SPE vs options?

[dfarms11]

Does anyone here use have an opinion on which is better? Has anyone actually looked close enough to see if one is better than the other? I havn't gotten into options myself, yet, so just wondering.

[charliep]

From what I can see today, the cost of a $380 put would be about $17/tonne (don't know if tradeable but the quote or perhaps better an indication). Picked this level because equates to the $360/tonne trigger on SPE with $20/tonne basis.

From a source, the cost of a canola SPE (30.3 bu/acre coverage @ 80 % level) is about $12/tonne ($8.10/acre).

From my calculations, SPE is about $5/acre cheaper with the added benefit triggering pushs you the $400/tonne whereas the put only pays out for futures under $380.

I would look at SPE with the comment that my source put the whole insurance cost (including hail) at close to $40/acre. Puts total insurance bill at 15 % of insured value. That makes for a sharp pencil and decisions about where to allocate money.

[dfarms11]

Yes, no kidding, its a lot of money for ins

[charliep]

That is a November $380 by the way.

[charliep]

One thing I would do is to separate your SPE risk management decision from production and make your decision about cost from this side.

My questions.

How much risk exposure do you have particularly on planned sales in the fall. Picking on canola, I might be longer term optimistic but I have concerns about the fall period if western Canada has a big crop and the issues around blackleg/China and salmonella in canola meal/US continue to cause market access issues. Big crops entering the market/being sold to pay bills and continued challenges to product moving to export market and domestic crush.

If you have priced a significant portion of your crop, then doing nothing is likely okay. If you haven't priced anything and you have to sell off the combine, then I would look harder at SPE. Again, keep the premium on you price insurance separate in your analysis from the production insurance side.

[vvalk]

What I dont like is that you can only get paid for your total coverage and that is it. Say you get hailed out 100% or a combination of crop failure and hail. If you are paid out to say your $180 per acre coverage first and then SPE triggers, you won't get a payment for SPE. So you can pay your three different premiums crop,hail endorsement and SPE but can only get paid once on your original coverage.

[frustrated1]

Not sure if the SPE is part of the total coverage $, I thought that was a seperate entity all together. I know the hail and crop portion add to a max coverage but think the SPE is independent. Last year's drought had many cancel their AFSC hail before the end of July when it was a sure thing to collect crop insurance, then put that money towards hail insurance with a line company so they could hopefully collect twice with a hailstorm as their production was in a pay position regardless.

[charliep]

SPE insurances against lower prices in a year you get a crop.
Production insurance insures against lower yields and therefore loss of
income. You can actually collect on both however.

Example.

You insure a canola field at 80 % coverage. Making the numbers easy
so I can multiply. Crop insurance yield 37.5 bu/acre. Coverage 30
bu/acre.

Your actual yield in the fall is 20 bu/acre. Price is $8/bu.

Crops insurance coverage is easy. Yield - 10 bu/acre below coverage
level (20 bu/acre). You get paid $90.70/acre. You get paid this first.

SPE will pay out on your actual production of 20 bu/acre. $8/bu is
below the trigger price. You would get $21.40/acre. 20 bu/acre times
the $1.07/bu below the spring price. Note this doesn't include the crop
production loss.

To the original question, this may make an option (i.e. put) more
appealing. You can collect on both crop insurance and the put in the
example. Another thing that may work in theory (volumes and ability
to sell make make tougher in practice) is that you have to ability to
capture some time value with a put by selling early. SPE means you pay
the premium with no chance to recoup value.

[frustrated1]

Charlie: would the SPE not be paid to your coverage level regardless of production? ie: in your example, SPE would be paid on the 30 bu coverage regardless of wether you produced 20 or 40 bu.

[vvalk]

You cannot collect more then your coverage combined. Say you have $180 coverage and you either get 100% hail or total crop loss and you get a $180 payout. Then SPE triggers, you will not get any money from it. I am 100% sure on this.

[charliep]

A farmer only gets paid SPE on actual production up to your coverage
yield. If you are filing a yield loss claim, you can't double dip on the
crop insurance payment and SPE (which is what vvalk is saying).

[FarmRanger]

How is it double dipping when I pay a separate
extra premium for the SPE?

[charliep]

The program and the premium calculation are based on the concept of crop
insurance paying first and SPE on actual yield to insured level. As I have
indicated before, hopefully AFSC looks at the processes around CPIP (cattle
price insurance program) and uses this as a template. Then you purchase the
price insurance you want based on business needs.

[gjoost]

I bought the 390 put at around 20 dollars , sold the 350 put at 8 dollars. Cost of insurance equals 12 dollars (similar to spe cost). Advantage #1 for me is I can reverse out of it anytime instead of waiting for the trigger period.
#2 I don't need canola futures to drop 10% to trigger.
My profit potential is 390 (cost 20)
350 (rev. 8)
390-350= 40 - cost (12)= 28 dollars per tonne max profit potential.
If you think Canola is going way below 350 dollars per tonne, you should take the SPE.
Alot of the SPE premiums could get stranded this year by dropping less than 10%.

[vvalk]

Charlie
I think SPE pays out on total insurance coverage regardless of yield. I think you were thinking of revenue insurance portion which they have combined now. Could be wrong though.