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Consider Crop Insurance Levels When Making Marketing Decisions
DR. AARON SMITH
KNOXVILLE, TENN.
For the past three months, harvest corn futures prices have traded between $3.78/bu and $3.95/bu, below the projected price for crop insurance of $3.96/bu established in February. Harvest soybean futures have declined substantially (currently trading at $9.30-$9.40/bu) from the projected crop insurance price of $10.19/bu. For those that have an acceptable level of crop priced (25-65 percent of anticipated production) a wait and see marketing approach is likely warranted. For those with no crop priced establishing a price on a quarter of estimated production may be worth considering.
When making marketing decisions, it is important to consider the crop insurance coverage selected. For example, if you purchase optional units at 75 percent revenue protection, with an APH of 125 bu/acre your revenue guarantee is $371/acre ($3.96/bu x 125 bu/acre x 75 percent). However, the greater your anticipated production is, compared to your APH, the more “unprotected” gross revenue you have. For example, holding price constant, if your anticipated yield is 175 bu/acre (gross estimated revenue of $693/acre (175 bu/acre x $3.96/bu)) and your crop insurance is as stated above your actual coverage is 54 percent ($371/$693) of anticipated gross revenue (not 75 percent). As such, it may be prudent to investigate additional in-season risk management alternatives (futures, options, and/or cash contracts). Crop insurance is a valuable risk management tool that should be utilized in conjunction with other risk management and marketing tools to mitigate price, revenue, and financial risk for a producer’s individual circumstances.
Old crop cotton has dropped 10 cents from contract highs two weeks ago. It is unlikely that nearby futures will be able to mount another charge into the 85 cent range. Trader focus will now shift to new crop planting progress and projected abandonment for the 2017 crop. Currently, the USDA projects upland cotton planting at 12.001 million acres (300 million in Tennessee), up from 9.88 million acres in 2016 (255 million in Tennessee). Since 2000, average national abandonment has been 13.6 percent (high of 35.8 percent in 2011 and a low of 3.1 percent in 2005). Texas is the dominant driver in national abandonment.
Corn
July 2017 corn futures closed at $3.74 up 2 cents since last Friday. For the week, July 2017 corn futures traded between $3.68 and $3.77. Across Tennessee, average basis (cash price-nearby futures price) strengthened or remained unchanged at Memphis, Northwest Barge Points, Northwest, Lower-middle, and Upper-middle Tennessee. Overall, basis for the week ranged from 5 under to 25 over the July futures contract with an average of 6 over at the end of the week. Corn net sales reported by exporters from May 12-18 were below expectations with net sales of 18 million bushels for the 2016/17 marketing year and 0.02 million bushels for the 2017/18 marketing year. Exports for the same time period were down from last week at 41.4 million bushels. Corn export sales and commitments were 94 percent of the USDA estimated total annual exports for the 2016/17 marketing year (September 1 to August 31) compared to a 5-year average of 94 percent. Ethanol production for the week ending May 19 was 1.010 million barrels per day down 17,000 from last week. Ethanol stocks were 22.684 million barrels, down 730,000 barrels. Jul/Sep and Jul/Dec future spreads were 7 and 18 cents, respectively. September 2017 corn futures closed at $3.81 up 2 cents since last Friday.
Nationally, the Crop Progress report estimated corn planted at 84 percent compared to 71 percent last week, 84 percent last year, and a 5-year average of 85 percent; and corn emerged at 54 percent compared to 31 percent last week, 58 percent last year, and a 5-year average of 55 percent. In Tennessee, the Crop Progress report estimated corn planted at 95 percent compared to 89 percent last week, 97 percent last year, and a 5-year average of 94 percent; and corn emerged at 83 percent compared to 74 percent last week, 88 percent last year, and a 5-year average of 81 percent. In Tennessee, September 2017 cash forward contracts averaged $3.69 with a range of $3.43 to $3.92. December 2017 corn futures closed at $3.92 up 2 cents since last Friday. Downside price protection could be obtained by purchasing a $4.00 December 2017 Put Option costing 31 cents establishing a $3.69 futures floor.
Soybeans
July 2017 soybean futures closed at $9.26 down 27 cents since last Friday. For the week, July 2017 soybean futures traded between $9.25 and $9.61. Average soybean basis strengthened or remained unchanged at Memphis, Northwest Barge Points, and Upper-middle Tennessee and weakened at Northwest and Lower-middle Tennessee. Basis ranged from 36 under to 13 over the July futures contract at elevators and barge points. Average basis at the end of the week was 10 under the July futures contract. Net sales reported by exporters were within expectations with net sales of 17.4 million bushels for the 2016/17 marketing year and 0.2 million bushels for the 2017/18 marketing year. Exports for the same period were down from last week at 12.3 million bushels. Soybean export sales and commitments were 104 percent of the USDA estimated total annual exports for the 2016/17 marketing year (September 1 to August 31), compared to a 5-year average of 98 percent. July soybean-to-corn futures price ratio was 2.48 at the end of the week. Jul/Aug and Jul/Nov future spreads were 3 cent and 3 cents, respectively. August 2017 soybean futures closed at $9.29 down 25 cents since last Friday.
