Disclaimer: This web page is designed to aid farmers with their marketing and risk management decisions. The risk of loss in trading futures, options, forward contracts, and hedge-to-arrive can be substantial and no warranty is given or implied by the author or any other party. Each farmer must consider whether such marketing strategies are appropriate for his or her situation. This web page does not represent the views of Kansas State University. 
Disclosure:  Dr. Barnaby’s research was the basis for the privately developed Crop Revenue Coverage.

CRC BASE PRICE FOR 2003 WHEAT[1]

The KSU WEB page (http://www.agecon.ksu.edu/risk/) continues to be updated with the CBOT soft red winter wheat, KCBOT hard red winter wheat, and Portland white wheat estimated planting prices for 2003 winter wheat.  The fall (planting) price is used to set the guarantees for Crop Revenue Coverage (CRC), Income Protection (IP), and Revenue Assurance (RA) crop insurance coverages.  The minimum CRC and RA with the harvest price option (RA-HPO) revenue guarantees will equal the fall price times percent coverage times the actual production history (APH).  If next summer’s harvest price is higher, then the CRC and RA-HPO guarantees will be increased.  The minimum and maximum RA and IP revenue guarantees will equal the fall price times percent coverage times the APH.  If the harvest price is higher, then the IP and RA without the harvest price option guarantees will NOT be increased. 

The current price estimates for setting wheat revenue guarantees are located in table 1.  The current RA & CRC estimated fall price is $3.65 and $3.43 for IP for Kansas wheat.  The IP fall planting price is lower because it is based on Chicago wheat while CRC and RA fall price is based on Kansas City wheat.  The final IP payment will likely have a lower revenue to count against the guarantee because next summer’s IP harvest price will also likely be lower because Chicago wheat typically trades at a discount to Kansas City wheat.

The RA contract also requires the implied volatility value to set final rates.  Many insurance companies are using last year’s wheat implied volatility value for RA premium quotes but so far the estimated implied volatility value is higher than a year ago.  If this continues the RA wheat premium rates will be higher than the rates and premiums being quoted by most insurance agents.  The implied volatility value has no impact on CRC or IP.  The current estimate of implied volatility for RA premiums is located in table 2.  The final implied volatility value is based on the 5 trading days prior to September 15.

Unlike, CRC there are no minimum trades required for price discovery in the RA or IP contract.  So it will require only a few futures contracts to be traded to set the fall planting price or only a few options to be traded during the 5 day measurement period to set the RA implied volatility.  Some farmers might be concerned about someone trading a limited number of futures contracts that will set the RA and IP guarantee or a limited number of options that will set the premium rate for RA.

Many growers will remember the news reports from a few years ago about the commission house that bought 4,500 puts by mistake and then drove the corn market higher when they tried to cover their error.  With a thinly traded July 03 wheat option market or a September 03 futures market, it would be much easier to move the wheat market than the corn market.

However there is little incentive for a grower to try and set the option price and affect the RA contract premium because the grower would only gain on a single insurance contract.  One should not worry about insurance companies influencing option prices to affect RA premium either.

With so few options trading, if any July option trades are out of line with the market, it is very likely the Commodity Futures Trading Commission (CFTC) will be investigating the case.  Most underwriters would want more than one trade for discover price, but those are the current underwriting rules for RA.

Table 1.