Latest / Professional Ag Marketing Podcast / Margin Protection

Transcript

Margin Protection · 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 September 13th.
• 0:25
  SPEAKER_00: I've got Mr.
• 0:26
  SPEAKER_00: Peters here with us.
• 0:27
  SPEAKER_00: How's it going?
• 0:28
  SPEAKER_01: It's going very well, Mike.
• 0:29
  SPEAKER_00: Very well.
• 0:30
  SPEAKER_00: Well, let's talk about the WASDA report swiftly here and crop conditions and progress in the area, and then we're going to have a fascinating discussion about margin protection and that wrapping up.
• 0:43
  SPEAKER_01: I'm looking forward to it.
• 0:44
  SPEAKER_00: The WASDA report yesterday at 11 came out, and uh we closed the week off pretty strong on the corn market, up seven today, 413 on the December contract here.
• 0:54
  SPEAKER_00: So about three cents shy of our high we put in here on the 6th on our last go round, and uh just before that in July we got up to about 423.
• 1:04
  SPEAKER_00: So we are getting dangerously close to a few key resistance levels, Lucas, uh in this corn market here currently.
• 1:11
  SPEAKER_00: Yesterday's Wazdirport, we did increase yield by half a bushel versus trade estimates, uh thinking we were probably gonna drop uh yield a little bit.
• 1:21
  SPEAKER_00: That was uh a little surprising, I thought, or at least I thought it would be more surprising.
• 1:26
  SPEAKER_00: However, we did increase demand in the old crop marketing year, and ending stocks actually went lower after that half a bushel raise.
• 1:34
  SPEAKER_00: So uh a few changes that all kind of netted out to be the same.
• 1:39
  SPEAKER_01: That was kind of what when I was looking at the report, it seemed like there was a lot of numbers that moved a little bit, and at the end of the result was basically nothing.
• 1:46
  SPEAKER_00: It certainly could have been a lot more.
• 1:48
  SPEAKER_00: Yes.
• 1:48
  SPEAKER_00: I mean, uh the the things pretty much did cancel each other out there.
• 1:52
  SPEAKER_00: So at the end of this month, we will get a quarterly stocks report that will come out and give us a better estimate on what maybe the WASD report should show on last year's demand and uh situation of how many bushels we are carrying over into this new crop.
• 2:08
  SPEAKER_00: Because the demand categories that changed were actually in this last year's crop uh that was sitting in the bin, so to say, from this last year, so not even this next upcoming year.
• 2:18
  SPEAKER_00: The spread and demand is getting actually quite tight between what we saw this year and what they're expecting, we will see next year, Lucas.
• 2:26
  SPEAKER_01: Oh good.
• 2:26
  SPEAKER_00: The soybean side, not a whole lot of changes there.
• 2:30
  SPEAKER_00: They moved around a few uh state yields, but that ended up at the same as well uh from last month, and uh ending stocks there just dropped about 10 million bushels, so no major changes there.
• 2:41
  SPEAKER_00: World ending stocks, stocks to use ratio, pretty significant on uh the world stage for the soybeans.
• 2:48
  SPEAKER_00: I think that's something worth talking about at this point.
• 2:51
  SPEAKER_00: Uh otherwise the report, not a whole lot of action besides that, Lucas.
• 2:55
  SPEAKER_00: But the thing we have seen after post-report would be strength in the grain markets, including corn here, up uh, you know, seven, like we mentioned today.
• 3:03
  SPEAKER_00: And then yesterday we did actually end up closing about a penny higher.
• 3:07
  SPEAKER_00: And then the wheat market, uh double-digit higher for basically spring, Kansas City and Chicago there across the board.
• 3:14
  SPEAKER_00: So a little bit of strength across all the grains.
• 3:17
  SPEAKER_00: Other than that, Lucas, we are looking at uh crops getting taken out uh very ever so slightly in the area.
• 3:25
  SPEAKER_00: I mean, just barely starting.
• 3:26
  SPEAKER_01: Yep, that's kind of you know, we're seeing a few real reports trickle in.
