Have you made your decision yet about crop insurance for 2013? Many of you will renew the Revenue Protection policy which has an automatic harvest price option without added premium. And many farmers who have not been crop insurance subscribers will be visiting with an agent in the next several weeks to get information and the necessary education about how it all works.
For now, we have entered the period that will determine the spring guarantees, so watch what the new crop contracts for corn and soybeans do during February.
February 1 began the calculation period for spring crop insurance guarantees. There will be 18 more trading days to determine what the average of closing prices will be. Dec 2013 corn futures closed at $5.92 and Nov 2013 soybean futures closed at $13.32 on Friday.
Those prices exceed the spring guarantees of 2012, which were $5.68 and $12.55. While you may have preferred $8 and $15, IL ag economists Gary Schnitkey and Bruce Sherrick say, “One effect of the drought and shorter crops in 2012 is that starting prices available for insurance are relatively more attractive than levels likely had a large crop been produced in 2012.”
Market uptrend during February
There could be a market uptrend during February. Schnitkey and Sherrick say, “Suppose prices trend steadily upward during February and the resulting average projected prices used to establish insurance values are below the current futures prices around March 1. In that case, there is already an increased likelihood that the harvest prices will be higher than the projected prices and insurance products that include harvest price options for guarantee increases are therefore relatively more attractive.”
Market downtrend during February
There could also be a market downtrend during February. Schnitkey and Sherrick say, “If, prices generally decline in February, then the projected price will be above the market's estimate of actual (crop) value and the use of insurance will start somewhat more "in the money" or more likely to result in payments. Secondly, the prices and volatilities can have large impacts on the premiums paid and the guarantee levels available for insurance.”
Market volatility influences the premium.
Higher option volatility, or more likely larger price movements, result in higher costs of insurance and lower volatilities result in lower costs of insurance. Schnitkey and Sherrick advise, “The prices and volatilities can have large impacts on the premiums paid and the guarantee levels available for insurance. For example, under a $5.70 projected price and .20 volatility, the cost per acre of Enterprise Unit RP insurance at an 85% coverage level would be $18.09/acre. If instead, projected prices were $6.10 and volatility were .24, the cost per acre would be $24.64, a 36% increase. The premiums can be particularly sensitive to changes in volatility.”