Latest / Professional Ag Marketing Podcast / Yield Protection

Transcript

Yield Protection · Professional Ag Marketing Podcast

• 0:01
  SPEAKER_01: Welcome to the Professional Ag Marketing Podcast.
• 0:04
  SPEAKER_01: If you want a deep dive into the ag markets and risk management strategies, your search is over.
• 0:10
  SPEAKER_01: Come here after every Friday to get your weekly commodity recap.
• 0:14
  SPEAKER_01: Trading commodity futures and options involves substantial risk of loss and is not suitable for all investors.
• 0:21
  SPEAKER_01: This is your host, Mike Minor.
• 0:22
  SPEAKER_01: Let's get started.
• 0:23
  SPEAKER_01: Today I've got Lucas Peters.
• 0:25
  SPEAKER_01: How's it going?
• 0:26
  SPEAKER_01: It's going pretty good, Mike.
• 0:27
  SPEAKER_01: Well, I've got a fascinating topic today for us to discuss.
• 0:31
  SPEAKER_01: We're only going to talk about really one topic today.
• 0:35
  SPEAKER_00: Crop insurance is that topic, Mike?
• 0:37
  SPEAKER_01: Well, something a little bit more specific and much more fascinating than normal crop insurance.
• 0:42
  SPEAKER_01: We're going to talk about yield protection.
• 0:44
  SPEAKER_01: I know it's something not a lot of people have done before.
• 0:47
  SPEAKER_01: However, I think uh here at Professional Marketing, uh we're really gonna pride ourselves on uh on yield protection here this year, aren't we?
• 0:55
  SPEAKER_00: Yeah, we're definitely gonna have guys give it a thought.
• 0:58
  SPEAKER_00: Um, you know what historically revenue protection on our corn and soybean crops in southern Minnesota, eastern South Dakota, northern Iowa has been the go-to.
• 1:08
  SPEAKER_00: Like it's yes, it's the most popular coverage sold in our area nationwide, like 80% of the coverage is nationwide.
• 1:16
  SPEAKER_00: So dang near everyone buys it.
• 1:18
  SPEAKER_00: Dang near everyone has been buying revenue protection.
• 1:22
  SPEAKER_00: And and not that that's wrong.
• 1:24
  SPEAKER_00: Okay, I don't want to say that uh you shouldn't have been buying it, okay.
• 1:28
  SPEAKER_00: But what we want to have uh our customers or or or have you guys think about is what am I getting when I buy revenue protection?
• 1:38
  SPEAKER_00: Because it's also one of the most expensive crop insurance coverages that we that we pay for, since it does include some price and yield protection.
• 1:46
  SPEAKER_00: Um and so let's look at uh you know when we compare yield protection and revenue protection, yield protection only protects bushels.
• 1:55
  SPEAKER_00: Okay, so everybody's has their APH.
• 1:59
  SPEAKER_00: Uh you buy you know a coverage level of that APH, so 75, 80, 85.
• 2:04
  SPEAKER_00: Well, yield protection is pretty easy to figure because you take, you know, if you're buying 80% coverage, 80% of your APH, that's your guaranteed bushels.
• 2:14
  SPEAKER_00: And if you harvest less than that, you get paid.
• 2:16
  SPEAKER_00: If you harvest more than that, you don't get paid.
• 2:18
  SPEAKER_00: Pay paid off what price?
• 2:20
  SPEAKER_00: So you're gonna get paid off of the base price or the spring price, what we're setting right now.
• 2:24
  SPEAKER_01: Right now.
• 2:25
  SPEAKER_00: Revenue protection, it guarantees revenue.
• 2:28
  SPEAKER_00: Okay, so it's a yield and price.
• 2:30
  SPEAKER_00: And you get to use the higher of the spring price or the fall price, which will be set in October.
• 2:37
  SPEAKER_00: Um, so anything that causes you to not hit that revenue guarantee, you get paid.
• 2:43
  SPEAKER_00: So maybe it's lower yields, maybe it's lower prices, maybe it's a combination of both.
• 2:49
  SPEAKER_00: But whatever causes you not to hit that minimum revenue guarantee, you'll get paid with revenue protection.
• 2:55
  SPEAKER_00: So very good policy, it's worked pretty well.
• 2:58
  SPEAKER_00: Uh, but one thing we got to look at is as we look stand here in 2023, um, our costs have gone up quite a bit.
