Time to manage risk: the clock is ticking for margin protection

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

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch. We are going to speak spend a little time here now talking crop insurance and particularly margin protection insurance. And I'm lucky enough to have sitting beside me a couple of experts in that area. First and foremost, Steve Johnson, retired ISU Extension Farm Management Specialist. And so happy to have you here, Steve. And then we also have Jared Creed here with us, who all of you know that we do a lot of marketing conversations with Jared, and he's really well schooled, as much as about anybody I know, equal probably almost with Steve in terms of understanding margin protection. And so with that said, an introduction here, let's start here with you, Steve. Give us a little perspective. We're recording this right as we kind of wrap up the price discovery period on margin protection.

Talk a little bit about what the producers need to be aware of and pay attention to.

Steve

Johnson: Yeah, margin protection is a really important decision that I think our row crop growers are going to want to consider. The 14th of September is the last day of price discovery, both projected price— that's December '23 corn and November '23 soybeans— but also because it's margin, there is a discovery of cost, and it's select variable cost.. And so I think if you are interested in margin protection, understanding how it works, it's really important that you schedule an appointment with your crop insurance agent.

Narrator: At Iowa State—

Steve

Johnson: you're real close to that— at Iowa State we've got a brand new publication, so you can just simply Google margin protection crop insurance and you'll see a 5-page publication as well as some FAQs So now is go time. Uh, you're going to know what the premium is, you're going to know the projected price, you're going to know the projected cost. It's an add-on to revenue protection, and I think it's the theme for the '23 crop— managing margins, not just managing costs and managing yields and managing price. In essence, margin protection crop insurance, federally subsidized by the federal government, and available through most any crop insurance agent, is a really important decision.

On or before September 30th, you've got to indicate to your crop insurance agent that you want to buy it, or if you had it last year, indicate to your crop insurance agent that you need to cancel that coverage. So in essence, Margin Protection Crop Insurance, September 30th is the deadline. And as I've told you before, Chris, give a farmer a deadline, they'll show you how close they can come.

Chris

Barron: Yeah. Exactly. So talk a little bit about why a producer should even be looking at this. You know, I'm Joe Farmer, I always buy, you know, revenue protection. What's the deal here? Why do I even look at this? What's the advantage, you know, for even spending the time figuring this out and adding it to the to the system?

Steve

Johnson: I think the 3 biggest advantages— number 1, it's giving you a different price discovery period. So it's giving you this mid-August to mid-September. Um, all the other products you buy— revenue protection, yield protection, SEO, ECO— uses the month of February. So basically you got all your eggs in one basket if you don't buy margin protection.

Chris

Barron: Stay broke.

Steve

Johnson: Number 2, I think, is that idea of costs. Nothing else that you do in the crop insurance industry is focused on costs. Again, it's select variable cost, not a lot of products. But now we know that those select variable costs are going to come in around $273 for corn and about $207 for soybeans. If those costs go up between now and roughly April then it's going to reflect in that trigger that you have for margin protection. So I think it's in essence this idea of diversifying from February, using a different discovery period for price and cost. I think it's the fact that it reflects costs where none of the other crop insurance products that you have reflect costs. And lastly, I think it fits where most of the typical growers are at right now. I'm going to buy inputs for the '23 crop, probably should be selling outputs.

And so the fact is, is that I think it's a complement to that idea, even though it's a county-based yields, it's an area-based program. You're just adding it on top of revenue protection. So yeah, I think it has some merit. And if I had to look back at the last 20 years Probably '23 would be a good year to consider buying margin protection.

Chris

Barron: We're kind of set up for it. Jared, any questions or anything? I'm not asking to make sure because you're, you understand this system really well. I think there's a lot of farmers probably listening to this that probably understand margin protection well enough to be somewhat dangerous, and there's probably the need for farmers to quiz their insurance agents to make sure that they understand it more than just being dangerous and can explain it to them. What things, what, what things from your perspective do we need to be thinking about or know as producers with that?

Jarod

Creed: Do you understand the mechanics? You obviously got to have the conversation with the agent, starts and stops there. But the reason that we're talking about this today is because of the environment we are in, and not to sound like a broken record, Have the conversation, right? If you've put it off in the past, sorry, but shame on you. You need to learn. And you're right down to the deadline, like Steve said. Get the appointment scheduled and learn about it. You would do the exact same thing on seed, chemistry, fertilizer, equipment. You're always researching what you're using. You know what you're using. And if there are tools in the industry that'll help you do better Oftentimes a farmer is going to flock to those tools. This may be a tool that fits a broader landscape this year across the Corn Belt in the environment we are in.

