Margin protection update and walk-thru

Shay

Foulk: Welcome back everyone to another episode of the Ag View Pitch. Today you have Shay Foulk and Jared Creed. It is March 1st. Jared, how are you today?

Jarod

Creed: Well, I'm waiting for 4 hours to see if the weather will change again because spring fever kicked in at the beginning of the week and then it got to parka season again. So hopefully, hopefully all that's behind us now.

Shay

Foulk: I think of the 12 seasons in the Midwest, we're in false spring. I think that's season number 3 on the chart. So we're doing all right. I should add it's March 1st, 2024, and that's relevant to today's topic. Had a subscriber write in and ask, Nate out of South Dakota, appreciate the comment, but he had asked about, you know, where's this margin protection? How should I think about this for what we have and the decision that we made in September of '23 for 2024? And I think maybe I would like to start with 2023. So the decision that would've been made in 2022, Jared, go back to that. And maybe draw some, some contrast between the two. So what are your quick thoughts on margin protection insurance as a tool? And then we'll look specifically at the '22 to '23 decision.

Jarod

Creed: Well, here in the last 12, 18 months, I think it's been imperative regardless of what the insurance program is, but more specific to buy-up coverage programs, that they almost need to be considered as a hedge, as a hedge that you could go try to recreate on your own via a brokerage account or forward selling crop. But with these programs, they're heavily subsidized by the government, which in turn means that financially, we cannot replicate them as, as a cheaper, cheap as a rate as what we can get our hands on on margin protection. Granted, it's not cheap. Don't get me wrong, when you're buying 90-95% coverage, it's not going to be cheap. But it is still relative to going to the open market in the exchange, cheaper than what you can try to do there. So back to it, it's a hedge.

You're buying 95% of a price, in essence, knowing that if price slides below that threshold, you have to have a higher and higher yield to offset that drop in revenue. Now with that said, margin has one other component in there, and that's input costs. I'll actually go back one more year. Prior to last crop year. 3 years ago, input costs went up, up, up all the way through the timeframe from basically Labor Day into the month of April. Last year, input costs went down, down, down. This year, they're pretty steady. So August 15th to September 15th, we take an average of the next year's corn and soybean prices and wheat for that matter as well. At the same time, they're tracking MAP, DAP, urea, interest rates, diesel. And they're going to compare those input prices again, and another average during the month of April.

And keep it pretty simple margin protection in the eyes of the government. If price goes up and inputs go down, that's better margin for the farmer. If price goes down and inputs go up, that's worse margin for the farmer. And that's ultimately what you are insuring. So last piece in October, it operates just like a regular multi-peril insurance policy, it's going to recalculate the harvest price, it's going to take into consideration what the actual county yield was, and that's going to determine what the indemnity is or isn't. So when you consider the volatility that we've had in the market for the last 3 years, it's, it's a, a viable tool to let the producer create a wildly profitable safety net the last 2 years, maybe not as much for 2024 as prior to, but create a safety net that can't be replicated anywhere else.

Giving you the peace of mind that if volatility stays in existence and markets go against you, you're covered. So as of today, if we— let's back up to last year again. Sorry, I'm jumping around here a little bit. Yeah, that's last year. We know that price just slid lower and lower and lower, but input costs went down as well, ultimately creating a situation where most counties had to yield significantly higher than what their expected county yield was. And most of the time to new record yields. Now you look at Mother Nature, some counties had really, really good production, some counties didn't have so good a production. And we have clients that are going to receive anywhere from zero to probably over $400 an acre from Margin Protection Payment. Now, again, it's a hedge, we're not trying to buy this policy in the hopes of getting paid.

