Communication With Your Crop Insurance Agent During A Drought Is Essential
DR. AARON SMITH
KNOXVILLE, TENNESSEE
On July 12, the U.S. Drought Monitor indicated 64 percent of Tennessee was abnormally dry, including 39 percent in moderate drought and 3 percent in severe drought. West Tennessee has been the hardest hit region in the state. Many crop producers will have some tough decisions to make moving forward. A couple of questions to consider are: what is the base level of protection that is provided by your crop insurance policy? what is invested in the crop and what will be needed to bring the crop to market? what are my current production estimates? and how much production is currently priced? Communication with your crop insurance agent during a drought is essential. Before any decision is finalized, a discussion with your crop insurance agent should occur to avoid voiding potential indemnity payments due to non-compliance with crop insurance policy provisions.
Knowing the revenue guarantee and yield that will result in indemnity payments for each insured unit is critical. For example, for corn, $5.90 (projected price) x 175 (APH) x 75 percent provides a revenue guarantee of $774/acre. The December futures contract is currently $5.96 meaning, at current prices, the yield trigger (the yield where indemnity payments would commence) would be 130 bu/acre. This base level crop insurance protection should be considered when evaluating cur-rent and future market-based transactions. Budgeted investment in the 2022 corn crop varied tremendously.
Purchase timing and product availability created a wide array of cost of production projections. Estimated per acre costs, for a 175 bu/acre corn yield target, had a wide range, $750 to $1,000/acre were common.
Currently, how much of the inputs were applied and what are the costs incurred to date? In counties with no or limited rain in the past 45 days it is likely that some input applications that were budgeted were not incurred. It is important to know what costs have been incurred to- date and what are the projected remaining costs to bring the crop to market. This will allow producers to know profit/loss estimates based on current harvest market offerings, potential revenue from crop insurance indemnities, and production priced prior to harvest.
Production estimates will be all over the map ranging from complete write offs to minimal yield losses. Projecting a yield range will allow producers to estimate potential gross revenue from production that was forward priced and under current harvest price offerings.
Additionally, projecting production will allow producers to determine if forward priced production exceeds projected production. Producers with a projected production deficit, relative to the amount that was forward priced, need to evaluate alternatives immediately. Hopefully, the forward priced production is at higher prices than current market offerings. This may provide options for producers to exit forward priced commitments without further financial losses. Developing a plan to move forward under current production and market conditions will be essential for producers being adversely affected by drought.
Corn
Ethanol production for the week ending July 8 was 1.005 million barrels per day, down 39,000 from the previous week. Ethanol stocks were 23.606 million barrels, up 116,000 compared to last week. Corn net sales reported by exporters for July 1-7, 2022, were up compared to last week with net sales of 2.3 million bushels for the 2021/22 marketing year and net sales of 13.7 million bushels for the 2022/23 marketing year. Exports for the same period were down 11 percent from last week at 46.1 million bushels. Corn export sales and commitments were 97 percent of the USDA estimated total exports for the 2021/22 marketing year (September 1 to August 31) compared to the previous 5- year average of 102 percent. Across Tennessee, average corn basis (cash price-nearby futures price) strengthened or remained unchanged at West, West-Central, North-Central, and Mississippi River elevators and barge points and weakened at Northwest elevators and barge points. Overall, basis for the week ranged from 27 to 85 over, with an average of 60 over the September futures at elevators and barge points. September 2022 corn futures closed at $6.04, down 29 cents since last Friday. For the week, September 2022 corn futures traded between $5.84 and $6.67. Sep/Dec and Sep/Mar future spreads were -1 and 6 cents.
Nationally, the Crop Progress report estimated corn condition at 64 percent good-to-excellent and 10 percent poor-to-very-poor; corn silking at 15 percent compared to 7 percent last week, 24 percent last year, and a 5-year average of 25 percent; and corn dough at 2 percent compared to 3 percent last year and a 5-year average of 3 percent. In Tennessee, corn condition was estimated at 40 percent good-to- excellent and 23 percent poor-to-very poor; corn silking at 67 percent compared to 44 percent last week, 61 percent last year, and a 5-year average of 72 percent; and corn dough at 11 percent compared to 2 percent last week, 17 percent last year, and a 5-year average of 20 percent. New crop cash prices at elevators and barge points ranged from $5.66 to $6.40. December 2022 corn futures closed at $6.03, down 20 cents since last Friday. Downside price protection could be obtained by purchasing a $6.10 December 2022 Put Option costing 57 cents establishing a $5.53 futures floor. March 2023 corn futures closed at $6.10, down 18 cents since last Friday.
Soybeans
Net sales reported by exporters were up compared to last week with net sales cancellations of 13.3 million bushels for the 2021/22 marketing year and net sales of 1.1 million bushels for the 2022/23 marketing year. Exports for the same period were down 13 percent compared to last week at 16.2 million bushels. Soybean export sales and commitments were 101 percent of the USDA estimated total annual exports for the 2021/22 marketing year (September 1 to August 31), compared to the previous 5-year average of 103 percent. Across Tennessee, average soybean basis weakened or remained unchanged at West, Northwest, West-Central, North-Central, and Mississippi River elevators and barge points. Basis ranged from 35 under to 115 over, with an average basis of 28 over the August futures contract. August 2022 soybean futures closed at $14.66, down 47 cents since last Friday. For the week, August 2022 soybean futures traded between $14.44 and $15.52. Aug/Sep and Aug/Nov future spreads were -107 and -124 cents. September 2022 soybean-to-corn price ratio was 2.25 at the end of the week. September 2022 soybean futures closed at $13.59, down 55 cents since last Friday.