Nationally, the Crop Progress report estimated soybeans planted at 53 percent compared to 32 percent last week, 53 percent last year, and a 5-year average of 52 percent; and soybeans emerged at 19 percent compared to 8 percent last week, 20 percent last year, and a 5-year average of 21 percent. In Tennessee, the Crop Progress report estimated soybeans planted at 36 percent compared to 19 percent last week, 48 percent last year, and a 5-year average of 38 percent; and soybeans emerged at 15 percent compared to 4 percent last week, 19 percent last year, and a 5-year average of 19 percent. In Tennessee, October / November 2017 soybean cash contracts average $9.38 with a range of $8.99 to $9.63. November/December 2017 soybean-to-corn price ratio was 2.37 at the end of the week. November 2017 soybean futures closed at $9.29 down 22 cents since last Friday. Downside price protection could be achieved by purchasing a $9.40 November 2017 Put Option which would cost 49 cents and set an $8.91 futures floor.
Cotton
July 2017 cotton futures closed at 77.09 cents down 2.36 cents since last Friday. For the week, July 2017 cotton futures traded between 77.01 and 79.5 cents. Delta upland cotton spot price quotes for May 25 were 75.66 cents/lb (41-4-34) and 76.91 cents/lb (31-3-35). Adjusted world price (AWP) decreased 3.19 cents to 69.25 cents per pound. Net sales reported by exporters were down from last week with net sales of 16,200 bales for the 2016/17 marketing year and 236,200 bales for the 2017/18 marketing year. Exports for the same period were down from last week at 332,800 bales. Upland cotton export sales were 101 percent of the USDA estimated total annual exports for the 2016/17 marketing year (August 1 to July 31), compared to a 5-year average of 101 percent. October 2017 cotton futures closed at 75.18 down 0.63 cents since last Friday. Jul/Oct and Jul/Dec cotton futures spreads were -1.91 cents and -4.3 cents, respectively.
Nationally, the Crop Progress report estimated cotton planted at 52 percent compared to 33 percent last week, 45 percent last year, and a 5-year average of 50 percent. In Tennessee, cotton planted was estimated at 70 percent compared to 35 percent last week, 65 percent last year, and a 5-year average of 57 percent. December 2017 cotton futures closed at 72.79 down 0.66 cents since last Friday. Downside price protection could be obtained by purchasing a 73 cent December 2017 Put Option costing 3.5 cents establishing a 69.5 cent futures floor.
Wheat
July 2017 wheat futures closed at $4.38 up 3 cents since last Friday. July 2017 wheat futures traded between $4.27 and $4.42 this week. July wheat-to-corn price ratio was 1.17. Wheat net sales reported by exporters were within expectations with net sales of 7.4 million bushels for the 2016/17 marketing year and net sales of 12.6 million bushels for the 2017/18 marketing year. Exports for the week were up from last week at 27 million bushels. Wheat export sales were 101 percent of the USDA estimated total annual exports for the 2016/17 marketing year (June 1 to May 31), compared to a 5-year average of 104 percent. In Memphis, old crop cash wheat ranged from $4.44 to $4.63. Jul/Sep and Jul/Dec future spreads were 13 cents and 35 cents, respectively. In Tennessee, June/July 2017 cash wheat ranged from $4.05 to $4.63. September 2017 wheat futures closed at $4.51 up 3 cents from last Friday.
Nationally, the Crop Progress report estimated winter wheat condition at 52 percent good-to-excellent and 15 percent poor-to-very-poor; winter wheat headed at 72 percent compared to 63 percent last week, 74 percent last year, and a 5-year average of 67 percent; spring wheat planted at 90 percent compared to 78 percent last week, 94 percent last year, and a 5-year average of 84 percent; and spring wheat emerged at 62 percent compared to 40 percent last week, 75 percent last year, and a 5-year average of 59 percent. In Tennessee, winter wheat condition was reported at 68 percent good-to-excellent and 9 percent poor-to-very poor; and winter wheat coloring at 36 percent. July 2018 wheat futures closed at $5.10 up 2 cents since last Friday. Downside price protection could be obtained by purchasing a $5.20 July 2018 Put Option costing 47 cents establishing a $4.73 futures floor. ∆
DR. AARON SMITH: Assistant Professor, Crop Marketing Specialist, University of Tennessee
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