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Transcript

Insurance · 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.
• 0:23
  SPEAKER_00: Today is January 19th.
• 0:25
  SPEAKER_00: I've got Lucas Peters with us here today.
• 0:27
  SPEAKER_00: How's it going, Lucas?
• 0:28
  SPEAKER_00: It's going very well, Mike.
• 0:29
  SPEAKER_00: Good.
• 0:30
  SPEAKER_00: Well, let's talk about insurance today.
• 0:31
  SPEAKER_00: We're going to talk about ARC first PLC, then we're going to talk about a couple other things along with it.
• 0:36
  SPEAKER_00: So let's get right into it, Lucas.
• 0:38
  SPEAKER_00: Tell me why this actually matters this year.
• 0:41
  SPEAKER_00: Because most years, I feel like you can almost tune this out.
• 0:44
  SPEAKER_00: This year, I I'd say it's actually important.
• 0:46
  SPEAKER_01: Yeah, that that's uh that's a good way to put it because it's it's the normal crop insurance cycle, right?
• 0:53
  SPEAKER_01: We we flip the calendar to January, and then by March 15th, we have to make all these decisions that nobody really likes to dive in and make, but it's a part of being a farmer, and we have to make these decisions.
• 1:06
  SPEAKER_01: And this year, you're right, I think they are more important.
• 1:10
  SPEAKER_01: Well, maybe not more important, but uh may take a little more study and comparison than they did last year.
• 1:17
  SPEAKER_01: You know, if you think of last year where we were at, or really the last two years, prices were higher, uh, our APHs are pretty were pretty good, are still pretty good, and so our guarantees were covering all of our base costs, and maybe even in some cases exceeding our base costs.
• 1:35
  SPEAKER_01: So we really couldn't go wrong.
• 1:37
  SPEAKER_01: If we had a disaster, if we had a price disaster, our crop insurance was gonna step in and protect us, and we were gonna be able to farm another year, right?
• 1:45
  SPEAKER_00: We just had to write a pretty big check for crop insurance.
• 1:47
  SPEAKER_01: Yeah, to pay the premium to get to get the coverage in 2024.
• 1:52
  SPEAKER_01: It's setting up that I would say most guys are going, if they buy the same coverage as last year, they're gonna be really close to being able to cover their costs or not able to cover their costs, of course, depending on the operation and everybody's just a little bit different.
• 2:08
  SPEAKER_01: Um, but that's why it's gonna take a little bit of analysis in 24 because as we're sitting here today with 2024 corn and soybean prices being where they are at.
• 2:19
  SPEAKER_00: That's not the case, is it?
• 2:21
  SPEAKER_01: It's not very good, right?
• 2:22
  SPEAKER_01: And so um we're trying to protect any margin or profit that might be there, or let's face it, protect us if we don't get a crop where the prices go lower uh to sustain our operation and be able to come back next year and and be able to do this again and and cross our fingers for the opportunity of the coming year.
• 2:44
  SPEAKER_01: And so uh that's kind of why crop insurance is here, right, Mike?
• 2:48
  SPEAKER_01: Is uh it got farm the whole reason it started was some sort of disaster program to come in and and protect farmers in the disaster.
• 2:57
  SPEAKER_01: The last time we kind of went through this low price cycle in the uh late teens, right?
• 3:03
  SPEAKER_01: Um, a few years in there in 2019 in particular, man, that's a reason why a lot of farmers are still in business.
• 3:10
  SPEAKER_01: The prevent plant coverage, along with some other government programs and payments, really stepped in and helped cash flow at a time where it's pretty tough.
• 3:18
  SPEAKER_01: Hopefully, we don't have to go that drastic, right?
• 3:21
  SPEAKER_01: Hopefully there are some opportunities that pop up through the year to allow us to make some money.
• 3:25
  SPEAKER_01: But if not, that's why we have a sound risk management plan.
• 3:28
  SPEAKER_01: And the base of most of those risk management plans uh start with crop insurance and the ARC PLC decision.
• 3:36
  SPEAKER_01: So kind of transitioning to that.
• 3:38
  SPEAKER_01: So ARC PLC.
• 3:39
  SPEAKER_01: Uh, these are the FSA programs.
• 3:42
  SPEAKER_01: Um, FSA programs that I guess usually crop insurance agents talk about.
• 3:46
  SPEAKER_01: It's kind of a weird uh dynamic there, but uh there's a reason for that.
• 3:51
  SPEAKER_01: And uh the reason for it is I guess first let's back up a little bit.
• 3:55
  SPEAKER_01: ARC PLC has been around here for the last few years.
