crop insurance revenue protection. Is farmers, if they didn't have a commodity broker, I remember a study that was done about 20 years ago in Successful Farming. Only about 15% of the farmers had a commodity broker. And you know, it's probably gone up somewhat since then, but I doubt if it's over 25%. So they're dependent upon the merchandisers, and that's why I think we need to do a better job of educating our merchandisers.

I wish merchandisers knew what the crop insurance agents knew and what the lenders knew, and vice versa. It's just like you, Mr. Farmer, have got to be the conduit to be able to educate all three simultaneously, and you can look like a rock star by educating them.

Shay: I think that was my drive-home point here as well. The successful farmers are the ones that understand it. You know, they have the education, they learn, they teach themselves, and they talk with others. Steve, you had said something with your podcast with Joe, don't try to make up for poor marketing decisions with crop insurance. I think there's a lot of truth to be said about that. Any egregious mistakes that tie into that?

Steve

Johnson: Are you sure I said that? Oh, you know, that's the worst problem with this digital technology is people remind you what you just said like 3 hours ago. I, it's a combination of all of the above. But I mean, I just believe that we've got to put all of these pieces together. And when we do it, it needs to be right now. And you give a farmer a deadline, crop insurance, March 15th. They'll show you how close they can come to it, and I do not like that. I just think February is the time the agents are calm. Lenders, uh, want to understand, you know, what type of loan balance you're going to be running. I'm talking to my merchandiser. Um, yeah, I believe that, you know, is the fact that you made poor decisions, and so I'm going to take crop insurance, or I'm going to take crop insurance at a high level because the government's subsidizing it. I'm not there.

I just think you've got to continue to build your knowledge. If you've been doing this 5 years or 50 years.

Shay: Steve, you had kicked out a slide looking at, you know, pre-harvest marketing strategies and tools as an example only. I'll stress that here. If you want to talk through that, and then I had a question here afterwards.

Steve

Johnson: Yeah, I put this together because I think a lot of people say, hey, Aren't you using options? Aren't you using futures? And the reality is, is I base this estimate on the roughly 10,000 Iowa farmers that I've worked with over the last 20, 25 years is I don't, I don't think that they're necessarily just using futures and hedging or just using options. You know, I, there's a guy on Market to Market, Mark Gold, just buy puts.. And it was like, I don't think that's a good strategy. I do believe that trend is that people are moving to more pre-harvest marketing. They're utilizing their APH bushels. They understand that. And it's not, I mean, it might be a majority for some farms, but the ones that I know are most successful are probably up in that 50 to 70%. And you say, well, I took it at 85%.

Well, you don't, have to preharvest market, and I probably wouldn't commit those bushels to delivery. So I kind of break marketing, uh, preharvest marketing into deliverable and non-deliverable. And so 2 and 3 are the non-deliverable bushels. Keep it simple. I agree with Jared, just keep this simple. But, uh, like I said, there's a lot of tools that are available, and it's not that one is always going to work better than the other. Every year is different, but if I had to step back and say, you know, my experience, that's kind of the typical, you know, Midwest farmer that I've interacted with, of what they're doing. They might be using hedging, others might be totally using hedging, but I have seen this incident of more pre-harvest bushels, and it has everything to do with crop insurance revenue protection with the harvest price attached.

Shay: Read this out loud. So pre-harvest market, 50 to 70% of approved APH bushels forward cash and/or HTA contracts for delivery. Hedge 10 to 15% of APH bushels non-delivery. And then number 3, buy put options on 10 to 15% APH bushels. Just in case anyone's listening and wants to visualize that. I'm going to skip through a couple things here. Steve, you have some slides, you know, a slide here on crop risk management websites that people can go visit. A lot of great tools there that I see and have hopped on and used.

Steve

Johnson: Well, the one I just answered before we went on, where's Eric Snodgrass? Conduit Ag, same URL, same URL. Just Google Eric Snodgrass and there's his URL. And he's still traveling extensively. He's got a buddy, Matt Reardon, from the University of Illinois, and they, they went They went over to the dark side. Remember when Eric, 7 years ago, left the university? He said, I'm going to the dark side, I'm going to Nutrien. Well, he's now at Conduit, and they're still doing weekday YouTube videos.

Jarod

Creed: Very good.

Shay: So bring us home here, Jared. Final thoughts on, on today's discussion, again, around the producer that, you know, wants to revisit this information year over year, drive home points. What do people need to be most educated on and get figured out with this crop insurance thing?

Jarod

Creed: Don't procrastinate, like Steve said. You know, this is— there's always a danger in speaking in too many generalities here. But in the here and now, the market has tried to show a little life at a very critical juncture in a time of the year. There's, from the math that rolls across your desk Shay, the numbers that roll across my desk, there is a serious percentage of US producers on the corn side that legitimately can put themselves in a close to breakeven worst case position from having, give or take, 25 to 40% of their grain sold closer to $5 futures and $4, $4.50 futures. Coupled with ECO. That one's a lot to unpack to be able to bring all that together. But in all reality, again, insurance does not care what you do or don't have marketed. And it might be a tough hill to climb for the producer to sell enough. It seems like it's always the hindsight 20/20.

It's always hard to sell enough. Well, with some of these shallow loss coverages and the ability for them to kick in to protect your butt sooner rather than later, that combined with having some grain sold is actually a lot better position than maybe what most people would think. As in, I would tell you that $4 corn come this fall on a December corn board with 30 to 40% of a crop sold is actually probably worth more than today's price. The producer will out-revenue where today's price is. So lots to unpack there. But don't wait. That's my point. You're going to go about in those— if you know what elections you're going to make now, you know, start implementing them into your marketing strategy today. Not until— not wait until March 15th.

Shay: Great comment. Steve, bring us home here.

Steve

Johnson: Speaking of deadlines, March 15th is still the crop insurance deadline. I'd make the crop insurance decision this month. I wouldn't wait to know exactly what the premium, the revenue guarantee is. I'd work with my crop insurance agent ASAP, and I'd make that decision. Then I'd schedule an appointment at FSA because FSA extended the deadline to April 15th for the ARC PLC election and enrollment. Trust me, in the Corn Belt, there's a lot better things to do on April 15th. Than be standing at the FSA office. So crop insurance first, and if you're not going to buy SEO or if you've already bought MP, then I think I'm probably going to enroll in ARC County. All right, and I'm not even going to blink, and I think we'll get ARC County payments on beans in many counties this fall, but it's going to be from the '24 crop.

And so this idea of a deadline, again, March Madness has nothing to do with college basketball. It's farmers that just procrastinate and can't make a decision. Don't be one of them. You know, keep— I feel good about agriculture. I feel good about the tools we have. Put all these in one place. Surround yourself with people that will help build your knowledge.

Shay: Great place to end. Gentlemen, thank you both for not only the time today, but your commitment to, uh, education in the industry on crop insurance. I can't think of two better people to talk with and really appreciate it.

Jarod

Creed: Thanks for the invites.

Steve

Johnson: Thank you. Thanks for your service.

Shay: Yeah, we'll talk with you guys later. And thank you everyone for listening to another episode of the Ag View Pitch.

Jarod

Creed: Catch you next time.