• 3:06
  SPEAKER_00: And so, in order to lock in profit, we really need to protect price this year.
• 3:11
  SPEAKER_00: Um, with revenue protection, we're protecting price, right?
• 3:16
  SPEAKER_00: We're setting our spring prices right now.
• 3:18
  SPEAKER_00: Right uh today, corn is running about 596 for an average.
• 3:21
  SPEAKER_00: Soybeans are are right in that 13 uh 60 to 70 range.
• 3:27
  SPEAKER_00: Um, you know, when we protect price with revenue protection, if we're buying 80%, 85%, well, that's the what we're guaranteed for price.
• 3:36
  SPEAKER_00: So let's say the price comes in at 590 on corn, similar to where it did last year, and I'm buying 80% coverage, my price protection is about 472.
• 3:46
  SPEAKER_00: Now, I don't know about you, Mike, but uh I'm growing corn this year, and if I'm uh relying on an insurance policy to protect me at 472, I'm not gonna be very happy at the end of the year if corn is hovering around 480 and uh have a normal yield, right?
• 4:03
  SPEAKER_00: Yeah.
• 4:03
  SPEAKER_00: Because at that scenario, I'm not gonna get paid.
• 4:06
  SPEAKER_00: Um, so what we're encouraging people to think about is let's split this coverage up.
• 4:12
  SPEAKER_00: Let's take uh the price component out of revenue protection and let uh let professional leg marketing do that.
• 4:20
  SPEAKER_00: Let Mike Minor work on that and use the a myriad of tools that we have available to us to protect price.
• 4:27
  SPEAKER_00: If we have a profitable price, let's go sell some grain, let's use some options, use futures, whatever the case may be, to protect a price that's closer to where the actual price is.
• 4:38
  SPEAKER_01: Today's levels and what May will bring us rather than protecting it at 470.
• 4:43
  SPEAKER_00: Yeah, exactly.
• 4:45
  SPEAKER_00: And let's use insurance to protect yield, right?
• 4:47
  SPEAKER_00: Yeah, there's there's not a lot we can do if Mother Nature comes in and freezes us off, uh, doesn't rain, so we have lower yields.
• 4:56
  SPEAKER_00: Maybe we don't get the crop planted with prevent plant.
• 4:58
  SPEAKER_00: Like there's a lot of different things that uh that Mother Nature can throw at us to prevent us from getting a high yield, but we can buy an insurance product to protect that, and let's have price be controlled in another way.
• 5:12
  SPEAKER_00: And and by doing that, by splitting those up, uh, I think there's some advantages we can we can have.
• 5:17
  SPEAKER_00: We talked about getting our price protection probably more uh at profitable levels.
• 5:22
  SPEAKER_00: Um the other thing we're gonna do is we're gonna save premium costs.
• 5:25
  SPEAKER_00: You know, everybody a lot of premium.
• 5:28
  SPEAKER_00: It's you know, if for a standard revenue protection versus yield protection at the same coverage level, yield is gonna be about half cost.
• 5:37
  SPEAKER_00: Okay, so everybody, every county, every situation is gonna be a little different, but just kind of figure it's 50% cheaper to buy yield protection versus revenue protection.
• 5:48
  SPEAKER_00: Okay, so that's always good news.
• 5:50
  SPEAKER_00: Our coverage level is gonna be our guaranteed bushels times the spring price.
• 5:54
  SPEAKER_00: Okay, so that's what I'm gonna be protected for uh if if I don't get bushels.
• 6:00
  SPEAKER_00: Um so if you're working with uh a lender or something and they need to show that you're protecting uh a decent amount of coverage, yield protection is gonna provide that.
• 6:10
  SPEAKER_00: If you're worried about prevent plant, uh you know, where where I farm up in northern South Dakota, prevent plant's more of a question of when than if.
• 6:19
  SPEAKER_00: Um and so the prevent plant coverage is actually the exact same with yield protection as it is with revenue protection.
• 6:28
  SPEAKER_00: So so that is is not gonna affect me at all.
• 6:31
  SPEAKER_00: Um so I get decent coverage, I spend a little less money, and my prevent plant coverage is the same.
• 6:38
  SPEAKER_00: Okay, all of that sounds pretty good.
• 6:41
  SPEAKER_00: Now, what are what are the downsides?
• 6:43
  SPEAKER_00: Okay, so let's talk about a couple of scenarios.
