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Crop Insurance Series: ECO · Professional Ag Marketing Podcast

• 0:01
  SPEAKER_00: Welcome to the Professional Ag Marketing Podcast.
• 0:04
  SPEAKER_00: If you want a deep dive into the ag markets and risk management strategies, your search is over.
• 0:10
  SPEAKER_00: Come here after every Friday to get your weekly commodity recap.
• 0:14
  SPEAKER_00: Trading commodity futures and options involves substantial risk of loss and is not suitable for all investors.
• 0:21
  SPEAKER_00: This is your host, Mike Minor.
• 0:22
  SPEAKER_00: Let's get started.
• 0:24
  SPEAKER_00: Today is the fourth breakout session of our crop insurance series.
• 0:28
  SPEAKER_00: I've got Lucas Peters back with us.
• 0:30
  SPEAKER_00: How's it going, Lucas?
• 0:31
  SPEAKER_00: Well, it's going pretty well, Mike.
• 0:33
  SPEAKER_00: Awesome.
• 0:33
  SPEAKER_00: Let's talk about one of the more fun conversations in crop insurance this year, which would be ECO.
• 0:39
  SPEAKER_00: Yeah, you bet.
• 0:40
  SPEAKER_01: This is probably the I don't know if there is a hot topic in crop insurance, but if there is, ECO for 2024 would be the hot topic.
• 0:50
  SPEAKER_01: Um and so let's get into it.
• 0:53
  SPEAKER_01: ECO coverage, uh, the enhanced coverage option.
• 0:57
  SPEAKER_01: Uh is what the ECO stands for.
• 0:59
  SPEAKER_01: Uh, crop insurance loves their acronyms, and this is no different.
• 1:03
  SPEAKER_01: But they do.
• 1:03
  SPEAKER_01: Uh so ECO has been around for a number of years.
• 1:07
  SPEAKER_01: Uh, it is one of the newer uh coverages, but it's been out for a while.
• 1:11
  SPEAKER_01: And the advantage of ECO is it's the highest coverage level you can buy uh that's subsidized.
• 1:21
  SPEAKER_01: And so in a year of 2024, when a lot of grain farmers are looking at uh where the prices are today, which they continue to kind of sink as we go through the the month of February here, the averaging period, um, as they continue to slide, and producers are looking at profitability sliding along with it.
• 1:41
  SPEAKER_01: Uh, the the kind of the look uh at what we can do about it uh is the topic that we are talking with a lot of customers about.
• 1:50
  SPEAKER_01: And ECO is one option that might be new to some people uh and the fact that they could buy this option and really ramp up their coverage to to get cover a few more dollars, but also move that trigger point of a claim up to 95%.
• 2:07
  SPEAKER_01: Um, so it's that ECO is at top band of coverage, it's gonna cover from uh 86% up to 95%.
• 2:16
  SPEAKER_01: Uh, there's also a 90% option, an 86 to 90.
• 2:20
  SPEAKER_01: Uh, generally, if you're gonna look at ECO, I'm gonna suggest looking at 86 to 95.
• 2:26
  SPEAKER_01: So we aren't gonna talk about the 90% uh here today.
• 2:29
  SPEAKER_01: Um and that 9% band, uh, you know, we we a lot of times we confuse ECO, SEO uh when we're talking uh uh SEO, of course, as we talked about already, and that's tied to the farm program, the ARC PLC decision.
• 2:44
  SPEAKER_01: ECO is not, so you can buy ECO on uh no matter what you signed up for uh at the FSA office.
• 2:51
  SPEAKER_01: And so that ECO, that 86 to 95 percent band and that band of coverage uh will mimic your will be the same coverage as what your underlying coverage is.
• 3:04
  SPEAKER_01: And what I mean by that is if you're buying a an 80% revenue protection product, then the 86 to 95% band with ECO will be revenue based.
• 3:15
  SPEAKER_01: If you are buying a yield protection product where you're just protecting yield, uh, an 80% yield policy, then your ECO would be yield based.
• 3:24
  SPEAKER_01: Okay, uh, so those are some of the details.
• 3:27
  SPEAKER_01: Uh, most of our guys, corn and soybeans, are gonna buy a revenue protection product.
• 3:32
  SPEAKER_01: So that ECO we're gonna talk about more in the revenue-based uh uh fundamental here.
• 3:38
  SPEAKER_01: And so what as the price continues to slide, this ECO becomes attractive because 95% uh is going to really kind of put us right at the top end of uh uh and move our price up to 95% of the averaging period is going to be right around break even, right, Mike?
• 3:59
  SPEAKER_00: Yeah, because right now 465 is probably where we'll end up averaging February's price on December futures, somewhere in that area.
• 4:08
  SPEAKER_00: And uh 95% of that, the trigger would be like 441 about.
• 4:13
  SPEAKER_00: So you really don't have to go very far much lower before you start to dip into that, don't you?
• 4:18
  SPEAKER_01: Exactly.