We're not in an old-fashioned $3.50 to $4 corn environment, and your inputs, your overall expense to grow a crop today versus 5 years ago, is almost 2x in total dollars. So drastic times require drastic measures. It's not necessarily a drastic measure to use margin protection, but it's a phenomenal time to understand what it may do. And at bare minimum, you've educated yourself.

Chris

Barron: Can you guys give an example of a scenario? I know, Steve, you're, you're good at this too, but, you know, do you guys have an example of, of the why? Or, you know, what's a scenario where where, um, could help the listeners understand the program better?

Steve

Johnson: Well, we've had margin protection for 7 straight years in the Corn Belt. 22 states have this for corn, soybeans, and spring wheat. And I think maybe one of the best examples is we've never had projected prices at these levels. As of yesterday, we are at $6.09 corn. That's December '23 simple average during this discovery period. Soybeans were at $13.53. It's like revenue protection. I'm going to add this on top, and I'm going to make this decision earlier. All right, and I'm going to diversify that strategy. And the fact is, is that I've got some guarantees sitting in front of me now that I typically don't know until March. So I'm making these decisions earlier. Government's paying 44 to 59% of the premium. I really think that the scenario that you're asking about is I need to run through the numbers with my crop insurance agent.

I need to see the value of this, not just the premium, because you're going to look at the premium and go, oh my gosh, is there any cheaper products? Yeah, there's some— a lot of moving parts. You can buy it up to 95%, uh, level of coverage. You can buy it up to 120% of price, but you don't have to buy— I call that the Cadillac. You don't have to, um, but I think it is a product that a lot of growers are going to be considering here the next couple weeks. And again, it's because of the risk that's coming at us on margins for the '23 crop.

Chris

Barron: You make a good point on the cost instead of— and I like to look at it as an investment in your business, but, you know, people are going to look at it and there's going to be an emotional reaction to the cost, quote unquote, and instead of looking at it as an investment in risk management, talk a little bit about how do you work through that as a grower to understand your, your, you're investing in your business and risk management and protecting a threat against a threat. Do you want to address that, Jared?

Jarod

Creed: Well, first let's just use the state of Iowa as an example. I bet 99% of Iowa producers and counties will find that an 80% enterprise policy with margin protection— hope you're sitting down before I say this— High-yielding counties will probably cost upwards of $120 an acre, all your insurance, all in. Low end, $75 to $80. That's going to catch the overwhelming majority. Now, before you go down the path— I can just imagine, Chris, somebody's driving down the road and I just said that, and boom, channel change, boom, volume down. So that's a chunk of money, all right? I'm not going to dismiss that. But Chris, you and I have talked enough that we're in agreement that there's a tremendous amount of producers that might be spending $1,200 to grow a corn crop.

Chris

Barron: That's exactly where I was going to go.

Jarod

Creed: And probably spending between $750 to $800 to grow a soybean crop. Your farm might be higher, your farm might be lower, but it's all relative. And you think about the dollars that are on the table on both a risk perspective from losing versus gaining. At the end of the day, like I've always said, risk is good and bad. I view this as the cost of doing business, a potential cost of doing business. If you keep the environment in right now and you carry it over the month of February, your insurance is still going to cost you $50 an acre for a pretty good policy. And quite frankly, if you go to like an 85% optional unit policy, I'd make an argument it's not going to be that much cheaper than an all-in margin protection policy with like an enterprise structure. You can structure multiple different ways, you can structure it county by county, whatever you want to do.

But the expense piece also has to be looked at as what are my other options. Option 1, I do nothing, I wing it, I'm buying high price inputs, I want to be friendly to grain markets. Okay, that's fine, your choice, a risk you want to take. Your choice, your operation, your business. No opinion here on market higher or lower, just addressing the idea your costs are greater than they've ever been, and the world around us is as volatile as it's ever been in my time in the industry. The— your second option: I buy my regular insurance and I stick with my traditional marketing plan. A traditional marketing plan, depending on what you define traditional, some would perceive as not enough in the environment that we're in.

