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Margin Protection: Risk Management for Price and Cost Changes

Corn growers have seen the projected spring price for crop insurance exceed $5.00 just three times in the past decade, the last being spring of 2013. That year, the fall price was $4.39, and producers could do nothing to protect themselves against the $1.27 price drop. Today, producers can buy Margin Protection (MP) to defend against price drops. MP also provides coverage in the event of unexpected losses due to lower yields or increases in input costs.

Margin Protection reduces risk better than any other subsidized product on the market, especially for those whose yields are consistent with or higher than the county in which they farm; the policy is tied to county averages – what it costs to grow a crop in local agronomic conditions -- not an individual grower’s actual costs.

Coverage can be purchased by September 30 as a stand-alone policy or in conjunction with other policies. For example, a producer could buy revenue protection for the revenue side of the balance sheet and margin protection for the input cost side. To understand how margin protection works, we’ll walk you through a scenario based on fall 2021 numbers for corn grown in Boone County, Iowa. First, a bit of background:

Price discovery for Margin Protection is August 15 to September 14. For the purpose of our example, we are using a point-in-time price discovery from late August. Every projected price in the graph below will be finalized September 14. The harvest numbers will be determined in 2022; the harvest price listed in the chart below is for illustration purposes only.

Remember, we are in a price environment in which corn is above $5.00 for the first time since 2013. Our farmer, Joe Corn, is looking to lock in today’s price for his 2022 crop. Our example demonstrates how margin protection can help Joe accomplish his goal.

 

Contract

Margin Protection Projected Price

Harvest Price

Unit

Corn

$5.09

$4.40

$/bu

Urea

$429.14

$426.50

$/ton

DAP

$592.50

$592.50

$/ton

Potash

$618.75

$618.75

$/ton

Diesel

$1.97

$2.01

$/gal

Interest rate

6.22%

6.23%

 

Fixed cost

$206.90

 

 

 

Now let’s say Joe buys 95% margin protection, the maximum allowed, with a 120% protection factor. The average yield for Boone County remains unchanged from the expected 202.8 bushels per acre. But the corn price drops 69 cents, triggering an indemnity payment of $106 per acre. (The trigger margin is $590.53. The actual margin after the price drop is $502.25, for a difference of $88.28 multiplied by the protection factor of 1.2.)

“I really hope everybody has 200 bushel corn and we have a $5.50 price next fall,” said Jason Fink, an insurance officer for Farm Credit Services of America (FCSAmerica). “But to lock in a $5 price this early for your next year’s crop – it doesn’t happen very often.”

Your local Frontier Farm Credit insurance officer has a tool that can help you understand how margin protection could work for your operation, based on possible changes in price and costs. The webinar recording takes a deeper dive into margin protection, including how it complements other policies such as revenue protection.  

 

Margin Protection Features

  • Coverage up to 95% of the trend-adjusted county yield and revenue.
  • Protection factors up to 1.2. Hence, MP can pay up to $1.20 for every dollar of loss.
  • Highly subsidized.
  • A premium credit is applied to MP when purchased with an underlying policy such as RP.
  • Initial price discovery is August 15 – September 14.
  • Uses the same harvest price as RP.
  • Purchase deadline is September 30.

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Frontier Farm Credit serves farmers, ranchers, agribusinesses and rural residents in eastern Kansas. For inquiries outside this geography, use the Farm Credit Association Locator  to contact your local office.