• 6:47
  SPEAKER_00: What if I buy yield protection and the price goes up in the fall and I'm short bushels?
• 6:53
  SPEAKER_00: Okay, kind of uh a worst case scenario, right?
• 6:56
  SPEAKER_00: Well, one, we all make a lot of money.
• 6:58
  SPEAKER_00: So the if if price goes up in the fall, uh on revenue protection, I'm gonna have to have a bushel loss in order to get a claim payment.
• 7:08
  SPEAKER_00: That's just the way the math works.
• 7:10
  SPEAKER_00: And so 2022 is a good example of that, right?
• 7:13
  SPEAKER_00: We some areas had short crops, and the fall price was about a dollar higher on corn uh than the spring price.
• 7:21
  SPEAKER_00: Well, when you look at that, the only difference you're gonna have in indemnity payment is how many bushels you're short times the price.
• 7:30
  SPEAKER_00: So in 2022, if I was 20 bushels short and I bought yield protection, I would get paid my 20 bushels times the spring price, which was 590.
• 7:40
  SPEAKER_00: If I was on revenue protection, I get paid my 20 bushels at the higher price, which was 686.
• 7:47
  SPEAKER_00: So I'd come out about$20 an acre higher claim payment with revenue versus yield.
• 7:53
  SPEAKER_00: Um that's not that huge a deal, and if I commit to this, I'm gonna save a lot more on premium cost than I'm gonna give up and claim.
• 8:01
  SPEAKER_00: The other scenario, what if price goes down?
• 8:04
  SPEAKER_00: Okay, now this is the point where revenue protection is gonna show its biggest advantage.
• 8:10
  SPEAKER_00: If price goes down significantly, and yield would happen to go down as well, you know, that's where revenue protection is gonna pay you because it's gonna pay you for your short bushels, but it's also gonna pay you every single bushel that you're short on price.
• 8:25
  SPEAKER_00: Okay, so versus yield protection is only gonna pay you for your short bushels off the spring price.
• 8:32
  SPEAKER_00: Um, so this is where the difference comes in claims and why somebody might say, you know what, boy, this this isn't for me, but this is where the the brokerage side comes in, right, Mike?
• 8:42
  SPEAKER_01: Yeah.
• 8:43
  SPEAKER_00: If if I'm worried about price going down, there's things I can implement to protect price.
• 8:49
  SPEAKER_00: And if you're going to buy yield protection, save some premium, uh, protect the bushels that I'm trying to grow, you really need to be proactive and protect that price in case we get into that situation where price goes down significantly, because that is the coverage you are giving up.
• 9:06
  SPEAKER_00: So just be aware of that uh if you're looking at this yield protection uh idea.
• 9:11
  SPEAKER_00: And then of course, what if everything stays the same?
• 9:13
  SPEAKER_00: You know, what if we have about an average yield uh with with price going down a little bit spring to fall, which is the norm?
• 9:21
  SPEAKER_00: Well, in that scenario, neither policy is gonna pay, and if I can save a little premium cost with yield protection, I'm probably better off.
• 9:28
  SPEAKER_00: Okay, so so there this yield protection, revenue protection discussion.
• 9:33
  SPEAKER_00: Um, there are scenarios where revenue is going to be better, uh, but there are a few things that I can look at yield protection and and kind of find an advantage for.
• 9:43
  SPEAKER_00: Um, and that's our main the main advantage is is splitting that price protection out.
• 9:49
  SPEAKER_00: And one thing that I would encourage guys to do if you are looking at doing yield protection is increase your coverage level, right?
• 9:57
  SPEAKER_00: So if I go if I'm typically by 80 revenue, maybe I can go to 85 uh percent coverage and not maybe spend as much money, spend a similar amount of money as I did before.
• 10:10
  SPEAKER_00: Um, but the likelihood of claim uh occurrence goes up quite a bit.
• 10:15
  SPEAKER_00: So every time I go up 5% coverage level from like 75 to 80, 80 to 85, my claim occurrence goes up about 10%.
• 10:25
  SPEAKER_00: Okay, so if uh if normally an 80% coverage level pays out three out of 10 years, 85% probably gonna pay out four out of ten years.
• 10:36
  SPEAKER_00: Um, so that's something to think about.
• 10:38
  SPEAKER_00: I think this really applies for South Dakota guys.
