The Option to Augment the Crop Insurance Price Floor

Producers face risks every growing season. Production risks, such as extreme weather and drought, affect yield. Marketing risks, including price direction and volatility, is affected by global supply and demand. Developing strategies that use crop insurance in conjunction with options can be an effective way to manage marketing and production risks within the growing season for row crop producers. 

Annually, Federal crop insurance provides over $100 billion in total liability protection (RMA, 2022). Many crop insurance products and features are available to producers; however, three popular crop insurance types are yield protection (YP), revenue protection (RP), and revenue protection with harvest price exclusion (RP-HPE). YP offers protection against declines in yield, whereas RP and RP-HPE offer protection against declines in revenue (yield and price). To calculate the insurance guarantee, RP policies use the greater of the projected or harvest crop insurance price while RP-HPE utilizes only the projected price. It is important for producers to consider the in-season price protection offered by the type of crop insurance policy and buyup coverage level as well as the price risk exposure throughout the growing season. Considering price risk exposure throughout the growing season introduces the opportunity for using crop insurance products in conjunction with other risk management tools such as futures and options.

Options can be used during the growing season to establish a futures price floor greater than the projected price in the crop insurance policy. Buying options allows producers to obtain the right, but not the obligation, to establish a position in the futures market at a specified strike price. The cost to purchase the option is the premium. As such, the strike price minus the premium establishes a futures price floor for the bushels protected. Figures 1, 2, and 3 show the daily December corn futures contract closing price, the projected crop insurance price (for Arkansas the projected price discovery period is January 15 to February 14 (Table 1); projected price discovery periods vary by state), and the put option floor (strike price minus the premium) that could have been established when the market peaked during the 2020, 2021, and 2022 growing seasons. In 2021 and 2022, purchasing a put option was an effective method to establish a futures market price floor above the projected price provided by crop insurance. In both years, the price floor established with the option contract also exceeded the harvest crop insurance price (Table 1). However, each year presents different market opportunities. In 2020, no opportunity was presented to establish a futures market price floor through put option purchases above the crop insurance projected price – the December corn contract declined after the projected price determination period and remained flat through most of the growing season.

Take Aways

  1. Producers should consider utilizing marketing tools that work in conjunction with crop insurance during the growing season.
  2. In-season marketing opportunities can be short lived, so action should be considered when opportunities are presented.
  3. Each marketing year is different, presenting unique challenges and opportunities. Knowing how to use numerous marketing tools (options, futures, hedge-to-arrive (HTA’s), forward contracts, basis contracts etc.) allows producers to select the tool that is best suited to provide in-season price protection.

Figure 1. Projected Crop Insurance Price, December Corn Price, and May 20th Option Floor, 2022

Figure 2. Projected Crop Insurance Price, December Corn Price, and May 7th Option Floor, 2021

Figure 3. Projected Crop Insurance Price, December Corn Price, and February 21st Option Floor, 2020

Table 1. Projected and harvest crop insurance prices for corn (Arkansas), 2020-2022

YearProject Price Discovery PeriodProjected PriceHarvest Price Discovery PeriodHarvest Price
2020
2021
2022
01/15 – 02/14
01/15 – 02/14
01/15 – 02/14
$3.95
$4.48
$5.75
08/15 – 09/14
08/15 – 09/14
08/15 – 09/14
$3.54$
5.36
TBD

Resources and References

USDA Risk Management Summary of Business. (August 2022). USDA Risk Management Agency. https://www.rma.usda.gov/SummaryOfBusiness

Biram, Hunter, and S. Aaron Smith. “The Option to Augment the Crop Insurance Price Floor“. Southern Ag Today 2(35.1). August 22, 2022. Permalink

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Associate Professor, Crop Marketing Specialist

University of Tennessee

Assistant Professor

University of Arkansas

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