• 3:59
  SPEAKER_01: Uh we have to make this decision now annually, and that decision has to be made at the FSA office by March 15th.
• 4:07
  SPEAKER_01: Okay, so those are the important things to remember.
• 4:10
  SPEAKER_01: Uh, if you don't do anything, you're gonna have the same thing you chose last year.
• 4:14
  SPEAKER_01: Okay, so uh keep that in mind.
• 4:17
  SPEAKER_01: But why we should take some time and look at it this year.
• 4:20
  SPEAKER_01: Uh the farm program got extended to 2024.
• 4:25
  SPEAKER_01: Uh should have been a farm bill year, it's not, so that's why we have to make this decision again.
• 4:30
  SPEAKER_01: And this year it kind of seems like it's a no-brainer choice, Mike.
• 4:35
  SPEAKER_01: And Arc County is looking like a an attractive option.
• 4:39
  SPEAKER_01: And I'll kind of go through why.
• 4:41
  SPEAKER_01: So Arc County is an area revenue coverage plan.
• 4:46
  SPEAKER_01: Okay, the FSA's revenue coverage, it has an 86% revenue trigger, meaning a combination of county yield and the price.
• 4:57
  SPEAKER_01: If it falls below 86% uh of the target, then an Arc County payment is triggered.
• 5:04
  SPEAKER_01: Okay, no bearing on what actually happens on your farm.
• 5:07
  SPEAKER_01: These are county level yields and national uh national average uh marketing year prices.
• 5:14
  SPEAKER_01: And this year, since Art County uses an Olympic average to set the price, explain the Olympic average.
• 5:23
  SPEAKER_01: Yeah, so Olympic average is a five-year Olympic average.
• 5:26
  SPEAKER_01: Olympic is you throw out the high and you throw out the low and you average the remaining numbers.
• 5:31
  SPEAKER_01: And so the last couple years price has been pretty high, right?
• 5:35
  SPEAKER_01: But in an Olympic average, you don't get to use the highest of the highs, and you still had a couple of low-year prices in a five-year average.
• 5:43
  SPEAKER_01: Now, this year you're kind of resetting that.
• 5:46
  SPEAKER_01: And so uh for 20 for this program year, 2024 uh election, the ARC price is going to be 474.
• 5:57
  SPEAKER_01: Uh, that's unfortunately pretty close to where December corn is trading at uh today.
• 6:03
  SPEAKER_01: Um, not exactly, but pretty close.
• 6:06
  SPEAKER_01: Uh so last year that price difference was huge.
• 6:09
  SPEAKER_01: The Arc County price was I think$410, and uh December futures were in the$590s.
• 6:16
  SPEAKER_01: So there was a big discrepancy.
• 6:18
  SPEAKER_01: This year, Arc County is pretty close to the same price.
• 6:22
  SPEAKER_01: Our yield uh yields are pretty good, it's using a benchmark trend in yield, so that should be pretty reflective of what's happened actually happening in the county, and so that's where this revenue coverage looks pretty decent for 2024, especially when you compare it to the PLC program.
• 6:41
  SPEAKER_01: PLC being price loss coverage where it only pays based off the price, uh, and the PLC price for corn is$370.
• 6:50
  SPEAKER_01: Okay, so with Art County I get$474 for uh corn, with PLC I get$370.
• 6:57
  SPEAKER_01: On soybeans for Art County I get$1089, and for PLC I get$840.
• 7:04
  SPEAKER_01: Alright, so just in prices alone, you can kind of see hmm, this seems like a no-brainer choice.
• 7:09
  SPEAKER_01: We should go Art County.
• 7:11
  SPEAKER_01: Um a couple of reasons maybe you want to second guess that.
• 7:16
  SPEAKER_01: Uh, first off, Art County payments are capped at 10% of the benchmark revenue.
• 7:22
  SPEAKER_01: Alright, so what does that mean?
• 7:24
  SPEAKER_01: Most of your Arc County payments are going to be capped between$60 and$80 an acre, depending on what county you're in, uh and yield-wise.
• 7:33
  SPEAKER_01: And so if we sustain a price loss or yield loss in the county, the most money we can get out of ARC is that 60 to 80 buck range.
• 7:43
  SPEAKER_01: PLC is not capped.
• 7:44
  SPEAKER_01: So if the price would fall to 330, uh, we would end up with some pretty hefty PLC payments that would exceed that.
• 7:52
  SPEAKER_01: The likelihood of either of those happening, I would say the likelihood of an ARC county slight price stip, slightly lower yield, is more likely than a really steep drop in price to trigger PLC.
• 8:04
  SPEAKER_00: Well, like PLC's never paid on soybeans, right?
