What is in this article?:
- Will pricing 2011 corn now reduce downside risk?
- Reduces downside risk
• At low coverage level of insurance, or with no insurance, hedging at least 50 percent of expected production is needed to reduce downside risks to their minimum.
"At 75 percent and higher coverage levels, only modest amounts of hedging are needed to reduce risks.
Reduces downside risk
For farmers who purchased RP at high coverage levels, hedging modest amounts of expected production now reduces downside risk, but most of the risk protection has already been obtained through the crop insurance policy.
"If we hedged somewhere between 50 and 60 percent with no insurance, we can reduce the probability of having revenue below $850 from over 30 percent to just below 10 percent," Schnitkey said.
"If we throw crop insurance into the mix— at the 85 percent coverage level, which is what most people have, we can minimize that risk by hedging 10 percent of production. We can reduce most of our risk by hedging — a really modest amount, 10 percent of the production."
Another important factor is that with the crop insurance policy you can minimize the risk by about 10 percent production, but if you go up to about 70 percent, you're not also increasing your risk, he said.
According to Schnitkey, farmers will have a very wide range of very low risk with crop insurance and marketing.
"The higher the coverage level, the wider the range," he said. "For example, at 65 percent coverage, 30 to 40 percent expected production is needed to minimize that $850 benchmark revenue."
Similar patterns exist for a 65 percent RP policy. "The chances of revenue reach their minimums at lower amounts hedged," Schnitkey said. "The minimum chance with an 85 percent RP policy and is reached at 61 percent hedged compared to 71 percent for no insurance.
At the $750 benchmark revenue, the minimum chance is obtained at a 2 percent hedged amount compared to 21 percent for no insurance.
At $650 benchmark revenue, the minimum chance is obtained at a 1 percent hedged amount compared to 13 percent hedged for no insurance. Reaching the minimums will continue to go down as higher coverage crop insurance is examined."
He added that there is no chance of being below $650 and $750 per acre over a wide range of percentage hedged when crop insurance is purchased at high coverage levels. "This suggests that a great deal of latitude exists when marketing grain with higher levels of crop insurance, because marketing will have lower impacts on downside risk than at lower coverage levels."
Schnitkey also noted that the results from this recent projection will change as the growing year continues.