I'd have much rather had $7 corn and big yields and make money that way. But in reverse, it gave us the coverage that we needed. And one other critical piece to remember as we kind of step into this year's multi-parallel plays a role with it as well. You're going to look at your multi-parallel, and margin is going to identify what your indemnity would be on a farm-by-farm basis, even if you're carrying enterprise, it's still going to look at a farm-by-farm basis.. And if there's a $100,000 claim in the multi-peril bucket and there's a $200,000 claim on margin, you're still going to get $200,000. However, $100,000 is going to come from multi-peril, $100,000 is going to come from your margin protection. So now you fast forward it to this year.

We just established our multi-peril insurance price and the insurance price is roughly $0.53, $0.54 lower than what— excuse me, $0.45 lower than what the margin protection price was back in around Labor Day timeframe. With the price drop that we have experienced to date, and pretty much a steady input environment from last fall to present day, most counties are already looking at record yield requirements, as in if today was the average of October and we knew what the price was, we would be able to identify simply what does the yield have to be to not have any type of an indemnity, where not most, but all counties right now, in essence, have to raise around 105% of their expected county yield on corn, and 108% of expected county yield in soybeans. And our insurance prices were $5.09. $12.95.

Now you could say this is a little bit hindsight, but we know what price has done since last fall, been borderline just straight down. In fact, this last week was the first time that we had higher weekly closes in July corn and July soybeans for 11 weeks. So now you're looking at situations— I have the county that we live in here. County of Iowa, for example, the expected county yield is 210. The record county yield is 214 and the required yield at today's price is 221, which is 103% of a record yield. Now you get into situations where what yield is actually doable and what's not doable, meaning probably today most individuals that are carrying margin protection have a 120% financial short in place. In the corn market and soybean market before any type of grain sales or hedges, they're covered, we continue to go lower, the yield cannot offset it.

Shay

Foulk: That's, it's a, it's a weird way of, maybe not a weird way, it's just a different way of looking at it. Because this hedge is being treated maybe a little bit different than people have considered their multi-peril insurance. And you said something, you know, it's heavily subsidized, I would also argue that it's heavily misunderstood. What's— what are some of the biggest misconceptions that come with this as people think about, okay, maybe I did, you know, make the election in 2023, or maybe I need to think about it because September sneaks up on you fast. That's why a lot of people haven't taken advantage of it and they don't understand it. What, what are some of the misconceptions out there? What, what do you hear people just not understanding about the program?

Jarod

Creed: I would say the two The two biggest ones is the idea that, oh, it costs too much. Cost too much compared to what? If something is cheap or expensive, it means we're comparing it to something else. If you choose not to do it because it is counterintuitive financially, I get it, but you better be comparing it to what other options you possibly have. Another misconception would be the idea of it's not a good fit for my farm because my yields are so much higher, so much lower than the county. Rather, it needs to be identified as a trend or correlation. If the county goes up, do you go up? If the county goes down, do you go down? That's where you're really looking for that correlation. Make no doubt about it.

If you're a— let's just throw an example— you're a 2,000-acre farm that's all in one township., you know, all in 5, 6 sections, all Nate close to each other, and you don't have a good, you know, correlation with the east side, the west side, the north side, the south side of the county, it might not be as good of a fit for you because you're possibly taking on more unnecessary risk rather than just insuring your own crop because you really don't have the ability to trend well with the county. So I would add one more misconception in there as well around margin. It costs too much. I'm different than the county. And then it's too confusing. We have to be able to move past that. Either you have to have an agent that can explain it to you appropriately or just go through multiple case studies of it, of understanding. It's just a simple A plus B equals C math equation. So what's the revenue?

Is this What's the best way to do that math equation?

Shay

Foulk: Yeah, I mean, we're— I mean, obviously you probably, you have tools that you utilize for that, but someone listening, I mean, how are— if they maybe don't, lovingly, if they don't have an agent that has walked them through that, how do they run those scenarios to feel good about it?

Jarod

Creed: So you're going to take an expected county yield times price. So let's just make it very simple. Shay, uh, where did you go to college at, Shay?

Shay

Foulk: Iowa State.