Just dotting your i's, crossing your t's, and that could be a fine strategy if your traditional marketing plan is to take risk off the table, lock in some profits, know what your risk parameters are. Great. Your third option could be a combination of kind of everything. If you want to be friendly the market, you want to be optimistic or cautiously optimistic, margin protection is the best bang for the buck to establish a tremendous floor across your entire operation to cover you on both yield from a county perspective, price Chicago Board of Trade, and input costs also Chicago Board of Trade.

So those pieces combined and you think about between now and April next spring when the harvest price is established for those inputs and now and next October when the corn price is established for margin protection, If you would have asked me last August, September when we were signing up for margin protection, to be dead honest with you, we did it because we were concerned about price long term. The world changed a lot. Yeah, from October 1st last year to the invasion into Ukraine to the inflation roaring its ugly head and then a challenging weather situation in the U.S. this year. What does it look like next year? Am I buying it for a perspective of price protection, yield protection, inputs? To be honest with you, I might be buying it because I'm scared shitless.

Chris

Barron: Yeah, right.

Jarod

Creed: Of what is on the other side of what can ever come here. Excuse the French. Good thing it's not a radio. Yeah, but it's reality, right? It's just reality that the risk is greater than it's ever been. And if I want to be cautiously optimistic, this might be something I should be— I should be willing to put the expense on the table when I say it's the best tool out there, it's because it's still cheaper than going and using an option in the grain market that only is going to cover you on price.

Chris

Barron: Well, yeah, you know, we, we spoke earlier, you know, offline, you can spend $50 or excuse me, $80 pretty easily on an option strategy and do a similar thing on the whole, whole deal with, with your margin protection and have a, have a lot better— it's not just price, right? It's, it's connected to And may— and maybe this is a good point here for just a refresher quick too, um, from you, Steve, on, on what it's protecting on the margin side, on the expense side.

Steve

Johnson: Yeah, again, it uses both fixed and variable costs, but the fixed costs don't change. We're comparing those select variable costs, and those are primarily interest, diesel fuel, DAP, urea, and potash for corn, no urea on soybeans, So the fact is, is that, is it possible that those costs could increase between this discovery period that we just close out on the 14th of September as compared to next April? And we're recording this in a day that the Consumer Price Index just came out and, and kept inflation, overall inflation at 8.3%. We're still at the highest level in 40 years. And by the way, the Dow Jones Exchange is off somewhere between 800, 900 points. This is a tremendous volatile time with a lot of uncertainty coming at us for this '23 crop. I think margin protection warrants a look here the next couple weeks.

Chris

Barron: Yeah, I, I'll get you guys' take on this. I'm just going to give you a farmer comment with my farmer hat on. As a farmer, I'm looking at it, and this is the, the logic I use with my, my partners too, is that, you know, we can afford to lose— or I shouldn't say lose, but we can afford to lay out $80 an acre or even $100 an acre on a $1,200— on the cost of a $1,200 input to protect that. Because I can't— we can't afford to lose $400 or $500 an acre. I can afford to plan on the expense or the investment of 80 or 100. Any comments on that just from a risk management standpoint?

Jarod

Creed: I don't know if there's a better way to look at it, to be honest with you. I mean, I'm not trying to dismiss your question there whatsoever, Chris, but I think just to take away here is the first step is admitting that there's a different world on the farm right now. It's like a shake in the tree. Yeah, that— it's not even a call to action what we're talking about here necessarily. You can go accomplish a business plan to keep yourself in the game moving in the right direction in a lot of different ways. But given the calendar and the urgency of understanding this program, that's the message.

And I think on your operation and several others, you hit the nail on the head that What else can I go do right now in the environment that I'm in today, making an imperative decision in the next couple weeks that will ultimately project myself all the way out into 2025 or '26 in the event something goes haywire? And margin protection there is to save my bacon. And I, I've had that conversation with a lot of guys. You know, there's a lot of land exchanging in the last year, a lot of land. And the idea is what you don't want to do is get into year 1 on that new ground and go backwards right off the bat. We have to make sure you take a step forward year 1. And what can I do to do that? Marketing grain aggressively? Not necessarily. Mother Nature can help me. It's a big crapshoot. Oh, I got this tool out here, margin protection, it's going to make me move forward virtually no matter what.

Chris

Barron: Well, and we, we've got to protect the working capital improvement that many operations have had as well too. So it's not just the one side of the equation, it's both sides of the equation, right? It's protecting that opportunity cost or your position. Hold your position, you know, don't let it push you back.

