Crop producers will have record high production costs in 2011, according to Andy Swenson, North Dakota State University Extension Service farm management specialist. However, this year crop prices also are high.

“Fortunately, on paper, high crop prices have provided crop insurance that should cover costs,” Swenson says. “The only other year that had a similar outlook was 2008. The safety net provided by crop insurance is very good, but it does not guarantee a profit.”

The price at which North Dakota crops can be insured under yield and revenue protection policies was finalized on March 1.

The popular revenue protection policy has a “revenue guarantee;” however, a producer’s actual revenue can be and often is less. The reason is due to the method of determining a producer’s harvest revenue. It is compared with the revenue guarantee to determine an indemnity payment.

Harvest revenue is the producer’s actual yield times the average closing futures price for the harvest month at a specified grain exchange, such as the Chicago Board of Trade or the Minneapolis Grain Exchange.

“Unfortunately, the cash price North Dakota producers can receive is usually less than those quoted at the grain exchange because of the distance to markets, differences in quality and the timing of sales” Swenson says. “That means their actual revenue in cash sales, plus crop insurance indemnity payments, can be less than the crop insurance revenue guarantee.

Crop insurance and marketing tools are among the basic building blocks of most strategies to manage production and price risk. An easy-to-use Excel spreadsheet program, Insurance and Marketing Simulator (RISKMGT), is available at http://www.ag.ndsu.edu/farmmanagement/tools/.

“This program simulates gross revenue per acre, less crop insurance and marketing costs, for specified crop insurance and marketing strategies,” Swenson says. “The program allows the user to compare different crop insurance and marketing strategies through a range of possible price and yield outcomes. Marketing strategies can include different combinations of forward pricing, plus put and call options.”

NDSU Agriculture Communication