• 3:30
  SPEAKER_01: Yep.
• 3:31
  SPEAKER_01: Uh I know you were talking to some guys yesterday or earlier this week that have done some early soybeans, uh, and we're seeing a few silage appraisals come in on the insurance side and and talking to customers.
• 3:42
  SPEAKER_01: In fact, uh driving around a little bit uh yesterday, traveling around southern Minnesota, I saw a couple combines going on early beans.
• 3:49
  SPEAKER_01: Um so I know the when I see the silage appraisals, of course, silage appraisals can be all over the board, right, Mike?
• 3:56
  SPEAKER_01: And and it depends on where you're at.
• 3:58
  SPEAKER_01: And if you're chopping the river ground that is half drowned out, that yield's not gonna look very well.
• 4:03
  SPEAKER_01: But you know, right now I would say we're uh we're kind of right where we expected.
• 4:09
  SPEAKER_01: It's it's really pretty good, right?
• 4:12
  SPEAKER_01: The the yields uh the appraisals we're seeing and the customers we're talking to that have combined some uh have been pleasantly surprised with the yields.
• 4:21
  SPEAKER_01: I know how about the soybeans?
• 4:23
  SPEAKER_01: I know you were talking to some guy combining some early soybeans.
• 4:25
  SPEAKER_01: What do you have to say?
• 4:26
  SPEAKER_00: Yeah, corn, I I a little bit all over the place, but nothing too crazy yet.
• 4:32
  SPEAKER_00: The soybeans I keep hearing above expected.
• 4:35
  SPEAKER_00: I mean, I haven't heard anything bad for soybeans yet.
• 4:38
  SPEAKER_00: The real questions I've heard are on these later soybeans.
• 4:41
  SPEAKER_00: Are we getting the rains we need to keep those later soybeans big?
• 4:45
  SPEAKER_00: Yeah, essentially.
• 4:46
  SPEAKER_00: That's the the question mark still up in the air.
• 4:49
  SPEAKER_00: So but the early ones so far have been spectacular in every report I've basically heard.
• 4:55
  SPEAKER_01: Yeah, so that's that's gonna be interesting, and I guess we're gonna find out over the next three weeks.
• 4:59
  SPEAKER_01: But um, you know, locally the soybean crop, especially this week uh with temperatures in the mid-80s and uh 15 to 30 mile an hour wind for the last few days, uh, has really pushed maturity on some of these uh corn and soybeans.
• 5:14
  SPEAKER_01: The soybeans are just easier to see because they're going from green to yellow to no leaves uh on some fields.
• 5:20
  SPEAKER_01: Um talking to customers uh like um three weeks ago, everybody was pretty much in the camp that this was gonna be the best soybean crop ever.
• 5:29
  SPEAKER_01: Uh very well still might be, but we have had an extended period here of like no precipitation, no significant precipitation.
• 5:40
  SPEAKER_01: And how is that going to affect a bean crop?
• 5:43
  SPEAKER_01: Uh, you know, I walk in a few fields, like we're not when you you go out there and look at the pods, right?
• 5:50
  SPEAKER_01: Even the top pods, there's a lot of three bean pods up there, which you boy, it's been a few years since we've seen that.
• 5:57
  SPEAKER_01: Um and I don't think you're going to like abort pods.
• 6:01
  SPEAKER_01: We are into like extreme drought or anything like that.
• 6:04
  SPEAKER_01: But to your point of seed size, if these are big beans, the big beans yield more, right?
• 6:10
  SPEAKER_01: It takes up uh more volume.
• 6:12
  SPEAKER_01: So um if we shrink that seed size, do we cut yield back five percent, ten percent?
• 6:17
  SPEAKER_01: I think that's possi a possibility.
• 6:20
  SPEAKER_01: Um and the other thing is looking at the forecast, we're gonna have another few days here of warm weather, but by next weekend we start turning this thing a little bit, and the temperatures cool, uh, rain comes back.
• 6:31
  SPEAKER_01: And the thing about seed size is you can even swell it up a little bit uh even after the plant is mature.
