Margin protection: pay attention, act now

Shay

Foulk: Hey everyone, this is Shay with Ag View Solutions. Before today's episode, just wanted to take a minute to remind you all of 3 things as we head into harvest this fall, and that's to be safe, be smart, and be healthy. And when we talk about being safe, primarily what we're looking at is when it comes to PTOs and guarded pieces of moving machinery, be smart about it. You know, don't wear that loose clothing, don't step over something just to save a minute. Be careful and watch that stuff. The second thing is the grain. When it comes to safety, we hear about it every year. Don't make dumb decisions when it comes to grain in storage bins, grain under moving equipment, grain in grain carts, things like that. Just be really smart about it. Don't be a statistic. The third thing when it comes to safety is just working on equipment.

So whether you're out in the field or doing stuff in the shop, take time to have the proper precautions and measures in place and also secondary measures. I know safety's a word that gets thrown around a lot, but when it comes to this message today, if you've heard it 1,000 times, it's worth hearing it 1,000 more times. So let this message sink in. Second one is just being smart. Take time to get sleep when it comes to this harvest season. I know we're all guilty of it. I am myself of trying to work a little harder than we should, a little longer than we should. When your body's telling you you need sleep, Take time to get that sleep. Stay off your phone on the road. There's tons of hands-free devices out there. They cost next to nothing anymore. Use those hand-free devices. Take a minute to pull off the road if you need to. Don't put others' lives at risk.

And then finally, just that smart driving, you know, so whether it comes to speed or if you're pulling in Hydrus tanks or you have wagons, be a defensive driver, but also don't be a problem on the road. Okay. The things that are going on that seem like emergencies right now, 5 days down the road are going to work out. So be safe when you're out there on the road. Final thing is just staying healthy. You know, so I already mentioned sleep, but it's important. I'm going to reiterate it. We need sleep as we get through this marathon, right? You know, sprinting is a— or planting is a sprint and harvest is a marathon. So keep that in mind. Get that sleep when you need it. Second thing is just finding good food. We're all guilty of wanting to eat our Snickers by 11 a.m. and we have phenomenal wives and spouses and grandma and grandpa that make cookies and cakes and lasagna and stuff like that.

And they take care of us, which is phenomenal. But eat an apple, get that good healthy proteins and carbohydrates and, and fruits and vegetables and keep that good food coming in. And then finally, if you need a mental break, take it, you know. So whether it's not working on a Sunday or taking a holiday off, just make sure that you're doing what you need to for that mental health as well. And again, you know, when it comes to this, Chris and I talk about it a lot, this, this, uh, this health side of things is important. You wouldn't let your equipment or your checkbook or your business get in a poor health position. Don't do that for your body either. So Ultimately, just wanted to share a quick message here before today's episode. You're going to hear it a couple of times throughout the fall here. We just, we care about you guys too much.

We want to make sure that you're staying safe out there. And as always, if you ever need anything, give us a call. We're here for you. Thanks. Welcome back, everyone, to another episode of the Ag View Pitch. Today you have Shay Foulk with Steve Johnson. And Steve, we are going to have a thrilling conversation today on margin protection. And people are probably wanting to reach through the phone and say, Shea, why are we having this discussion. It's December, I'm just trying to get the combine ready to go. So Steve, if you could just tell us a little bit about, you know, what margin protection is and why it's important as we head into 2022 here.

Steve

Johnson: Sure, margin protection has been around for about 5 years, but we just haven't had these attractive prices. The price discovery period for margin protection is mid-August to mid-September. So now it's mid-September, and now my crop insurance agents can quote me what the premium will be for margin protection. There is a little bit of a cost component with it because it also reflects both fixed and variable costs, but again, it's a county product, area-based, and so you just don't get the play on cost like you do on price. So I think when we step back from margin protection, the biggest advantage, it is a hedge against lower futures prices.

Between now and February when we decide the projected price for multi-period revenue protection, and especially if we could lock in at these high prices, looks like we're going to come in around $5.06 for December '22 corn, simple average last month. For soybeans, $12.56, could be $12.57. So really attractive prices compared to, you know, the last 7 or 8 years.

Shay

Foulk: And the reason we're having this discussion right now, so the due date on this is September 30th, and that's 2021 for, uh, 2022 election here as we're looking at the decisions to be made. So that's one of the main reasons we're having this discussion here today. And when it comes to, you know, just a product in general, when you look at it, margin protection, that gets me excited, right? Because when we talk with producers, we're talking about how are you managing that margin, What's your projected income and ROI off of the farm? And again, this is a great tool. If you have your crystal ball, I would love if you would look at it, Steve, and tell us what prices are going to be next year. That would be fantastic. But unfortunately, since that's a little bit of an unknown, this hedge is potentially a good way for producers to, you know, leverage next year's decision-making process.

Let's talk a little bit about price. This can be a little bit of a pricey product here, right?

Steve

Johnson: Yeah, especially if you're buying the Cadillac, the 95% coverage level and the 120% protection factor. If you're buying the Cadillac, you know, in Iowa I can tell you you probably got expected county yields between, oh, I don't know, 200, 205 bushel an acre. That premium for a 95, 120 with the harvest price option, easily over $60, probably pushing $65. And I think that's the first pullback is people say, oh, I can't afford a Cadillac. Great. You know, I grew up on a farm. We didn't drive a Cadillac. You know, we drove Chevys and we drove Oldsmobiles, and that's how I'd approach this product is, you know, how much protection do I need? And again, it's a margin protection product, and so it's got this play, if you would, that's influenced by cost. And so I would want to contact my crop insurance agent, have them run this product, and say, hey, what kind of premiums?