• 8:07
  SPEAKER_01: Correct.
• 8:07
  SPEAKER_01: So the PLC program has never paid on soybeans.
• 8:10
  SPEAKER_01: So uh that's why this year it does seem like Arc County is the best fit.
• 8:14
  SPEAKER_01: The only reason to sign up for PLC, in my opinion, is if you are interested in buying an additional crop insurance coverage called SCO or the supplemental coverage option.
• 8:26
  SPEAKER_01: And that uh is essentially an 86% trigger, uh, similar to ARC County, and that's why they don't let you buy both ARC and SCO.
• 8:36
  SPEAKER_00: Can only have so much fun.
• 8:38
  SPEAKER_01: That's exactly right.
• 8:38
  SPEAKER_01: You can't double dip on the same uh trigger level.
• 8:41
  SPEAKER_01: But so the advantage of SCO over ARC would be I can use Planted Acres, it'll get you know, SCO was paid off that planted acres for that year.
• 8:51
  SPEAKER_01: All the ARC and PLC programs are paid off of 85% of base acres.
• 8:57
  SPEAKER_01: Of course, base acres is an FSA term, not a crop insurance term.
• 9:01
  SPEAKER_01: Um but this year last year I thought SEO was a good buy.
• 9:05
  SPEAKER_01: You know, we got to use the$591 price.
• 9:08
  SPEAKER_01: Uh, we got to use planted acres.
• 9:10
  SPEAKER_01: It only cost me eight bucks an acre to buy SEO.
• 9:14
  SPEAKER_01: I kind of liked that idea and had some farmers do it, and it's gonna work out very well for them.
• 9:19
  SPEAKER_01: This year I do not uh think the value is there to spend eight bucks to protect a little bit higher price.
• 9:26
  SPEAKER_01: The ARC program is free, and I get my 86% coverage on a county basis with pretty close to the same price.
• 9:34
  SPEAKER_01: I think that's the better fit for 2024.
• 9:38
  SPEAKER_01: And so going uh kind of transitioning now more into the crop insurance with that SCO discussion, and and as we we look at uh our standard crop insurance plans, and you know, kind of a general rule for our corn and soybean producers across our listening area, Mike, it's you know, 75, 80, 85 percent revenue protection, uh, optional enterprise units, depending on where you're at.
• 10:04
  SPEAKER_01: Um, but for the most part, those coverages this year are going to uh the coverage is going to be down because the price is down quite a bit.
• 10:14
  SPEAKER_01: Um, you know, last year for corn we got 591.
• 10:17
  SPEAKER_01: Uh I'm using I used a 485 for a ballpark uh December corn price, or that will average during the month February.
• 10:25
  SPEAKER_01: That's when we'll set the crop insurance price.
• 10:27
  SPEAKER_01: So$591 to$485 with similar yields.
• 10:31
  SPEAKER_01: Uh you're going to at for 2024, that gives you about$803 of protection, revenue protection at an 80% level for most of our standard customers, right?
• 10:44
  SPEAKER_01: Yeah.
• 10:45
  SPEAKER_01: Uh in 23, that same producer was covering 978.
• 10:50
  SPEAKER_01: Okay, so you're you're 170 bucks, uh, 175 dollars lower in guaranteed money this year compared to last year.
• 10:59
  SPEAKER_00: And your break-evens probably somewhere in between those two numbers, like you said.
• 11:04
  SPEAKER_00: They probably would have been pretty close last year.
• 11:06
  SPEAKER_01: So last year I would say most of our producers had uh uh break-evens in like the nine ten to nine forty level, right, Mike?
• 11:16
  SPEAKER_01: This year you're you probably are a hundred dollars lower than that.
• 11:19
  SPEAKER_01: Yeah, like maybe you're in the 810 to 820, 830.
• 11:23
  SPEAKER_01: You know, your big savings fertilizer, chemical, especially, fuel is down.
• 11:28
  SPEAKER_01: Uh, but of course, our interest cost is up significantly.
• 11:32
  SPEAKER_01: Land might be up significantly, depending if you're buying or or uh how you can negotiate rents.
• 11:38
  SPEAKER_01: And so our our guarantee on the crop insurance at 800 and our expenses at 825, let's call them.
• 11:46
  SPEAKER_01: Um, that's that's not good, right?
• 11:49
  SPEAKER_01: I can't cover all my base expenses.
• 11:51
  SPEAKER_01: So so the first question is well, what can we do about it, right?
• 11:55
  SPEAKER_01: Do we just have to live with it?
• 11:56
  SPEAKER_01: And if you buy the same level of coverage, yeah, you you can live with it, right?