Jarod

Creed: Did they teach algebra there?

Shay

Foulk: A little bit.

Jarod

Creed: Yes. Let's take 200 bushels times $5. Yeah. How much is that? $1,000. Now I'm insuring 95% of that. $950. Yep. If price goes down to $4, I'm going to take that $950 divided by $4, and that's going to tell me what? What my yield has to be.

Shay

Foulk: Yep.

Jarod

Creed: Or if yield goes down to a certain level, I get to divide it again and it's going to tell me what price has to be. And if the price is higher than the spring price, that means that the program is going to recalculate to the higher guarantee. Because if you fall below the 95% threshold, it is going to have an indemnity pretty much no matter what. So oftentimes I think your multi-apparel insurance, the math that is used is I'm taking my APH times the percent coverage that I elect. I encourage guys to think about the other way. Take your APH times 95% of the price. So if the price is $5, 95% of that is going to be $4.75. Meaning if the market is below $4.75, I now know that the only way to get to the guarantee is I have to have the yield be higher than the expected. It's again, it's, it's like a pendulum. Well, if price is this, yield has to be that.

If yield is this, price has to be this. And it's not any more complicated than that. So that's that third bucket of don't overcomplicate it. It is just math. It's just a simple algebra equation of yield, price, and input costs. And I should mention on input costs, Jay, you know, if inputs are up, it's basically increasing the guarantee. If inputs are down, it's decreasing the guarantee. And then you go right back to the yield and price calculations.

Shay

Foulk: I think a lot of people are going to go back and re-listen to how you explained it. That was very good. The question, one of the questions that was asked, you know, out of here was, okay, we purchased margin protection insurance in September. We're currently 20% hedged on corn at $5.34 and 20% hedged on soybeans at $13. Is there any marketing strategies with the futures prices being so much lower than $5.09 since we have or, you know, that we have with the margin, that $5.09. What are your thoughts on that?

Jarod

Creed: Well, I'm going to go back to the idea of I got to look in each county, what the expected county yield is, what input costs have done, and what price has done. And I'm going to put a value on my insurance policy more or less every day. And knowing that today with where prices have gone, most counties are looking at a yield threshold or requirement that is flat out not doable. So on March 1st, Friday, December corn closed at $4.58. And obviously, we're not going to mention any names. The subscriber that asked is a South Dakota producer. We have lots of farms that are in South Dakota as well. I'm going to pull up Grant County, South Dakota, which would be— that's kind of northeast, but we're going to run with this one. So the expected county yield for Grant County, South Dakota is 175.1.

At today's insurance— today's current December corn at $4.58, if the county yielded 175, it has an indemnity of over $50 an acre. Now keep in mind, margin is paying 120% of every dollar that's lost. You don't have to do it that way. That's a buy-up on the program. But more often or not, that's what it's used as. So 120% payout means that our indemnity shortfall today is roughly $43 an acre. So if I take 175 bushel yield, times 105%. That's 183.75. And why I said 105% is going back to the little cheat sheet I have. Right now we know that counties have to yield about 105% of their expected. So I'm going to go ahead and just say, all right, 183 bushel, that's an 8-bushel increase on roughly $5 corn. That's $40 an acre. And my indemnity shortfall today was $43. So if I punch in 183 bushel yield, my indemnity is going all the way down to $8.

Now I'm $7 above the threshold, so I'm going to go ahead and kick her to 185. And it just so happens for Grant County, South Dakota— I apologize, I should have had this pulled up, but thankfully I have this cheat sheet right here in front of me. South Dakota does seem to have some boom or bust yields once in a while. But a record county yield for Grant is 109 bushel, or excuse me, 189 bushel. So as of today, 185 yield requirement versus a record of 189. That situation right there would tell a producer that if price slides a little bit lower, I know that we have to yield a new record. If I drop price by 10 cents on 185 bushel corn, it's a drop of $18 an acre. I have to make that up in yield, which at $5 corn, $18, that's another 3.5 bushel. Now I'm at a new record county yield, right? So I probably could have chose a better one there. So let's just do one more, Shay, if we got time.