Jarod

Creed: When you retire and look at your balance sheet in 20 years, are you going to think back on, hmm, wish I didn't write that margin protection check in the fall of 2023?

Chris

Barron: Gonna be looking at the balance sheet.

Steve

Johnson: Well, and I think the premiums— I think way too much focus just on the premiums and what this is going to cost. You have to understand what you're getting for that cost, and we've talked about this. And then maybe we've got to calculate that on a per-bushel basis, not on a per-acre basis, because somebody offers us this product and, you know, it's $80 on top of the other revenue protection decision I'll make next winter. You know, that might be some of the cheapest protection you've got. Because again, we've had 20-plus years of revenue protection, and we're only again protecting revenue—yield times price. Now we get a play of also protecting costs as a part of this select variable cost, and we get a different price discovery period—mid-August to mid-September, ending September 14th. Let's go ahead and schedule an appointment with your crop insurance agent.

Uh, don't wait until the last couple days of September and see if this fits for your farming operation. Again, the premium's not due until October 1st of 2023, but if margin protection, uh, does trigger an indemnity claim, you don't get that indemnity until after the county yields are released. That'd be June 16th of 2024. It is a county-based product, area-based is what we call it, using county yields. But I do believe it is a tool that, again, you're the only farmers in the world that have it, and it's going to get some traction in 2023 like we've never seen.

Chris

Barron: Any other comments, Jared, as you think through, or, or Steve, on things that, uh, you know, what, what's the takeaway? I mean, what's the, what's the My takeaway is, sorry to sound like a broken record.

Jarod

Creed: Yeah, it's all right. I just encourage guys that you got to have the conversation. You need to understand what it is. That's it.

Chris

Barron: Yeah, that's the biggest thing. That's the whole point of the, of this conversation really, is to encourage people to get with the agents, have the conversation, make the decision, because, you know, this is an opportunity to, to hold your ground, not go backwards. And, uh, here's like a real-life example.

Jarod

Creed: I recall exactly where I was. I was on a fence row with a local farmer— or not with a local farmer, in a combine trying to focus on not taking out the fence, cutting beans— and had a listener of yours call last fall wanting to know more about margin protection. You are going to find if you make a call to your agent, there are chances your agent doesn't know, right, wrong, indifferent. They might not know. Find somebody that can. I know that my week next week is going to be loaded with communicating with the farms we work with, with their agents, and relaying what we're trying to accomplish back to the farm, providing all the education possible before that final yes or no decision is made versus, eh, it doesn't sound good, so I'm gonna move on.

Chris

Barron: Yeah, yeah. And that's the thing, with all due respect, love and respect to all agents.

Jarod

Creed: No, no, I'll say that.

Chris

Barron: Yeah, yeah, that you need to have expectations for, for the agent as well. They better understand it. If they don't, find somebody that does.

Jarod

Creed: That's kind of what you want to say. 100%.

Steve

Johnson: In the last couple years, we've really ramped this up, you know, wrote a publication that's out there on the Iowa State Ag Decision Maker website, uh, FAQs. I presented today to a group of farmers that you had, so They could email you and say, hey, send me those 8 PowerPoint slides, and by the way, link me that, uh, 5-page publication that Steve said they wrote on this topic. I think this is where you really got to be focused. And like I say, this isn't one of those, I'll wait till October, I've got more time. No, no, is, uh, September 30th's the deadline to make a decision for purchasing margin protection for the '23 crop.

Chris

Barron: Yeah, if people want that publication or the presentation that Steve just referred to, just email me cbarron@agviewsolutions.com and I've got the presentation. I'll forward it to you. And Steve did a great job of putting together the— some examples and really clearly explaining margin protection. So any final comments from either of you guys and then we'll wrap her up?

Steve

Johnson: In the words of Larry the Cable Guy, get 'er done.

Chris

Barron: Get 'er done. That sounds good.

Jarod

Creed: And I think I'd speak for all of us, if you need help, we can connect you with somebody as well.

Chris

Barron: Yeah, exactly.

Jarod

Creed: Can't promise the time to explain it to everybody. Yeah, but if you need help, just ask.

Chris

Barron: Yeah, exactly. So hey guys, thank you very much. Uh, Steve Johnson and Jared Creed, great conversation. And again, everybody, um, get a hold of that crop insurance agent and get some things figured out, and we will catch again next time on the Ag View Pitch.