As with any type of crop insurance, determining whether Margin Protection is the right fit for your farm requires an individual evaluation of your operation. The decision largely depends on your risk tolerance, grain marketing goals and understanding what will trigger loss payments.
The following article explores key insights and considerations for adding this option to your crop insurance policy and how Margin Protection can help serve as a hedge against market volatility.
Reasons to use Margin Protection
Margin Protection was designed to provide coverage against three major sources of risk that impact the dollars you have left to spend at the end of each crop year:
- reduced county yields
- reduced commodity prices
- increased production costs
Producers can choose to make Margin Protection part of their risk management strategy for any one or combination of these reasons, and selecting this policy may fulfill different needs from year to year.
Margin Protection is unique in that it allows you to establish a floor price in the fall, five months before the Revenue Protection price is established. If you expect prices to decline or production costs to increase, then Margin Protection may be a good option.
Bundling can expand protection
In most cases, Margin Protection is paired with an underlying base product such as Revenue Protection or Yield Protection. By bundling policies, producers benefit from a premium credit that reduces the cost of Margin Protection. They also expand their protection against unforeseen circumstances on both an individual and an area-based level.
Remember, Margin Protection is tied to county averages – what it costs to grow a crop in local agronomic conditions – instead of an individual producer’s actual costs. That means that if a windstorm were to cause significant county-wide damage but spared your operation (or vice versa), you are protected against both scenarios by adding Margin Protection to your base plan.
Revenue Protection will determine projected price for the crop in February. If the price continues to go up, a producer’s Revenue Protection policy could secure that higher price. If the price goes down, a producer may have established a much higher level of coverage per acre earlier with Margin Protection than what their Revenue Protection policy alone would afford them.
A hedge against market volatility
“The fact Margin Protection can be purchased at higher coverage levels – up to 95% – makes this an attractive policy when it comes to triggering a loss, especially with the volatility and disruptions we’ve seen in the market lately,” explains Craig Law, regional vice president of related services with FCSAmerica. “Plus, if prices go down, Margin Protection can be a cheaper hedging strategy than buying a put option.”
Additionally, while Margin Protection requires an earlier sign-up period than other crop insurance products, producers don’t have to pay for the policy or finance the position until the following September.
“Ultimately, Margin Protection is a very cost-effective way to lock in a strong price and mitigate losses due to increasing input costs,” says Law. “It’s an important crop insurance tool producers can leverage to financially prepare for strong shifts in the ag economy and protect their bottom line.”
Is Margin Protection right for your operation?
The answer starts with knowing your cost of production and the profits you expect to see per acre. Then, using your breakeven point as a baseline, your FCSAmerica crop insurance officer can use a proprietary decision-making tool, called Optimum, to determine if Margin Protection can help you reach or exceed your goals.
“It is important to acknowledge that if a producer does not get paid from Margin Protection Insurance, it means they have ‘checked the boxes’ of breaking even and hitting the goals of their established price per acre,” says Law. “In the event a payment is made, then Margin Protection gives producers something to fall back on to shore up some of those losses.”
Backed by a team of highly trained specialists and exclusive crop insurance technology, FCSAmerica has the tools and resources to help you make confident and informed decisions whatever your risk management goals.
To start a conversation about adding Margin Protection to your operation, reach out to your Farm Credit Services of America insurance officer.