Nationally, the Crop Progress report estimated soybean condition at 62 percent good-to-excellent and 9 percent poor-to-very poor; soybeans blooming at 32 percent compared to 16 percent last week, 44 percent last year, and a 5-year average of 38 percent; and soybeans setting pods at 6 percent compared to 3 percent last week, 9 percent last year, and a 5-year average of 9 percent. In Tennessee, soybean condition was estimated at 39 percent good-to-excellent and 21 percent poor-to-very poor; soybeans emerged at 96 percent compared to 91 percent last week, 95 percent last year, and a 5-year average of 95 percent; soybeans blooming at 34 percent compared to 23 percent last week, 28 percent last year, and a 5-year average of 36 percent; and soybean setting pods 7 percent compared to 1 percent last week, 11 percent last year, and a 5-year average of 10 percent. Nov/Dec 2022 soybean-to-corn price ratio was 2.23 at the end of the week. New crop cash soybean prices at elevators and barge points ranged from $13.14 to $14.34. November 2022 soybean futures closed at $13.42, down 54 cents since last Friday. Downside price protection could be achieved by purchasing a $13.60 November 2022 Put Option which would cost 85 cents and set a $12.75 futures floor.
Cotton
Net sales reported by exporters were down compared to last week with net sales of 10,200 bales for the 2021/22 marketing year – a marketing year low – and 139,300 bales for the 2022/23 marketing year. Exports for the same period were down 17 percent compared to last week at 312,700 bales. Upland cotton export sales were 109 percent of the USDA estimated total annual exports for the 2021/22 marketing year (August 1 to July 31), compared to the previous 5-year average of 112 percent. Delta upland cotton spot price quotes for July 14 were 101.46 cents/lb (41-4-34) and 103.71 cents/lb (31-3-35). Adjusted world price (AWP) was down 4.27 cents at 109.1 cents.
Nationally, the Crop Progress report estimated cotton condition at 39 percent good-to-excellent and 27 percent poor-to-very poor; cotton squaring at 57 percent compared to 44 percent last week, 53 percent last year, and a 5-year average of 58 percent; and cotton setting bolls at 22 percent compared to 13 percent last week, 15 percent last year, and a 5-year average of 18 percent. In Tennessee, cotton condition was estimated at 47 percent good-to-excellent and 28 percent poor-to-very poor; cotton squaring at 65 percent compared to 43 percent last week, 56 percent last year, and a 5-year average of 68 percent; and cotton setting bolls at 22 percent compared to 10 percent last week, 7 percent last year, and a 5-year average of 14 percent.
December 2022 cotton futures closed at 88.71 cents, down 6.92 cents since last Friday. For the week, December 2022 cotton futures traded between 82.54 and 96.69 cents. Dec/Mar and Dec/May cotton futures spreads were -3.86 cents and -5.54 cents. Downside price protection could be obtained by purchasing an 89 cent December 2022 Put Option costing 13.11 cents establishing a 75.89 cent futures floor. March 2023 cotton futures closed at 84.85 cents, down 6.96 cents since last Friday. May 2023 cotton futures closed at 83.17 cents, down 6.56 cents since last Friday.
Wheat
Wheat net sales reported by exporters were up compared to last week at 37.4 million bushels for the 2022/23 marketing year and 1.1 million bushels for the 2023/24 marketing year. Exports for the week were down 6 percent compared to last week at 9.9 million bushels. Wheat export sales were 33 percent of the USDA estimated total annual exports for the 2022/23 marketing year (June 1 to May 31), compared to the previous 5-year average of 33 percent. Nationally, the Crop Progress report estimated winter wheat harvested at 63 percent compared to 54 percent last week, 57 percent last year, and a 5-year average of 61 percent; spring wheat condition at 70 percent good-to-excellent and 5 percent poor-to-very poor; and spring wheat headed at 44 percent compared to 20 percent last week, 81 percent last year, and a 5-year average of 77 percent. Wheat cash prices at elevators and barge points ranged from $7.30 to $8.33. September 2022 wheat futures closed at $7.76, down 1.15 cents since last Friday. September 2022 wheat futures traded between $7.65 and $9.40 this week. September wheat-to-corn price ratio was 1.28. Sep/Dec and Sep/Jul future spreads were 18 and 34 cents.
December 2022 wheat futures closed at $7.94, down 112 cents since last Friday. July 2023 wheat futures closed at $8.10, down 96 cents since last Friday. Downside price protection could be obtained by purchasing an $8.10 July 2023 Put Option costing 97 cents establishing an $7.13 futures floor. ∆
DR. AARON SMITH: Assistant Professor, Crop Marketing Specialist, University of Tennessee