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oldken157096
Contributor

The so-called Crop Insurance "put option"

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I've had farmers tell me that they will use the revenue guarentee offered thru crop insurance as a "put option" and only market the 20% or so of the uncovered crop prior to planting.  Please help me understand that thinking when the revnue guarentee has the potential of being wiped out by higher than average yields.

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Shaggy98
Senior Advisor

Re: The so-called Crop Insurance "put option"

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Don't you think if you've got higher yields you will be getting more revenue? I always thought crop insurance was for crop disasters, not price swings.

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Shaggy98
Senior Advisor

Re: The so-called Crop Insurance "put option"

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Don't you think if you've got higher yields you will be getting more revenue? I always thought crop insurance was for crop disasters, not price swings.

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oldken157096
Contributor

Re: The so-called Crop Insurance "put option"

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Well ya thats kinda my point.  Why spend the money for crop insurance when from a crop management standpoint farmers today are doing everything technically possible to achieve above aveage yields.  Isnt crop insurance really Balance Sheet Insurance?

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Shaggy98
Senior Advisor

Re: The so-called Crop Insurance "put option"

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Just because we have good management practices doesn't mean we'll avoid disaster. Take 2012 for the latest example.
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oldken157096
Contributor

Re: The so-called Crop Insurance "put option"

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I know but does the crop insurance premium you have paid say over the last 10 years (assuming you have been a crop insurance user) effieciency and economically covered your risk?

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Hobbyfarmer
Honored Advisor

Re: The so-called Crop Insurance "put option"

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Crop insurance for the most part is "banker" insurance. It "insures" that the majority of farmers can get an operating loan.

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highyields
Senior Contributor

Re: The so-called Crop Insurance "put option"

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The original idea behind revenue insurance was that you market your coverd bushels.   So if you have a 150 yield and you take 70% insurance thats 105 bushel you are guranteeed.   So if you have a $6 gurantee spring price you can market $630/ac worth of corn and if there is a bad yield your insurance is suppose to cover what you have sold if you can't cover the bushels with your actually production.   
Thats the way it was explained to me.    

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RowCropRenegade
Senior Reader

Re: The so-called Crop Insurance "put option"

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I only view crop insurance as a put option if you market more than 50% of your crop and the price does fall.  I know some folks that cleaned house in this scenerio in 2008.

 

Let me give an example of what happened in 2008. 

 

6.00 spring price,  4.00 fall price.  200 bpa APH, coverage level 85%

 

.85 x 200 x 6.00 = 1020/acre guarantee.   Farmer sells 70% of production in spring. Farmer raises 200 bpa and price falls to 4.00

 

200 x 4.00 =800 in production.    1020 guarantee - 800 in production = 220 payment.

 

Now, since the farmer sold .70 x 200 bpa x 6 = 840 per acre.  Received 220 in a payment. 840 +220= 1060 PLUS

he sold the remainder of 30% in production ( 60 bpa ) x 4.00 = 240.  +1060 = 1300 an acre.

 

Then the farmer who sold 0% raised 200 bpa.  200 x 4 = 800 + 220 an acre payment = 1020.

 

The way I see it, you have to forward contract at the higher price in order to benefit from the crop insurance "put option"

 

                   

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JCCWIS
Senior Contributor

Hobby...Crop Insurance= Banker Ins.

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 And me [being my  own banker] by carrying Fed. Crop am able to plant another year.....in case of a crop destroying drought , excessive rain or whatever.   John

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Hobbyfarmer
Honored Advisor

Re: Hobby...Crop Insurance= Banker Ins.

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JCC: we are in that other category ... the minority.

 

And yes you are also right, makes no difference whether it is self financed or done through the bank down on the corner of Savings and Loan in town.

 

You guarantee you will farm again.

 

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