About This Episode
The February average set corn around $4.57 against $3.88 a year earlier and soybeans near $11.82 against $9.17, up 18 and 29 percent. The part that surprises people is the volatility factor, the Black-Scholes input off December corn and November bean options. Corn came in near 0.23 versus 0.15, beans above 0.20 versus 0.12. Higher price plus higher volatility means premiums land harder than the guarantee alone would suggest, and the sign-up deadline is March 15. The same election buys $100 to $120 an acre more coverage than last year.
Johnson's warning is about managing with the checkbook, comparing this premium to last year's and cutting to match. He calls that driving 65 miles an hour looking in the rearview mirror. Barron ran the numbers a different way on a 200 bushel corn client: revenue protection costs 17 cents a bushel, takes 8 bushels to pay for, and is 3.9 percent of total cost of production while covering nearly every expense on the sheet within about $10 an acre. He can budget another $13 an acre; he cannot budget a $120 loss.
Three levers cheapen a premium and each one sells risk back: dropping from 85 to 80 percent coverage, moving optional units into enterprise, and taking off the harvest price. Take off the harvest price only if you will not pre-harvest sell. The government already pays 50 to 80 percent of an enterprise unit premium. If you want to get to 90 or 95 percent, stack the county endorsements, SCO and ECO, on top, and add hail, wind and green snap coverage when you are in enterprise units.
“I think it's like driving down the road at 65 miles an hour looking in the rearview mirror.”
— Steve Johnson
Key Takeaways
The premium jump is volatility as much as price. Corn's factor came in near 0.23 against 0.15 last year, beans above 0.20 against 0.12.
Price revenue protection per bushel, not per acre. On 200 bushel corn it is 17 cents a bushel, 8 bushels, and 3.9 percent of total cost of production.
Keep the harvest price if you intend to pre-harvest sell. Dropping it is what turns a forward sale into a production risk.
Moving optional units to enterprise units cheapens the premium by pooling every field in the county, which is the same thing as taking on more risk.
In enterprise units, buy the supplementals: hail, wind and green snap. SCO and ECO stack on top of revenue protection to reach 90 or 95 percent.
Run your own numbers on the University of Illinois premium calculator before March 15 instead of comparing this year's bill to last year's.
Full Transcript
Narrator: We are grateful that you are joining us for another episode of the Ag View Pitch, as we know that your time is very valuable. Our team at Ag View Solutions is always here for you for any questions or comments that you may have. Please feel free to reach out to us at cbarron@agviewsolutions.com. And now here is your host, Chris Barron.
Chris
Barron: Welcome everybody to another episode of the Ag View Pitch. We are just getting to the end of February price discovery period for crop insurance, and we have a special guest with us, Steve Johnson, the foremost expert that I'm aware of anyway on keeping track of what's going on with crop insurance. Steve, how's it going?
Steve
Johnson: It's going really well, and I'll tell you, talk about an exciting time. Lots of volatility as we close out the month of February.
Chris
Barron: Yeah, that's for sure. So hey, you know, can you go through some scenarios for us? Can you talk through a little bit on kind of give us a comparison, tell us a little bit about, okay, here's where we were last year, here's where we're going to be, and what that might mean for us as we make some decisions now?
Steve
Johnson: Sure, let's just briefly compare the '20 to the '21 projected price. The projected price being determined the month of February. Again, we won't know these numbers until Monday, March 1st, but we're going to be up about 18%. Last year we were at $388, this year we're going to be around $457, maybe $458. So we know that the projected prices are going to be higher, and those projected prices determine not only our revenue guarantee, but they're also going to influence our premiums. For soybeans, we're up 29%. Last year we were at $9.17. This year it looks like the simple average in the month of February is going to be around $11.82, could be $11.83, could be $11.84 again as we close out, uh, February. But Chris, there's one other factor, and I think this is the one that you really need to recognize. It's called the volatility factor.
It is a measure volatility for December corn futures options and November soybean futures options. It uses a Black-Scholes model, and that is really the factor that's increasing these premiums is because, uh, that factor is probably going to come in around 0.23 For corn last year it was 0.15. For soybeans it's going to come in over 0.20. Last year it was 0.12. We're going to get both higher prices but much higher volatility. These premiums are going to provide a sticker shock the likes of some of your listeners probably aren't prepared for.
Chris
Barron: Yeah, so talk a little bit about that. What, you know, what are you seeing? What, what do producers need to prepare for mentally so that they can do the right thing economically?
Steve
Johnson: Well, I think number one, I think you need to recognize your revenue guarantee is going up, so you're going to have a lot more revenue sitting underneath you. It's going to be that ability to have confidence in '21, that ability to pre-harvest sell, leaving that harvest price on and, and getting 30 or 40 or 50 or 60 or 70% of your bushels sold, committed to delivery. I think that's the key. I'm concerned that some farmers are going to say, oh, I got to cut costs somewhere, I guess I'll cut it in crop insurance.. But when you got the government paying such a large percentage of this premium, I'm reluctant to try to cut back on my revenue guarantee in order to try to reduce my premium. I think this is going to be the true test. 2021 is going to be the test of how you understand the importance of managing revenue risk.