• 4:19
  SPEAKER_01: So so it's almost like buying an at-the-money put option right now, or pretty close, right?
• 4:24
  SPEAKER_01: With the subsidy, so it's a lot cheaper than and and plus you get the advantage of some yield protection as well in there because it is a revenue product, uh, so you do get price and yield.
• 4:34
  SPEAKER_01: Now the ECO, just like the SEO before, is going to be a county-based coverage, so it doesn't matter what happens on your own individual farm.
• 4:43
  SPEAKER_01: This is county-based.
• 4:44
  SPEAKER_01: Um, but just like we've talked about uh a couple of days ago, the county coverages I'm getting more and more comfortable with as the county yields continue to climb.
• 4:55
  SPEAKER_01: A lot of our counties are up uh between one and three percent in yields again this year.
• 5:01
  SPEAKER_01: Um, and you can check that out uh for your specific counties, but yields continue uh to go up, be pretty similar to what uh maybe your APHs are or your expected yields are.
• 5:13
  SPEAKER_01: And the other thing with county policies is on our own farm, you know, we're trying to, and most farmers are gonna be this way, you're trying to do everything you can to get another bushel of corn or another bushel of soybeans.
• 5:27
  SPEAKER_01: And when we add that extra bushel, of course, that's gonna take away any potential crop insurance claim we have.
• 5:33
  SPEAKER_01: Uh, county policies, you get the advantage, uh, which can be an advantage, of the whole county, right?
• 5:40
  SPEAKER_01: It's harder to move the county one bushel than it is your farm one bushel.
• 5:45
  SPEAKER_01: And so uh with that being in mind, and the yields are going up, I feel more comfortable buying these county coverages.
• 5:53
  SPEAKER_01: Uh another, maybe maybe this is more of a watch out on ECO, or not a watch out, just something we have to keep in mind, is the indemnities or the claims on these policies are not paid until late June of the following year.
• 6:07
  SPEAKER_01: And that's just a fundamental of we have to figure out the county yield.
• 6:12
  SPEAKER_01: That is going to come from all the crop insurance data in the county for that crop.
• 6:17
  SPEAKER_01: Uh, that doesn't have to be reported until mid-May or the end of June by the time we get some processing deadlines in there.
• 6:24
  SPEAKER_01: And so they can't calculate that accurately until mid-June.
• 6:28
  SPEAKER_01: So your 2024 ECO policy, if there is a claim, if price continues to slide or the yield goes down in the county, won't be paid until July or late June or 1st of July of 2025.
• 6:41
  SPEAKER_01: Uh, probably not the greatest scenario.
• 6:44
  SPEAKER_01: If you do have a crop loss or the price is a lot lower in November, December, it would be nice to get that claim check right away.
• 6:51
  SPEAKER_01: But if you don't have the grain to sell or it is a lower price, and you normally sell into the next year anyway, getting a check late June probably doesn't throw our cash flow off too much.
• 7:01
  SPEAKER_01: Uh so that that uh just something to be aware of as you look at buying the ECO coverage.
• 7:07
  SPEAKER_01: Uh but when I look at 2024 and where premiums are at, ECO is an expensive coverage.
• 7:13
  SPEAKER_01: Okay, it is county-based, it is subsidized, but when anytime you get up to that 95% trigger, that top band, uh the premium is going to be expensive.
• 7:24
  SPEAKER_01: So a lot of times uh for what we're quoting this year, corn is gonna be$25 to$30 an acre just for that ECO band.
• 7:33
  SPEAKER_01: So that's on top of your base policy:$25 to$30 on corn, and a lot of times$15 to$20 on soybeans is what we've been quoting.
• 7:43
  SPEAKER_01: I when we look this year with the price kind of sliding, I think everybody should really consider ECO.
• 7:51
  SPEAKER_01: And we have to get over that premium hurdle, we have to get over the county yield hurdle.
• 7:57
  SPEAKER_01: But if we can, I really like adding this as price protection now, and then we can kind of wait and see what these grain markets do, right, Mike?
• 8:06
  SPEAKER_01: Seasonally, our corn and soybean price should climb into planting season, and so let's spend a little money on insurance now, put a floor under for price and yield, hopefully get a rally into the seasonal time frame, then we can sell this 2024 crop at a profitable price, and we're good.
• 8:25
  SPEAKER_01: If that doesn't happen, well, now we know we have our ECO sitting here at 95%, and if prices continue to go down through the year, well, we're gonna get a claim from our crop insurance coverage, and so that's where I would use ECO this year.
• 8:40
  SPEAKER_01: Uh, really consider doing that.
• 8:41
  SPEAKER_01: There's some other things you can do to help cheapen it up.
• 8:44
  SPEAKER_01: We can adjust liability factors.
• 8:47
  SPEAKER_01: Uh, all that's gonna do is slide premium down, but coverage is gonna come down right along with it.
• 8:52
  SPEAKER_01: Uh, so talk to your agent or talk to us about uh that if you're interested.