Just because kind of fun with math. I'm going to go to— we have a ton of producers in western Iowa that carry margin. I'm gonna look at Crawford County. That's outside of Denison. Yep. When corn was $4.50 to start the week, Crawford County would have had to yield 241.3 to not have a margin claim. The record yield is 236. The expected county yield is 225. The county has only yielded over 230 one time in history. So now I'm getting into some law of probabilities or odds. This is where it gets into more of the marketing and the financial aspect of all this. If I find myself in a situation that the yield is not doable and price continues to go lower, I pretty much have to earmark a yield and say, this is the number. It can't get any higher than that. I know that I'm recouping every dollar that's lost from this price and lower.

So if I'm recouping $1.20 for every dollar I lose because of the 120% factor, that means I have 120% hedge across all my acres. I'm covered. Insurance doesn't care what you have or haven't sold, same as what you have and haven't sold doesn't care what you're carrying on insurance.

Shay

Foulk: Yeah.

Jarod

Creed: So the producer question that came in, okay, I'm 20% sold on corn and beans. And I'm looking at a situation that I cannot see a county yield be high enough to offset the drop in price. 20% of my physical grain is sold, meaning 80% is exposed. But I've got this 120% short over here from margin, the two of those combined, that producer is 140% short the market. Not physically sold, but 140% short. That's where a situation comes in that $4 corn is probably worth $5. $10 beans might be worth $13. Because at the end of the day, it still created a hedge. I just hedged 120% of my acres at a certain price. Because yield cannot go any higher. It's physically impossible to see a yield go to that level. And if I continue down the path on Crawford County, If our concern is $4 corn, the county now has to yield 271.

Shay

Foulk: I don't know, those guys can read corn.

Jarod

Creed: You know, maybe sometime that happens, but it's not today. Yeah. And again, if all of a sudden the county yields 250, yeah, okay, I dropped my, my margin indemnity, but I still got something out of it. But that means that the odds are higher that I'm raising a huge crop myself, and I'm trying to bushel my way out of the system. I'm busheling my way out of the loss. So I think it's the one other aspect to throw in here, Shay. We're talking about lower prices creating this big hedge, but within insurance, it's either a hedge or it's not. It's not in between. So all of a sudden, if price goes back to $5, now the yield requirement has dropped significantly and I don't have any coverage from my insurance and I'm 20% sold. Whose ball is— or whose court is the ball in now? Now it's in the farmer's hands again to start making marketing decisions because I don't have a hedge over here.

The market could come back down. Now I have coverage from my insurance again, giving me the ability to safely adjust how I'm positioned because of the grain I have sold and my insurance. You don't have to sell something you don't have risk on. And in fact, there's probably quite a few producers today, they're 50% sold, 60, 70. We have some extreme as high as 100% sold for this next year, they're 220% short the market. That gives us a lot of opportunity to think about 2025 and beyond, knowing that we have the coverage from a hedge from insurance until we don't. And then if we don't, we get to resell the grain again. So lots of different advantages come in there. Sorry, I'm rambling there a little bit.

Shay

Foulk: No, that's perfect. The follow-up question was, okay, how does this then play into what we're electing here for spring program, 80-85% on the revenue side of things? Thoughts on that?

Jarod

Creed: I don't think anything gets changed drastically from your practices from years prior. More often than not, it does seem like the 80% policy finds the best fit for these programs. Um, you do get a premium credit to your multi-peril if you're carrying margin. Uh, if you're carrying a higher multi-peril policy, that's obviously taking some of the risk away from the margin program. If you're carrying a lower multi-peril, it's putting more risk on margin because again, if multi-peril pays, it's coming off the margin payment first. So I don't think you recreate the wheel anything too special. And what's important to remember there too is you could always have that isolated event You could get a hail out, windstorm, or a real freaky drought on just your farm and not the rest of the county. So you don't want to give up all of your own multi-peril coverage.