But don't stop at a 95/120. You know, I think the first number is the most important number. So run a 95/100, you know, run a 95, you know, 90, or a 90/90. And then you can take the harvest price off. So literally, you're playing with all these options on margin protection. And I think, you know, we get down there, and again, we're going to discuss what might be, you know, reasonable value, but You know, if you're protecting $100, $120 extra above what I can ever protect for revenue protection next winter, now you start reflecting these increasing costs because I think that's where most growers are at. If you talk '22, I can only think cost. I can't think of price, and I think we're out of order. You got to focus on revenue simultaneously because you know that these costs are going to increase and I was just asked, what's your going to be your theme for the winter?

I think my theme for the winter is going to be this margin compression is that we just are not going to have profit margins that we had in '21. We have higher costs. The likelihood is we're going to have lower prices. And heaven forbid, you know, what if we had higher county yields, not lower county yields? So yeah, margin protection will look like a shining star next winter. When you price SCO and ECO. Right now it's just a little bit of a distraction. Why would I need margin protection?

Shay

Foulk: So when you look at the competitiveness of the SCO and the ECO, you know, it sounds like this margin protection, it could be in the ballpark or maybe even well exceed that because of, uh, you know, taking some of that compression off of the, uh, out of the equation here for next year. Is that right? Am I kind of hearing you right there?

Steve

Johnson: Yeah, but you know, let's move to the term shallow loss. I mean, how many times have you not triggered revenue protection coverage because you just got too good yields on your farm and, you know, the harvest price never gets low enough? And so you say, I don't even know if I need this revenue protection. Think of adding on top of that revenue protection a product that could be bought at the 95% level or the 90% level because You know, as far as federal subsidies, you can't buy revenue protection at more than 85%, and so that's what most growers do, 80 or 85%. But then you can add on this margin protection. Government's paying 44% of the premium at the 95% level. So that's why I think these shallow loss products like SCO and ECO and margin protection, they make a lot of sense. But margin protection advantages, it's giving you a different time frame for price discovery.

It's giving you mid-August to mid-September, and most years I wouldn't like that. But you know, I think I'm going to look back at '21 and go, you know, $5.06, you know, $12.57, those really are not too bad of new crop futures prices. And I can build a product around that customized for myself because I still am going to use my APH yields for revenue protection, but then I'm going to use the county yields for this, if you would. Shallow loss product called margin protection.

Shay

Foulk: Absolutely. You know, so you and I are not— you are, I'm not the expert on this. We get a lot of questions on it when it comes to the insurance questions. You know, if producers are, you know, piquing their interest right now listening to this conversation, what do they need to be doing in the next 14 days?

Steve

Johnson: Well, I wouldn't wait 14 days. I think this week or early next week I'd get an appointment with my crop insurance agent because now the expertise isn't at the land grant universities. It's not those that, that train the trainer. The expertise is at that crop insurance agent level. So I play what-if games. I'd have my agent pull up all my APH yields and then I'd go in and say, okay, I'm thinking about added margin protection. Now let's play the 95/120 Cadillac, now let's play the 95/100 or the 90/90, and now let's take off the harvest price option. If that's what's driving you premium, then I wouldn't walk away from this product. I think it's adding on that shallow loss protection in a year that we feel pretty good about, '22, but we know that there's a lot more margin risk out there than we want to admit. Absolutely.

Shay

Foulk: Any final thoughts, Steve? Uh, or I guess the only question that I would ask in addition is when it comes to this 2022 marketing decisions, you look at something like margin protection being added into that. To me as a producer, it seems like it would make you a little bit more comfortable making some of those sales into 2022 knowing that you have plans in place.

Steve

Johnson: Yeah, I'm in that camp. If you haven't made any '22 sales and I'm going to focus mostly on corn because the research that I've done would say corn probably has the greater advantage. Um, I think this is that comfort level to go ahead and get started marketing the '22 crop, you know, getting some new crop sold, probably hedge to arrive, harvest delivery, but grab that futures price for the '22 crop. And I'm not saying, you know, 50, 60, 70% of your crop. I, I'm going to likely wait until revenue protection is known, and we know what those February simple averages are. But 10, 15, 20, 25% of my '22 corn, I'm starting to price over $5 because I'm trying to manage margin, not just reducing costs.

There's my concern is, yeah, is we've got to manage the margins that are out there, and I think these margins are are going to compress on us, and we need to get started now, not wait until February and we see what the February average is. Because I've done some early work— if we just drop these prices 10% between now and February, uh, from what the projected prices are today for margin protection, holy smokes, I made a mistake. I should have been buying margin protection. So yeah, that's that foot in the water, I think, is just to say, yeah, I want to go ahead and price this product. At least I want to be knowledgeable and find out, are my neighbors buying margin protection?

Shay

Foulk: Absolutely. Great place to end it, Steve. Steve Johnson here. Always appreciate the conversation, and I'll let you know if we have any producers start throwing books at us, you know, talking about these decisions here in September. It's important. That's why we had the conversation here today. Thanks a lot, Steve.

Steve

Johnson: My pleasure. Thanks, Shay.