Chris
Barron: Well, and that's, that's a great point. I mean, you, you said the two words that, you know, as farmers we've had to manage really, you know, really closely, especially the last 5, 6 years, which is, you know, cost cutting. And the key though is to cut out the right things, correct? I mean, it's— don't cut out the things that bring the most value to the business.
Steve
Johnson: Yeah, and what other product guarantees your revenue like Revenue Protection Crop Insurance? It's kind of says it all. It guarantees your APH times your level of coverage, and you get to multiply it times the spring projected price, roughly $4.57 corn and $11.82, $83, $84 on soybeans. So again, it's doing exactly what you want it to do. It's allowing you to guarantee revenue, but cutting back that revenue when you finally get to a level that you've not seen in 6 or 7 years. That's going to be an individual decision, but I don't think I want to take the harvest price off if I'm going to pre-harvest market. And I don't think I want to move to enterprise units if I'm already in optional units, because then I'm exposed to more risk by putting all of those fields together for that crop in the county. So again, let's discuss with your crop insurance agent.
Let's have a real good discussion, not just about premium. I call that managing with your checkbook and Chris, there's going to be a lot of farmers managing with their checkbook over the next 2 weeks as March 15th deadline is coming.
Chris
Barron: Yeah, I love that statement too because, you know, that's one of the things that we've always tried to coach people on, on all the important line item expenses, which crop insurance always— and I'm not a crop insurance salesperson, but I've just always recognized that that single line item tends to always have the most value of any other line item in any, any year. And then this year it's even more so. I, I ran some numbers, and I want to get your take on this, but I ran some numbers on Profit Manager with an average client that's really close to what our average scenario is on corn specifically. And basically what we're looking at is, if you looked at the, at the checkbook for this producer, you know, he's going to look at the dollars like you said that he's writing a check for.
But more importantly, what we try to get people to focus on is, okay, what's your cost on the per bushel basis, and on 200 bushel corn for this grower, it's 17 cents a bushel. So rather than, like you said, rather than looking at what you write the check out for, look at, okay, what is that in terms of a cost per bushel? And then the other category I like, two other categories I like to look at, is how many bushels does that take to cover that cost? In this case, it's 8 bushels. But even more importantly, or as important as those other two comments, is it's 3.9% of the total cost of production., and it's protecting, in this, in this producer's case, it's essentially protecting all of their expenses within about $10 an acre. And, and so, you know, I don't, I, you know, why would, you know, is there, are there some reasons why not to, um, look at that from this perspective?
Or is, you know, am I catching this the right way?
Steve
Johnson: No, I think you're catching it the right way. I just don't think you think like most farmers. Sorry. I, I mean, I think the well-managed farms All right, we're drilling down through this to see that, that the 3.9%, the overall cost of production crop insurance revenue protection is only 3.9%. That is key right there. I think you're spot on. I just think we've got to be careful in a year like '21 where we've seen the volatility this last week of February. We've got to have a plan. We've got to understand our cost. And the reality is, is that I've got 2 weeks to make a decision. Yeah, I could go to a lower level Guarantee I could go from 85 to 80 and I could cheapen up my premium, no doubt about that. I, I could go from optional enterprise units and I could cheapen up my premium. I could take off my harvest price and I could cheapen up my premium.
But in every example is I'm exposing myself to more risk. And I think you're spot on, is less focused on what I really need to do to manage revenue risk on my farm, understanding that we are going to likely have higher prices, but we're going to have higher premiums. We've got to make that adjustment. We're gonna have to go back and review what we did in '12 and '13. We didn't back off these levels of coverage. We recognized that, man, what a revenue guarantee, and remember how profitable those years were because we had revenue protection sitting underneath us.
Chris
Barron: Yeah, you know, the sticker shock, and we're doing this, you know, right at the very end of February. So we don't have the exact number, but we're within a penny or two. And as you look at last year in comparison to this year, there's another, you know, if you bought kind of the same level of coverage, you know, we're talking over $100, you know, $100, $120 an acre more coverage, likely the way it looks. And so, you know, what, You know, the thing that scares me is, you know, you look at, you know, the revenue protection with harvest price exclusion, it would take most people back to similar to cost of last year if they do start making decisions from the checkbook or they start looking at lower levels of coverage to get back to last year's price. What's your statement to that when people start looking at that and trying to manage with a certain dollar amount of expense?
Steve
Johnson: I think it's like driving down the road at 65 miles an hour looking in the rearview mirror. I really think we've got to be careful. Say, well, let's compare '21 to last year and we can see these premiums are going to jump. I mean, you and I were just looking at some numbers and it was like, oh my gosh, you know, compared to last year, you're right, we're going to pay a lot more for crop insurance, but we're going to pay that premium for the right reason. To manage revenue risk on my farm. So I think we've got to be careful just comparing this year to last year, because I'll tell you, they're starting in completely different places as far as prices, and because of the volatility, and because of the premiums.