I would say 9 out of 10 producers that we work with, regardless of what state they're in, east or west of the Mississippi, doesn't matter. They're all carrying 80% with their margin protection. So again, I don't think you need to go recreate the wheel there and do anything too special. And you get to the isolated piece. I know I'm kind of jumping ahead here, but should we consider wind and hail? If there's a situation that your revenue has just exploded because prices went higher or lower, you now have the opportunity to identify what's the last piece or two that can take bushels away from me. And if I run that risk of being wind or hail, then of course I step in and I identify what that risk is and I buy the coverage that I need.

Shay

Foulk: Yep, I agree.

Jarod

Creed: Hail rates can be wildly different depending on where somebody is located. And I know we're running short on time. I want to throw one other piece out there, Shay. 2025 margin protection. As soon as like April 1st, there are programs out there that allows us to go put a floor under next year's margin protection price. With any type of luck, if we have some volatility in the next 60, 90 days and we have the ability specifically on corn to lock a margin protection price in of at least $5 for the next year, I'm going to be all over it. If the margin protection price ends up coming in higher, so be it. I get to use that higher price still, but I'm still setting myself a floor hopeful input costs come a little bit lower into 2025, and I have the same type of revenue guarantee in '25 that I had in '24 with a cheaper cost. It's a good conversion margin.

Shay

Foulk: Yeah, you must have a telekinetic pathway there because that was going to be my follow-up question is, is it too early to be thinking about considerations for '25? And I don't think it is, especially if you're someone that's listening to this that does not understand the program, does not understand how margin protection can have a benefit or impact on the marketing decisions and how you manage your farm operation moving forward, make some calls, reach out to Jared, you know, think about what are ways that we can be leveraging this in our business.

And Jared, I think, I think it's fair to say that some of the producers that, that we work with, either through mutual connection or just kind of the type of producers that we work with, have had massive benefits to their operation by learning margin protection, learning how to utilize it, and giving them the, the comfort level and the decision-making processes to help them succeed. Is that a fair statement?

Jarod

Creed: Yeah, and I think another viable point in there, most progressive producers, for lack of better words, you're probably starting to procure inputs for the next growing season as early as July, August. Yep. The advantage with margin protection is it's setting that price for that crop 4 months earlier than your regular multi-peril when you're starting to lock in those input prices. So another addition here that there's— if the Farm Bill passes, the language that's in it right now, it's going to increase margin protection from 38% all the way to 65%. At the same time, ECO and SCO is going to have more subsidy to it. The RMA gets a bad rap sometimes, but gosh darn it, they are continuing to remodel these programs to better fit the needs of farms in volatile markets. And they're subsidized. Awesome. We cannot go recreate the wheel in the same fashion in the open marketplace today.

And at-the-money put option for next year's corn will run a guy $0.35 a bushel, 200 bushel corn, $70 an acre just to protect price. And I'm going to spend less than that on margin protection to cover price, yield, and inputs, albeit at a $0.50 higher price than we're at today.

Shay

Foulk: Quite the program. I think it'll be interesting to see how it plays out. As you mentioned with Farm Bill there, and if you're not utilizing it, if you don't understand it, please reach out. Jared, what's the best way for anyone to reach out if they have questions here?

Jarod

Creed: Phone is always easiest, area code 402-680-1744. Or if you happen to find yourself in northeast Iowa, just swing by our office in Hudson.

Shay

Foulk: Yeah, awesome. Jared, thank you for the time on this. I think it's an important discussion. Thank you guys for the mailbag questions. We like addressing those because our whole purpose here is to provide value and perspective to your operation. So thank you everyone for listening to another episode of the Ag View Pitch, and we