• 6:38
  SPEAKER_01: So uh if you take these beans at on weather conditions like this, might be eight or nine percent, and you put it cooler with a little uh humidity or rain in the uh air or a few days before harvest, now you can get the moisture back up to 13%, and we might pick up a little yield that way that we didn't have.
• 6:55
  SPEAKER_01: So uh still potential great potential on the bean crop.
• 6:59
  SPEAKER_01: It's just uh yeah, when a uh extended three-week period of no rain, how is that gonna affect it?
• 7:06
  SPEAKER_01: I guess we're gonna find out.
• 7:07
  SPEAKER_00: And a quick finish, I would typically expect not as good of yields as what it would have been if it was a more normal or longer.
• 7:16
  SPEAKER_01: That's the general feeling I have, right?
• 7:18
  SPEAKER_01: Like it's when we race a crop to maturity, it feels like it shouldn't yield as much.
• 7:24
  SPEAKER_01: Um, you know, and I think the same's true on corn, but you know, even on corn, a lot you were racing to black layer, but we're not gonna lose a lot of yield uh when we're this close to black layer either.
• 7:37
  SPEAKER_01: And especially this year with the prices, even though we've had a nice little bounce here recently, um you know, where we were sitting at a month ago, I thought we were gonna be trying a lot of corn, and maybe we still are.
• 7:51
  SPEAKER_01: Uh you know, the obviously we the weather can change on a dime up in this neck of the woods.
• 7:56
  SPEAKER_01: But um if it continues and looking at the long range forecast, it kind of thinks the general trend is going to be warmer and drier.
• 8:04
  SPEAKER_01: Uh that is gonna save a lot of drier gas this fall.
• 8:08
  SPEAKER_01: And that$30 to$40 an acre we thought we were gonna spend on drying.
• 8:12
  SPEAKER_01: Uh, if we don't have to spend that, that's gonna be a real big big saver.
• 8:17
  SPEAKER_01: And most guys would probably give up a few bushels so they don't have to do that.
• 8:21
  SPEAKER_00: Still better than late maturity and get some freeze or frost concerns by all means, but being a little nitpicky, here we are on our agronomy skills.
• 8:30
  SPEAKER_00: So uh, what do you got for margin protection and uh an update on that here?
• 8:35
  SPEAKER_01: Yeah, so uh this uh today, the 13th, was the last day of the margin protection price averaging period.
• 8:42
  SPEAKER_01: Uh, we do that through the mid-August through mid-September.
• 8:45
  SPEAKER_01: Um, and we came in, I I haven't seen the official uh numbers on the close, but like 440 on corn, 1041 on soybeans uh is where we were uh tracking at.
• 8:56
  SPEAKER_01: So um, and these would be for 2025 prices.
• 9:00
  SPEAKER_01: So the margin protection product, the first chance you have to buy insurance on the 2025 crop.
• 9:07
  SPEAKER_01: So um, you know, historically the prices aren't great, right?
• 9:11
  SPEAKER_01: We kind of know that the prices have been trending down.
• 9:14
  SPEAKER_01: Uh, when we look at last year, last year corn was 509 and soybeans were 1295.
• 9:19
  SPEAKER_01: So uh, especially that soybean number really took a beating over the last 12 months.
• 9:25
  SPEAKER_01: Um, but that doesn't mean we shouldn't do it, right?
• 9:28
  SPEAKER_01: So uh prices are lower in general, just because they aren't as high as last year doesn't mean we shouldn't do it.
• 9:33
  SPEAKER_01: So I just a quick thought here as as we start looking at 2025 on on whether we should buy margin insurance or not.
• 9:43
  SPEAKER_01: And we have till September 30th.
• 9:45
  SPEAKER_01: That is the sales deadline to add the margin coverage.
• 9:48
  SPEAKER_01: Uh, so you do have a couple of weeks to think about it, get some quotes, talk to talk to us, talk to your agent.
• 9:55
  SPEAKER_01: Uh we'll be sure to help you out uh at best we can.