• 11:59
  SPEAKER_01: It's you're covering most of your expenses.
• 12:02
  SPEAKER_01: And so rather than throw more money at crop insurance, maybe you want to stay where you're at, and I totally can understand that.
• 12:10
  SPEAKER_01: Work with uh Proeg, develop a price risk management strategy that uh can implement and and take your get some opportunities when they present themselves with a little bump in the market, and and we go forward from there.
• 12:23
  SPEAKER_01: Uh, maybe you're in a situation where you are looking for some additional coverage, and the first step would be to just if you're at 80%, bump to 85.
• 12:32
  SPEAKER_01: Uh, every 5% jump in crop insurance level gives you about$50 extra coverage.
• 12:37
  SPEAKER_01: Okay, so all of a sudden I go from 80 to 85, now I'm covering 850 bucks, my expenses are covered, and and we can move forward.
• 12:46
  SPEAKER_01: I'm gonna double my premium cost when I do that, but at least I got all my base uh bases covered.
• 12:52
  SPEAKER_01: The other thing we can do is look at some adding some uh different supplemental coverages, uh one being the SEO, which we talked about, which probably not gonna happen because we signed we're probably gonna sign up for ARC, right?
• 13:05
  SPEAKER_01: And so then we could look at ECO, enhanced coverage option.
• 13:08
  SPEAKER_01: That gets us up to 95% coverage on a county level.
• 13:13
  SPEAKER_01: And so why would we do that?
• 13:15
  SPEAKER_01: Well, if we're at 485 uh for a uh a spring price this year, if if that's where we come up, you know, a 95% coverage level is gonna trigger a claim somewhere around 458, 460, something something uh to have that as a floor for our prices probably isn't terrible.
• 13:36
  SPEAKER_01: And I can add that coverage for less money than jumping up to an 85%.
• 13:41
  SPEAKER_01: So is it individual coverage?
• 13:43
  SPEAKER_01: Nope, it is not, it's county-based, but I think the ECO has a good fit for a lot of producers this year that are looking for just a little bit more coverage in uh in a time when they're trying to squeeze out every penny they can.
• 13:57
  SPEAKER_01: Um and the other thing there is there's some other uh private products you can look at protecting bushels revenue on your own farm.
• 14:06
  SPEAKER_01: Those products are offered by many insurance companies.
• 14:09
  SPEAKER_01: Uh all the products are good.
• 14:11
  SPEAKER_01: Uh, it's just they cost more money.
• 14:13
  SPEAKER_01: So the nice thing on ECO is it's subsidized by the government, so the discount is uh is pretty decent versus if we have to do everything on a uh uh supplemental, non-subsidized product.
• 14:25
  SPEAKER_01: But those are out there, and so I guess what I would encourage every farmer to do is start crunching the numbers, know what dollar level you want to protect.
• 14:35
  SPEAKER_01: I don't think this is a year we roll in and just say, oh, sign me up for the same thing as last year.
• 14:40
  SPEAKER_01: Yeah, it maybe that's where you end up, and that's just fine.
• 14:44
  SPEAKER_01: But let's just do a little homework first to see how our costs are stacking up compared to our coverages.
• 14:50
  SPEAKER_01: Look for maybe an opportunity to add coverage uh if there's one there that we can add uh for a for a decent premium cost, not get our costs out of whack, and hopefully protect some bushels, protect our operation, uh lock in a little bit of a guarantee so we can take advantage of price opportunities when they present themselves.
• 15:10
  SPEAKER_01: And I think if we do all that, we can make 2024 as successful, at least right now, as we can possibly can.
• 15:19
  SPEAKER_01: So I guess that's kind of our uh quick and dirty crop insurance arc PLC discussion, Mike.
• 15:26
  SPEAKER_01: And yeah, good uh be happy to review that with any customers.
• 15:30
  SPEAKER_01: If you have questions, call ProIG.
• 15:32
  SPEAKER_01: You can talk to me or talk to some of the guys on setting up a pricing strategy, and we'll help you out through 2024.
• 15:40
  SPEAKER_00: All right, sounds good.
• 15:41
  SPEAKER_00: Thank you, Lucas.
• 15:42
  SPEAKER_00: And thank you to all our listeners.
• 15:44
  SPEAKER_00: Please reach out to us at professionaleggmarketing.com.
• 15:47
  SPEAKER_00: Check out our other podcast as well, Professional Egg Marketing, that's released every Friday.
• 15:52
  SPEAKER_00: Trading commodity futures and options involves substantial risk of loss and is not suitable for all investors.
• 15:58
  SPEAKER_00: See you next time.