• 10:41
  SPEAKER_01: South Dakota guys because you you get 75% crop insurance enterprise, let's say in South Dakota, a lot of guys do, compared to the same price you're spending as Minnesota or Iowa for 80%.
• 10:55
  SPEAKER_01: But your likelihood on a lot of those uh counties in South Dakota, especially at 70 or 75 percent of actually getting paid with where their APHs are, is really slim.
• 11:06
  SPEAKER_01: Like it takes a lot of price decrease and yield to actually get a payment.
• 11:11
  SPEAKER_00: You have to have a really bad year to trigger much of a payment on bushel losses.
• 11:16
  SPEAKER_01: Especially in South Dakota.
• 11:17
  SPEAKER_01: Yes.
• 11:17
  SPEAKER_01: So if you're able to raise that up to 85% using yield and not really spend any more money on it, I think that's a huge advantage for someone in South Dakota specifically.
• 11:26
  SPEAKER_00: Well, and especially if you're on enterprise units, right?
• 11:28
  SPEAKER_00: Yeah.
• 11:28
  SPEAKER_00: If you know enterprise units, you throw everything together in South Dakota, that's probably the policy that's most common because it is so expensive.
• 11:35
  SPEAKER_00: So you're looking for any way to cheapen up costs.
• 11:38
  SPEAKER_00: And if I can bump up that coverage level, my claim likelihood uh goes up quite a bit in in bad years.
• 11:44
  SPEAKER_00: So there's lots of good things about this and things to think about.
• 11:49
  SPEAKER_00: Um, you know, crop insurance, we tend to get in a rut of let's just do the same thing we did last year, right?
• 11:54
  SPEAKER_00: Before you sign up for March by March 15th for 2023, I'd encourage you to take a look at yield protection, get it quoted, think of the scenarios on your own farm of what years would have I collected on more on yield?
• 12:09
  SPEAKER_00: Uh, what years would the revenue option help me?
• 12:12
  SPEAKER_00: But one of the main points, too, is if you're gonna switch to yield, we got to take advantage and protect price somehow, right?
• 12:20
  SPEAKER_00: And that's the beauty of working with ProEgg Marketing, right, Mike?
• 12:23
  SPEAKER_00: Like we can we do the crop insurance, we give you some ideas to think about, and we can also talk about how to protect the price.
• 12:29
  SPEAKER_00: We got some profitable prices, maybe you want to wait until May, June, the seasonal rally, sell at a little higher price.
• 12:36
  SPEAKER_00: Um, there's lots of things we can do and implement to protect price, and we won't have to rely on that revenue protection policy.
• 12:44
  SPEAKER_01: Even just making comparisons.
• 12:46
  SPEAKER_01: Like when I spend$9 on SEO to protect 11 bushels, I mean you're spending 80 cents a bushel for that protection on that 6%.
• 12:55
  SPEAKER_01: Where if you go out and buy a$6 put and sell a$7 call, for example, you're only spending 10 cents if we're at$6.25 or$6.30.
• 13:03
  SPEAKER_01: So some scenarios like that I think we should really talk about here with how to spend your premium, especially.
• 13:11
  SPEAKER_00: Yeah, there's lots of different things we can do.
• 13:12
  SPEAKER_00: Yeah.
• 13:13
  SPEAKER_00: We don't just have to buy an insurance policy.
• 13:15
  SPEAKER_00: Exactly.
• 13:16
  SPEAKER_00: Yep.
• 13:16
  SPEAKER_00: So yeah, hopefully uh give it some thought, think it over.
• 13:19
  SPEAKER_00: If you have uh uh any questions, by all means reach reach out to me or or anybody here at Professional Egg Marketing and we'll help walk through the discussion.
• 13:26
  SPEAKER_01: And please drown Lucas in some really heavy work here on these examples, especially for your farm too.
• 13:33
  SPEAKER_01: That is the plan.
• 13:34
  SPEAKER_01: We would appreciate it.
• 13:35
  SPEAKER_01: And thank you to all our listeners.
• 13:37
  SPEAKER_01: Please reach out to us at professionaleggmarketing.com.
• 13:40
  SPEAKER_01: Check out our other podcast as well, Professional Egg Marketing, that's released every Friday.
• 13:46
  SPEAKER_01: Trading commodity futures and options involve substantial risk of loss and is not suitable for all investors.
• 13:52
  SPEAKER_01: See you next time.