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Locking in a corn profit
Most Midwest farmers use crop insurance to manage risk, but it doesn’t cover everything. Ag economists at the University of Illinois decided to see what it would take to hedge out the rest of the crop using corn futures at the CME in Chicago.
The goal was to gross at least 850 dollars per corn acre on a central Illinois farm. The FarmDoc team found that a corn farm covered by an 85 percent revenue protection crop insurance policy can nearly eliminate the risk of not making at least 850 dollars an acre by hedging just 10 percent of the expected yield.
University of Illinois Extension Farm Management Specialist Gary Schnitkey says, “If we’re at that level, we can minimize risk by hedging 10% of production.”
Schnitkey says there’s another important part of this.,“With that crop insurance policy, you can minimize that risk by about 10% of production,” he says, “But, if you go up to 70%, you’re not also increasing your risk either. So, you have a very wide range of very low risk with crop insurance and marketing.”
That means a grower could hedge up to 70 percent of the expected yield and not really risk making less than 850 an acre.
The FarmDOC team used a central Illinois corn farm with an average yield of 184 bushels to the acre and a cash corn price of $6 to the bushel to make the risk factor calculations.
Todd Gleason contributed to this report
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