Saturday, September 29, 2007

Another risk transfer...

I have been noticing the risk-aversion behavior that is now the standard for good farming practice. I think our profit margins will be squeezed relentlessly by these choices, despite record prices.

Primarily because the return to labor is diminishing. Our physical work takes less skill (autosteer) and some entire jobs have disappeared (walking beans). This shows up in our economic decisions.

We're not the only ones transferring risks. Consider this announcement from Monsanto:
A new pilot program recently approved by the Federal Crop Insurance Corporation (FCIC) will provide farmers an opportunity to pay lower premiums if they plant a majority of their corn acres using hybrid seeds that feature YieldGard Plus® with Roundup Ready® Corn 2 or YieldGard VT Triple™ technology from Monsanto Company (NYSE: MON).

The insurance product will be offered as a pilot program in cooperation with Western Agricultural Insurance Company and will be called the Biotech Yield Endorsement (BYE). Western Agricultural Insurance will make the program available to all other approved insurance providers to offer to their farmer customers.

The pilot program will be initially available in four states: Illinois, Indiana, Iowa and Minnesota. Implementation of BYE has yet to be determined pending available resources and priorities for the deployment and administration of the program by the Risk Management Agency (RMA).

To be eligible for the program, a farmer must plant 75 to 80 percent of their corn acres with seeds featuring YieldGard Plus with Roundup Ready Corn 2 or YieldGard VT Triple technology. Refuge requirements must also be respected. Depending on the grower's production history, amount of coverage purchased and other criteria, the farmer may be able to reduce the yield component of their premium up to 24 percent. [More]
I got word of this last week and saved my 6-hour commute to/from South Bend to tape US Farm Report to ponder the possible ramifications of this program. (Note: this strategy may or may not improve the quality of the pondering.) Some thoughts:
  • This is tacit actuarial proof of decreased production risks. We've all been seeing it in our fields. (Note the happy surprises in the AgWeb Crop Comments.) The number one yield threat - drought - threatens all corn growers less with this technology protection. So, if crop insurance has been a questionable benefit (example: I have only ever carried CAT coverage because of a FSA grain bin loan), it is a true loser now. I know many of you can't imagine farming without CI, but some of you probably could now, especially if you sock the saved premiums away for a "rainless day".
  • Insurance companies are probably not thrilled (more on this in a later post). The farm bill drafts are squeezing their profits - which have been handsome lately - and now premiums will drop because of seed choice. Monsanto has unilaterally transferred a risk premium from crop insurers to seed - and can legitimately capture that value. If it doesn't support an actual price increase, it will justify current boosts. This is superb business practice, and Monsanto is displaying again why they currently have no match in the seed/technology marketplace.
  • I bet rotary hoe sales jump and prices for old hoes increase sharply. Stay with me on this one. It seems to me the biggest risk now is having to replant. Even with a break on seed costs, you still pay the tech fees (now enormous) on replant seed. Slapping corn in the ground willy-nilly now carries one of the higher penalties even as the production boost to early planting may be decreasing. Free replant seed should be a big factor in hybrid seed choice. Ditto with waiting an extra day or not planting just ahead of a downpour.
  • This trend is not over. The (in my opinion) over-hyped pipelines just might offer more production-stabilizing technology that should make crop insurance premiums less by reducing payouts.
This is how competition looks in our 21st Century economy. Each link in the production chain must constantly be on guard to protect the value they deliver, because other links want to capture that contribution themselves. For that matter they should be looking to predate values currently being delivered by others themselves. Producers are building bins like crazy, stealing the value traditionally delivered by elevators. Tractors are too complicated for most farmers to manage, and a repair becomes a value delivered increasingly by dealers. Now seed packs insurance in the bag. The tug of war for margin continues.

The big and constant question for me is, "What value can only I deliver and claim for myself?" That list seems to be shrinking.

[Thanks, Darren]


Anonymous said...

I had to replant corn this past spring. You only pay for the technology once. I received a rebate for the Bt and RW traits I replanted. My crop insurance covered all the seed cost, so there was no out of pocket expense to me.

John Phipps said...

Anon: Thanks for the correction. Last year (06) was the first time I had replanted any for years. The seed was price, I think. At any rate, not cheap.

Thanks for reading.

John Phipps said...

First: The above post should read "half-price". Blogging during harvest is not pretty.

Second: a reader writes

"One more thing to consider with the apparent coming on of this premium reducing program is what does it do to a large portion of our export business. Currently many of our exports are required to be non-GMO grain loadings to suit the needs of our customers, largely Japan. What message does this program send to them about the future of their business with them?? Does this lead South America to take a lot of this business from us.

Apparently the Grain and Feed Assoc. had no knowledge of this program before it was released, which to me further shows Monsanto’s flippant attitude to anything but the dollar that goes into their pocket.

Any thoughts?"

I wonder if the market will continue to demand that much non-GMO. Your point is well taken, we could be all-GM-all-the-time soon. But I think producers were fading that way already.

The production boost right now outweighs any market signal to produce non-GMO corn. And I think it will be so for Brazilian producers as well.

Besides, aren't those guys gonna grow umpteen-million hectares of beans with prices where they are?

Short answer: if customers want non-GMO corn, the price just went up - regardless of the source.

Of course, I reserve the right to change my answer when proven wrong.