• 9:59
  SPEAKER_01: But as just a quick reminder on margin protection insurance, it's uh a county-based policy.
• 10:05
  SPEAKER_01: You buy up to 95% protection, and that's where I would recommend a lot of our guys be if they are interested.
• 10:12
  SPEAKER_01: And it's a margin-based product.
• 10:14
  SPEAKER_01: So we take a county yield uh times the prices we just talked about, and then we subtract off expenses, and our expenses are fertilizer, fuel, uh, and interest rates, along with a fixed number for each crop in each county.
• 10:28
  SPEAKER_01: And so today we set the prices both on the crop side and the input side.
• 10:32
  SPEAKER_01: Uh, inputs are a little lower than last year as well.
• 10:36
  SPEAKER_01: Uh so in reality, our margin that we're protecting on corn hasn't changed a whole lot uh this year to last year.
• 10:43
  SPEAKER_01: It's a little lower, but not uh significantly.
• 10:46
  SPEAKER_01: Uh, why that important is because uh that is what's driving our premium cost.
• 10:51
  SPEAKER_01: And so uh when we look at margin protection, it is a pretty expensive uh insurance coverage uh compared to like your standard multi-parel uh insurance products, a revenue protection, things like that.
• 11:05
  SPEAKER_01: Uh, and so uh a lot of times we're gonna, you know, the quotes we're running this year uh are$40 an acre or so on corn,$25 an acre on beans.
• 11:16
  SPEAKER_01: There's a lot of different factors that play into that number, so don't just automatically assume that's what it's gonna cost me.
• 11:22
  SPEAKER_01: But more and more quotes I ran, that's a pretty general number.
• 11:26
  SPEAKER_01: Um, and so when we run that back, that's like 22 cents a bushel on corn and 45 cents a bushel on soybeans.
• 11:32
  SPEAKER_01: Okay, so we just talked about uh uh like should I buy when we talk about whether I should buy margin protection or not, one of the main talking points is it is our first chance to put a floor on price for the 2025 crop.
• 11:47
  SPEAKER_01: And so we got let's say 440 is our corn price uh for margin protection.
• 11:54
  SPEAKER_01: If I'm buying 95% coverage level, that gets me to 418.
• 12:00
  SPEAKER_01: That's when uh the margin policy'd start kicking in.
• 12:03
  SPEAKER_01: Well, if it's gonna cost me 22 cents a bushel, now we're uh we're gonna be lower than that, right?
• 12:09
  SPEAKER_01: We're gonna be like 398 or 396 uh for for when when uh net of premium I'd start collecting.
• 12:19
  SPEAKER_01: So that uh uh doesn't sound like a real sexy price uh to protect, but when you think about 2025, we've had a nice little run up here.
• 12:32
  SPEAKER_01: Maybe maybe it is something we should look at because the big thing on margin protection is and the j all the insurance products are we when we buy them, we buy them on 95% of our bushels.
• 12:47
  SPEAKER_01: We can or Mike, you can do a lot of different things to protect price for 2025, right?
• 12:53
  SPEAKER_00: Yep.
• 12:53
  SPEAKER_01: Um, but most farmers aren't doing 95% of their bushels, are they?
• 12:57
  SPEAKER_00: Also true.
• 12:58
  SPEAKER_01: So if we are going to significantly protect our operation for 25, that's where these insurance products do have a place.
• 13:07
  SPEAKER_01: And so if you're crunching your numbers and$4 corn is a pretty good uh, I don't know if it's a break-even for you, but it's a point where you don't want to slip below, well, then you should probably look at margin protection for and sign up before the September 30th.
• 13:21
  SPEAKER_01: Uh, it feels like corn is a better option than soybeans this year.
• 13:24
  SPEAKER_01: I mean, soybeans at uh, you know, where we're at, uh, and and with a 95% coverage, that's a 989 we're protecting for you know next October of 2025.
• 13:36
  SPEAKER_01: Uh, and then of course it's costing us 41 cents, so that drops it even further down, you know, close to 950 uh on soybeans is the number we're protecting.