But we are setting ourselves up— this '21 could really be a good year, and, and I think crop insurance And pre-harvest marketing is part of how we could really have a great 2021 without going back to, you know, previous generations thinking I just got to cut costs somewhere.
Chris
Barron: Yeah, another, another thing that I was just looking at too, like in our, in my own operation or our family operation, you know, you know, we can afford another $13, $14 an acre for coverage, but we can't necessarily afford a $120 an acre loss. And I can budget, I can budget that $13 or $14, but I can't budget that $117 loss or $120 loss.
Steve
Johnson: Now, you know, last year was a good example. You and I had a couple of these interviews on podcasts. Last year was so critical that you had the crop insurance in place in March that you were able to ride out that 20-year with all of this uncertainty and volatility of price, and then we had production risk, then we had demand, and we had uncertainty of weather in South America. I think what you do in the next 2 weeks, by Monday, March 15th, really kind of sets you up. I agree with you. I think you're in the right camp. You're recognizing the importance of managing revenue risk, not just cutting costs, and crop insurance is such a small percent of your overall cost and the only one that guarantees revenue. That's the key.
My gosh, the government paying roughly 50 to 80% of your premium on enterprise units and probably 40 to 60% on optional units and just recognize that, hey, this is a great tool to use. Not many farmers in the world get a tool like revenue protection, but I've got it and I've got 2 weeks to make a decision. Work with my crop insurance agent. Again, they're going to be really busy because they're working from home. Probably email and letting them send you a quote for comparing. Now what we did last night, we went to University of Illinois, we pulled down their tool that's been online for the last 5 weeks. Uh, Gary Schnitke had just updated the volatility factors and the prices. We used those today.
So you can go to University of Illinois and look at their crop insurance premium calculator and you could pretty much make the same types of assumptions for your farm using your APHs, using your trend adjusted yields, I think spend some time in the next couple weeks and let's go ahead and get this decision done. That's why we had ARC PLC out of the way, because now we want to focus on the big one, the big safety nets, crop insurance. And we want to stay with the revenue protection and weave our own safety net for 2021.
Chris
Barron: Yeah, so, you know, I think you and I both kind of see through the same lens. And what, what practical, you know, if you were to leave a producer with some practical go do this, these are some, some key things, this is your checklist, get this, this checklist covered.
Steve
Johnson: Yeah, get the right product in place with revenue protection. I don't want to take the harvest price off unless you just aren't going to sell anything in advance. And then I think I want to focus on unit structure. Are you in basic, optional, or enterprise units? That's an important decision, and that's an annual decision by crop by county, so you don't have to pick the same product by crop in different counties. Level of coverage is the same way. Maybe you can move from 85 to 80 or 80 to 75, but just recognize, yeah, you're saving premium, you're lowering your revenue guarantee, and is that what your intent is? And then don't forget the supplementals. If you're an enterprise unit, you better Make sure you've got hail and consider wind and green snap.
And then, Chris, we talked about in the previous podcast, don't forget you've got these county-based endorsements, the supplemental coverage option as well as the enhanced coverage option, that if you are looking for a year to get to 90 or 95% of a guarantee, you could add on top of your revenue protection these county-based endorsements. So hey, crop insurance agents are going to be busy, but this is going to be a good time to be a good communicator. Let's work with your crop insurance agent because they're going to be pretty buried here as we head into March Madness. And remember, has nothing to do with college basketball this year, right?
Chris
Barron: And, and just to remind the listeners that, you know, Steve and I did a pretty specific conversation on SCO and ECO, and also Joe Vaklovic did a pretty detailed conversation with, with Steve as well. And both Both of those, Steve, you did a great job of laying out, you know, the SCO, the ECO, how that works, and just the whole topic of, of some things to consider and the key things to, to focus on as you make this difficult decision for some. Not— it wasn't really very difficult for me because I, I want the protection. I want to be able to sleep at night. To me, there's always, there's always two types of risk you got to think about. You got to think about your your mental tolerance if it doesn't rain for 6 weeks in a row or whatever, and, uh, or the prices are starting to go back down because the crop does look awesome.
And, and so it's that, that peace of mind is one side of it, and then the other side of it's just obviously the economic component and what type of risk you can tolerate. So with that said, Steve, any final, any final comments?
Steve
Johnson: No, I just want to make sure that everybody is focused right now. You've got roughly 10 days to communicate with your crop insurance agent what changes you want to make in crop insurance coverage for 2021. So hey, been my pleasure again. Good luck to everybody, and as we head for March 15th, let's feel comfortable in these decisions we make.
Chris
Barron: Awesome. Hey, that was awesome conversation, Steve, and we'll definitely have you back, and, and we'll start on some other projects throughout the course of the year. There's always a lot of things that we got to work on and think about to make our businesses profitable. So Steve, I really appreciate your time and your commitment to helping producers make good decisions, sound decisions, and then managing the risk. So thanks a lot, really appreciate it.
Steve
Johnson: All right, thank you. Stay safe.
Chris
Barron: Yeah, will do. And thanks everybody for listening, and we will catch you again next time on the Ag View Pitch.