March 7, 2002

Market Advisor: Analyzing Crop Insurance and Marketing Tool Combinations

By George Flaskerud, Crops Economist

NDSU Extension Service

Crop insurance and marketing tools are among the basic building blocks of most strategies to manage production and price risk. They can be evaluated in an easy-to-use spreadsheet program, which can be downloaded from http://www.ag.ndsu.nodak.edu/aginfo/cropmkt/analysis/anal.htm . The program is called the "Insurance and Marketing Simulator" and requires the use of Microsoft Excel. It was developed by Matthew Diersen, South Dakota State University Extension Service, and Andrew Swenson, North Dakota State University Extension Service.

The first step in using the model is to decide how the simulation results should be viewed: base, multiple or grid. Base results show total revenue and its sources for one specified yield and price at harvest. Multiple results show total revenue and its sources for nine yields and futures prices at harvest. Grid results show revenue for 70 price and yield scenarios.

The desired view determines which of three spreadsheets to use. There is one spreadsheet for base results, one for multiple and one for grid. Select the spreadsheet and specify the information needed for insurance products and marketing tools. The multiple spreadsheet is suggested as a starting point.

The simulator can be used to evaluate popular insurance products: Multi Peril Crop Insurance (MPCI) and Crop Revenue Coverage (CRC). The simulator can also be used to evaluate a third product, Revenue Assurance with the Harvest Option (RA-HO), because it is essentially the same as CRC.

The following is insurance information for some crops. Producers should visit with their crop insurance agent about the many other crops covered by insurance.

For 2002, the MPCI price is $3.15 per bushel for spring wheat, $3.05 per bushel for durum, $1.95 per bushel for barley, $2.00 per bushel for corn, $4.92 per bushel for soybeans, $9.30 per hundredweight for oil sunflowers and canola, and $13.60 per hundredweight for confectionery sunflowers. The CRC base price is $3.18 per bushel for spring wheat, $2.32 per bushel for corn and $4.50 per bushel for soybeans.

The RA price can be specified in the simulator where it calls for a CRC base price. The RA-HO base price is $1.95 per bushel for barley, $7.10 per hundredweight for sunflowers, and $9.20 per hundredweight for canola. Other RA-HO base prices are the same as for CRC.

Other information that needs to be specified in the simulator is the loan rate, expected harvest basis and actual production history (APH) yield. Your local elevator manager should be able to help you determine an appropriate harvest basis. The loan rate is needed to determine a loan deficiency payment.

The simulator has a table to specify yield and price percentage elections and the premiums for MPCI and CRC (or RA-HO). In that same table, you indicate if you want to use MPCI or CRC (RA-HO) in the analysis. You can not do both at the same time. You need to get results from using one product and then from the other.

A marketing table permits you to sell futures, buy puts and buy calls. Selling futures can be used to represent a hedge-to-arrive elevator contract. A marketing tool is activated by specifying the percentage of the APH yield to sell using that tool. This would be equivalent to specifying a percentage of the expected crop. You need to specify the futures price for selling, and the strike prices and premiums for the options. All three of the tools can be used simultaneously.

The final step is to specify the expected futures price and harvest yield. For multiple and grid results, increments in prices and yields must also be specified.

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Source: George Flaskerud, (701) 231-7377, gflasker@ndsuext.nodak.edu
Editor: Tom Jirik, (701) 231-9629, tjirik@ndsuext.nodak.edu