WACONIA, Minn. (DTN) -- Using crop insurance as part of a marketing plan is like hunting.

That's the simile Gary Rhea, a Des Moines, Iowa-based marketing consultant, uses to explain crop insurance to his clients.

With revenue insurance, "time becomes an ally" to increase the opportunities a producer has to market the crop; the shorter the time span, the less likely the market is to be accommodating, he said.

"It's like a hunter, who only has a little ammo," Rhea said. "The sun is going down, and he has to get something to feed his family that night. If he started out early in the day waiting for the big one, by sundown he may be taking shots at less attractive game."

This piece is the second in an occasional series that will look at marketing issues in 2010, exploring the views of producers, marketing advisers and merchandisers. See the first article, "Digging Through the Marketing Toolbox," in Recent Feature Articles.

About half the Corn Belt growers who use crop revenue insurance -- Revenue Assurance (RA) or Crop Revenue Coverage (CRC) -- use those products to market grain pre-harvest, said Steve Johnson, a farm management specialist with Iowa State University extension. "But that group is growing, and that group is making a lot of money."

Here's the short explanation for how it works: If a grower has a 170-bushel actual production history (APH) and wants to insure the corn crop at an 80 percent coverage level, he has revenue guaranteed on 136 bushels per acre at the spring base price, which is the average of December corn futures in February.

"There should be a comfort level for initiating pre-harvest sales when the futures price is higher than this spring base price," Johnson said. Having insurance helps ease the decision to make forward sales.

Rhea starts to look at a crop year the previous June. So he made the first sales for 2010 in June 2009. RMA doesn't set the spring price until the following February, but "I figure the insurance will be decent," he said, and "maybe sell 10 bushels or 15 bushels to the acre."

Growers can wait until February when the guarantee is set, but then there's less opportunity to find prices, he said.

"I know farmers who have 35-bushel-an-acre beans sold for 2010 and 140-bushel corn," Johnson said. "And I don't mean just sold, committed to delivery coming out of the field. They've already locked in a profit for next year."

CROP INSURANCE ISN'T PERFECT

The primary Achilles' heel for crop insurance is that it does not do a perfect job to address quality-related issues, Rhea said. "For example, for crop insurance to cover a loss for wheat, the weight has to be below 52 pounds per bushel, but you are already whacked if the weight is that low."

Elevators begin discounting prices well above that 52-pound threshold; still, in the grand scheme of farming and marketing, it's a relatively minor issue, he said.

For corn, elevators and ethanol plants start discounting when test weights drop below 54 pounds per bushel, but test weight had to drop below 49 pounds to qualify as a yield discount factor for crop insurance. That was an issue for many producers during the 2009 growing season.

Kevin Wirth, a Barton County, Kan., wheat and cattle producer has other concerns: If growers promise to deliver grain and then can't for some reason, insurance only offsets part of the risk. "It's not foolproof," he said.

Two years ago, when wheat prices ran up so high, the market got to within a dime of where he planned to trigger some sales. That summer it hailed, and had he forward contracted that wheat, "I would have gotten smoked on it," he said.

If he does any forward sales, he prefers to use options, rather than selling actual grain. "If you sell on the board, it's strictly dollars. But if you sell to an end-user, you may have to come up with the grain," Wirth said.

"If I can't deliver the corn I've contracted, and have to ship it in, you've got to find it and pay shipping; those are worst-case scenarios, but one shot like that can ruin you," said Wirth.

UNLIKELY SCENARIOS

Johnson finds those scenarios unlikely. "I'm not aware of a merchandiser that did not work with a producer to help purchase the neighbor's bushels to cover a forward contract commitment," he said. "Since revenue insurance products use the futures price, rather than cash, it is rare that the actual cash price received would exceed the futures price guarantee."

The insurance guarantee facilitates hedging, said Rhea. "Grain merchandisers can look at the guarantee and are willing to work with a producer to offer those contracts," he said. "In most cases, even if you don't raise a crop, if you sold well above your cost of production, you will come out OK."

Steve Pierson, a corn and soybean grower near Pipestone, Minn., uses a combination of RA and CRC insurance with 70 percent coverage and markets up to 75 percent or 80 percent of his guarantee (APH times level of coverage) through cash contracts and a few hedge-to-arrive contracts.

He's not comfortable doing more than that. Insurance and forward contracts are supposed to help minimize the risk, "and I think you're putting risk back in by selling 100 percent," said Pierson.

If you have a bad harvest or, like this year, a hard time getting the crop out, you put yourself at risk, he said.

Wirth takes out 20 percent deductible hail insurance. "It's way cheaper" than a revenue product, he said. "The insurance agent says I'm not insuring the first 20, but I can live without that first 20; I can't live without the last 80."

Even with a revenue product, hail insurance is an important consideration, especially if a grower uses enterprise units -- which group together all a producer's fields in a given county -- rather than traditional optional units.

Enterprise units were popular in 2009, Johnson said, "because of a subsidy savings of 45 percent over insuring by farms in each section of land. However, if farms are dispersed in the county, a peril such as hail might hit one farm and not trigger an indemnity payment."

If producers elect enterprise units in 2010, they should consider additional hail coverage by individual farms, he said.

Whatever the market dynamics, farming is still about the bottom line -- meaning Revenue Assurance coverage should remain a key part of a marketing plan going forward, said DTN Senior Analyst Darin Newsom. "Despite its warts, revenue insurance combined with a strategy of cash forward contracting, hedging in futures, or buying put options (or a combination of these three strategies) is still the best way of protecting the bottom line and increasing the likelihood of being in business the following year."

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As with any discussion of marketing strategies, it's important to note that producers have to evaluate the information in terms of their own situations. Commodity trading is complicated, and the risk of loss is substantial. The information here is general, and is NOT a substitute for a producer's independent business judgment or the advice of a registered commodity trading adviser.

DTN Markets Editor Pat Hill contributed to this story.

Susanne Stahl can be reached at susanne.stahl@telventdtn.com

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