• 13:46
  SPEAKER_01: Uh I'm not sure I want to go out and spend money and lock up my coverage on soybeans at these price levels.
• 13:52
  SPEAKER_01: Um, but same story.
• 13:54
  SPEAKER_01: If if that price is a price that you can't let slip away uh or you want to protect, then you should step in and buy the insurance product uh and move on.
• 14:04
  SPEAKER_01: One thing we didn't talk about spring wheat, uh margin production is available on spring wheat as well.
• 14:09
  SPEAKER_01: Um what's interesting on spring wheat is the volatility factor is about twice as high as last year.
• 14:15
  SPEAKER_01: So when I run quotes for spring wheat, it's actually about uh three to five dollars an acre higher than corn.
• 14:22
  SPEAKER_00: Not exactly high prices on the wheat market.
• 14:25
  SPEAKER_01: Not high price, high volatility.
• 14:27
  SPEAKER_00: Uh we basically got to pre-COVID level lows.
• 14:31
  SPEAKER_00: Like the corn to soybean ratio or the the wheat to corn ratio, for example, was way out of whack.
• 14:37
  SPEAKER_00: Like we got way too close to where corn price was in actuality.
• 14:41
  SPEAKER_01: Yep.
• 14:42
  SPEAKER_01: No, and and so that's why maybe with the recent run-up here in wheat, why some guys were considering margin protection.
• 14:50
  SPEAKER_01: Is like the price has come back a little bit, maybe we should step in and buy this.
• 14:54
  SPEAKER_01: But that volatility factor is causing the premium just to be so high uh that we're losing some interest in that.
• 15:00
  SPEAKER_01: But after talking all that and all the numbers, and I'm sure you aren't going to remember that as you're driving around listening to this, uh, I think it comes down to three choices as we look for 2025.
• 15:12
  SPEAKER_01: Uh on as far as insurance is concerned, Mike, is we can buy margin protection by the 30th of September.
• 15:19
  SPEAKER_01: And I would go back to crunching your break-evens.
• 15:23
  SPEAKER_01: A lot of us are are locking up expenses right now, or we've done it already.
• 15:28
  SPEAKER_01: Uh, we know what you know probably what our rent is going to be next year.
• 15:31
  SPEAKER_01: Maybe we've bought fertilizer, or at least we're getting quotes.
• 15:35
  SPEAKER_01: We'll be buying seed here in the next little bit uh for uh uh chemicals.
• 15:40
  SPEAKER_01: A lot of our expenses will be taken care of here in the next few weeks.
• 15:44
  SPEAKER_01: Um and if you haven't started protecting the the grain price side of that, you probably should.
• 15:51
  SPEAKER_01: And insurance is one way to do that, and you could kind of put in a flop around a four-dollar floor with March protection.
• 15:58
  SPEAKER_01: Uh, what else could you do?
• 16:00
  SPEAKER_01: The uh one thing you can do, and this is might be where a more popular choice and might be where my head is at too, is we wait till March and buy our normal crop insurance and then add the ECO coverage.
• 16:13
  SPEAKER_01: And we'll get into ECO a lot uh here this spring, I'm sure, but uh ECO coverage is a 95% coverage, similar to margin protection.
• 16:22
  SPEAKER_01: The nice thing about that, in 2025, they increased the subsidy level on it, which basically means it's cheaper for the farmer now.
• 16:29
  SPEAKER_01: So we'll be able to buy ECO, I think, about half the cost of margin protection, or even less than half the cost.
• 16:39
  SPEAKER_00: Okay, so your big differences are there's no input difference in the ECO compared to the margin, and then just what price you're locking it in, do you want to lock it in now or in the spring?
• 16:52
  SPEAKER_01: So that's the big thing, right?
• 16:53
  SPEAKER_01: If if I'm going to say, well, I'm gonna skip margin protection and I'm gonna buy 75% revenue and ECO come uh come March, well, as long as we can hold price, that plan works.
• 17:06
  SPEAKER_01: If price goes down significantly, well, then we should about marge protection.