• 8:57
  SPEAKER_01: But for 2024, I would really encourage everyone to quote ECO, take a look at it, and kind of think about how it could complement your grain marketing plan this year.
• 9:08
  SPEAKER_00: And I'm gonna compare it to like 440 put this morning's 26, 27 cents.
• 9:12
  SPEAKER_00: So I mean that's 52 bucks an acre if you did it on 200 bushels.
• 9:17
  SPEAKER_00: Uh, you know, if ECO is gonna cost you 25, that subsidy is definitely doing quite a bit of work for you.
• 9:23
  SPEAKER_00: There, there's some other limitations with it for upside potential, things like that.
• 9:27
  SPEAKER_00: But uh that total payout that you can get out of the ECO, right, but and yields included in it.
• 9:32
  SPEAKER_01: But but you're but you're gonna spend if you add ECO to an 80% revenue protection problem, you're probably gonna spend a similar amount of dollars.
• 9:40
  SPEAKER_01: Yeah, like that 50 bucks an acre, let's say.
• 9:43
  SPEAKER_01: Uh the nice part about it is I don't have to pay for it until November, and I get some yield coverage with it as well.
• 9:49
  SPEAKER_00: Yeah, you don't have to margin it.
• 9:51
  SPEAKER_00: You can wait to pay for it, and then I think it buys you time to say right now, record net short position in the corn market.
• 9:59
  SPEAKER_00: Yeah, we've had a really hard sell-off.
• 10:01
  SPEAKER_00: You're probably mm dipping into some very uh tight, tight margins, if anything, at this point that's left in this corn market at these levels.
• 10:10
  SPEAKER_00: Um, maybe it buys you a little bit more time to say, you know, that April 1st is kind of the seasonal time frame where we start to rally.
• 10:18
  SPEAKER_00: Maybe I can wait for that a little bit longer, Lucas.
• 10:20
  SPEAKER_01: Exactly.
• 10:21
  SPEAKER_01: Let's use use the crop insurance coverage we have available now to help our overall profitability for our farm all year long.
• 10:28
  SPEAKER_00: This is a most relevant topic, I'd say, probably this year for crop insurance.
• 10:32
  SPEAKER_01: I would say it's it's something that again has been around for a few years, but this is probably the first year where you can look at it and say, you know what, this really makes sense uh for 2024 to help cover us, but also buy us some time to get these markets to come back.
• 10:46
  SPEAKER_00: So if futures uh being at 460 this morning on DS, I mean, if we would have continued to fall really, really hard and it ended up here at the end of the month at like 420 or something, then you could say, well, that's pretty easy decision.
• 10:58
  SPEAKER_01: Yeah, then your ECO would be essentially in the money already in the money already.
• 11:02
  SPEAKER_00: Yep.
• 11:02
  SPEAKER_00: So it yeah, you know, if you really wanted to uh be extreme with it, that would be one case.
• 11:07
  SPEAKER_01: But and you know, you can kind of look back to 2023.
• 11:10
  SPEAKER_01: Uh, you know, we started off the averaging period and kind of slipped really hard at the end of February and uh last year, and that ECO was kind of in the teetering at the same point of it was in the money.
• 11:23
  SPEAKER_01: Some producers did choose to to grab it, and it's gonna work out because the price did fall over a dollar.
• 11:29
  SPEAKER_01: That's probably good.
• 11:30
  SPEAKER_01: Yep.
• 11:31
  SPEAKER_01: So like like the yields were okay, they're flat, maybe down in a few counties, but with the price drop, the ECO's trigger, and those guys are gonna get a payment here come late June.
• 11:41
  SPEAKER_01: But for 24, I think it probably fits a little wider audience.
• 11:44
  SPEAKER_01: Yep.
• 11:45
  SPEAKER_01: Because last year, when we were having those conversations, you could have also just sold the bushels at a profitable price.
• 11:51
  SPEAKER_01: Yeah.
• 11:51
  SPEAKER_01: And and not have to worry about crop insurance or a yield impact.
• 11:55
  SPEAKER_01: This year, I really don't want to sell the bushel right now.
• 11:58
  SPEAKER_01: Different balance sheet too.
• 11:59
  SPEAKER_01: It looks worse.
• 12:00
  SPEAKER_01: Yeah, exactly.
• 12:00
  SPEAKER_01: Then when you look at uh how much uh corn stocks we got to chew through, uh, I kind of want to delay that decision a little longer.
• 12:07
  SPEAKER_00: Definitely.
• 12:08
  SPEAKER_00: Well, thank you for your time.
• 12:09
  SPEAKER_00: And thank you to all our listeners.
• 12:11
  SPEAKER_00: Please reach out to us at professionaleggmarketing.com.
• 12:15
  SPEAKER_00: Check out our other podcast as well, Professional Egg Marketing, that's released every Friday.
• 12:20
  SPEAKER_00: Trading commodity futures and options involves substantial risk of loss and is not suitable for all investors.
• 12:26
  SPEAKER_00: See you next time.