Crop insurance price guarantees were set in the spring, prior to planting, at $11.36/bushel for soybeans, and $4.62/bushel for corn. Decline in price losses were determined in November to be based on $9.65/bushel for soybeans and $3.49/bushel for corn. Both the beginning price guarantees and the price losses were based on an average of the futures markets.
Assume you have the following resources:
1000 acres of tillable cropland, suitable for growing either corn or soybeans
Storage bins capable of holding 20,000 bushels of either crop
Ten year average production history of 150 bushels/acre for corn, and 53 bushels/acre for soybeans
Necessary equipment and labor to grow either crop on all 1000 acres or some combination of the two crops
A belief based on your study of agricultural economics, that prices were going to decrease $1 per bushel for both soybeans and corn over the growing season.
What would your plan have been for 2014 based on the above assumptions considering the following questions? For each decision, write a brief explanation of your reasoning:
1. How would you have split your crop acres between soybeans and corn?
2. What percentage of your expected crop would have been forward contracted at the price guarantee set in the spring for crop insurance?
3. What percentage of your crop would have been planned for on-farm storage?
4. What percentage of your crop would have been hedged on the futures market. Detail how many 5000 bushel contracts you would have bought and sold, as well as when you would have bought and sold.
5. What percentage of your crop would have been sold at harvest to the elevator?