• 17:10
  SPEAKER_00: And we really like waiting until spring.
• 17:13
  SPEAKER_01: And and when you kind of look at the cost difference, like we can have corn slip to about 425 and still come out about the same as my margin protection.
• 17:22
  SPEAKER_00: You're given a little cushion there.
• 17:23
  SPEAKER_01: I'm giving got a little cushion there.
• 17:25
  SPEAKER_01: Uh now last year it didn't work.
• 17:27
  SPEAKER_01: Uh price slipped pretty significantly, 509 down to 466, but no two years are alike.
• 17:34
  SPEAKER_01: So uh that is something to keep in mind.
• 17:36
  SPEAKER_01: If you if you aren't really excited about buying margin protection insurance and spending the premium up front, uh keep in mind ECO come spring because the uh extra subsidy will make that uh discounted and and uh yeah, something to pay attention to.
• 17:52
  SPEAKER_01: Of course, the other thing is we don't need to use insurance to protect price.
• 17:55
  SPEAKER_01: They can come talk to you, Mike, and and put together a strategy to start protecting the 2025 crop.
• 18:02
  SPEAKER_01: Um, and I'd encourage guys uh I guess to wrap up here.
• 18:06
  SPEAKER_01: I think the the biggest thing is we should start doing something on 2025.
• 18:11
  SPEAKER_00: And there's a lot of flexibility, I think.
• 18:13
  SPEAKER_00: There's a lot of things I can do right now going out into this next year to give us a chance.
• 18:18
  SPEAKER_01: And on the insurance, uh it's pretty restrictive, right?
• 18:21
  SPEAKER_01: Yep.
• 18:21
  SPEAKER_01: The nice thing about it is I I sign up for it to, you know, whenever I do it, either September or March.
• 18:28
  SPEAKER_01: Uh I don't have to pay for it for a few months after that.
• 18:31
  SPEAKER_01: And I'm protecting up to 95% of my crop.
• 18:35
  SPEAKER_01: Um, those are all good things, but one of the bad things is when you sign up, you are committed.
• 18:40
  SPEAKER_01: You can't get out of it.
• 18:42
  SPEAKER_01: Uh, what working with you and some of the tools that uh uh that you have at your disposal, there's lots of different things we can do with protect price and a lot of different uh uh strategies that you can implement that aren't as restrictive as the the crop insurance products.
• 18:57
  SPEAKER_01: So um I think the bottom line is we got to get started doing something.
• 19:01
  SPEAKER_00: Yeah, and I think this is a really fun discussion.
• 19:04
  SPEAKER_00: I really like working through this with people.
• 19:06
  SPEAKER_00: I think it's something we all should do.
• 19:09
  SPEAKER_00: It gives you a good outlook on what to expect for this next year.
• 19:12
  SPEAKER_00: And uh I feel like it right now it's easy because there's a lot of options still that and flexibility that we have because of the time out there, and you know, four and a half dollar corn for next year probably isn't the end of the world quite yet.
• 19:24
  SPEAKER_00: Soybeans that uh that number is a little bit uglier going out into next year, but um, I don't know.
• 19:30
  SPEAKER_00: I think it's uh a very fascinating discussion to have right now.
• 19:33
  SPEAKER_01: And that's why we're here to have this discussion with you, both on uh on um insurance products and just traditional pricing tools.
• 19:41
  SPEAKER_01: We'll be happy to help you out.
• 19:43
  SPEAKER_01: Some more fun than others.
• 19:45
  SPEAKER_00: All right, thanks for your time, Lucas.
• 19:46
  SPEAKER_00: You bet.
• 19:47
  SPEAKER_00: And thank you to all our listeners.
• 19:48
  SPEAKER_00: Please reach out to us at professional eggmarketing.com.
• 19:52
  SPEAKER_00: Check out our other podcast as well, Professional Egg Marketing, that's released every Friday.
• 19:57
  SPEAKER_00: Trading commodity futures and options involves substantial risk of loss and is not suitable for all investors.
• 20:03
  SPEAKER_00: See you next time.