Farm Management Minute: Harvest and crop insurance guarantees
As I reflect on my past market tracking, we’ve lost $.50/bushel on new crop corn and another $.70/bushel on soybean harvest delivery prices in the last month. The price decline is being fueled by the large portion of excellent crop ratings across the nation as a whole. With the price decline and the local crops showing some stress from dry conditions lately, it makes me look at our crop insurance guarantee levels. Fortunately the spring crop insurance price was $4.62 on corn and $11.36 on soybeans. For corn, the “spring price” is the average of the Dec corn futures price in the month of February. The “spring price” for soybeans is the average of the Nov futures price in the month of February. For example; if I have a 125 bu./acre yield, based on my APH (Actual Production History), multiplied by a common 75% level of coverage 125*.75 = 93.75 bu *$4.62= $433/acre of revenue coverage. If the fall harvest price (Chicago futures) is in the $3.25 range (8-1’14 was $3.61) a revenue loss will not occur until the yield drops below 133 bushels. $433/$3.25 =133.23 bu. So in this example, a yield above your APH of 125 bu./acre could result in a revenue loss due to the lower harvest price.
The prior statements lead me into a potential scenario of 2015 in which the spring price could be in the $3.50 range. This would allow for a revenue guarantee of: 125 bu. * .75=93.75bu. * $3.50 = $328/acre for 2015. This would be a decline of $105/acre from 2014. According to the data from our 2013 SD Annual Report Book, the average cash rented cornfield had $420 total expenses excluding rent. This represented $348 of direct costs, and $72 overhead costs. So as cash rental rates are negotiated for next year’s growing season, please be aware of the potential of 100 dollars less of guarantee. I’m sure this will be preached over and over by March 1, 2015. In addition to an early awareness, I bring this up at this time because oral leases renew each year unless terminated by September 1. Not to point fingers at either party, but it is likely that the last lease you entered had prices above $5 on corn and $12 soybeans used as a reference of past or potential revenue. Another option to consider is a flex lease arrangement where a set base cash rent is paid plus a bonus based on revenue. This somewhat incorporates a cash and a share rental arrangement. These can be as simple or complex as so desired between parties. Future columns will display an example of such. For simplicity I’ve used corn and soybeans in these examples, but the concept pertains to any commodities we grow in South Dakota.
You can contact us at 1-800-684-1969, www.sdcfrm.com or myself at email@example.com.