Author: Hunter Biram

Agriculture is inherently risky, with producers facing a complex array of production, market, and financial risks. These risks can significantly impact farm profitability, necessitating robust risk management strategies. Risk management in agriculture has become a complex system of financial instruments and strategies, with crop insurance and forward contracting serving as two key components.

Forward contracting allows producers to mitigate price risk by securing a predetermined price and buyer for their grain. This approach can be especially attractive due to the potential weather risk premium embedded in forward contract grain prices. Buyers are often willing to pay higher prices to hedge against weather-related uncertainties affecting crop production, which allows farmers to lock in favorable prices and potentially increase their revenue. However, it’s crucial to note that while forward contracting addresses market risk, it does not directly mitigate production risk. Aggressive use of forward contracting can expose farmers to unexpected yield risk as farmers may be unable to meet contracted quantities, leading to non-delivery penalties imposed by elevators and potentially substantial financial losses.

Farmers can also purchase crop insurance as a complementary risk management tool to address the production risk associated with forward contracting. The federal crop insurance program offers various products, with yield (YP) and revenue protection (RP) accounting for 71% of the $158.6 billion of liability in 2024 (USDA-RMA, 2024). YP provides production risk management using a farm-specific Actual Production History (APH), while RP additionally provides price risk management using futures prices. Pairing forward contracting with either insurance product could potentially help offset non-delivery penalties and reduce the financial burden on farmers who experience yield shortfalls. The combination of forward contracting and insurance protection allows farmers to confidently engage in more aggressive marketing strategies. By protecting against both price and yield risks with RP and yield risk with YP, this integrated approach could potentially lead to a more stable farm income and improved overall risk management.

We provide a visual example of how these two risk management tools can work together in Figure 1 below. The red bar is the potential revenue generated from corn production by locking in a price of $4.50/bushel via a forward contract at a farm yield expectation of 200 bushels/acre. If a farmer booked 80% of expected production, the expected revenue from forward contracting would be $720.00/acre. The blue bar behind the red bar shows an RP crop insurance policy at 80% coverage that is layered underneath the expected revenue from forward contracting which guarantees $744.00/acre.

Figure 1. Layers of Protection Provided by Simultaneously Using Revenue Protection (RP) Crop Insurance and Forward Contracting in the Local Cash Market 

NOTE: The purpose of this figure is to show two different “layers” of revenue coming from two different revenue risk management tools: forward contracting and RP crop insurance. The forward contracted revenue is in red while the crop insurance revenue guarantee is in blue behind the forward contracted revenue.

To illustrate the importance of this “layering” strategy, consider when a yield shortfall occurs leaving only 150 bushels/acre to sell at the forward price of $4.50/bushel rather than the 160 bushels/acre promised for delivery. This leaves a 10 bushel/acre shortfall. The local grain elevator is offering a cash delivery price of $4.00/bushel with a $0.05/bushel non-delivery penalty resulting in a non-delivery price of $4.05/bushel, and therefore, a total penalty of $40.50/acre. The resulting harvest revenue is about $635.00/acre (see table 1). Despite the penalty, the RP policy – which is in blue underneath the forward priced grain – provides an indemnity of $121.00/acre at a producer-paid premium of $56.00/acre. This results in a final cash revenue of about $700.00/acre rather than $635.00/acre, showing how the RP policy was able to pull crop revenue almost completely back to the expected amount of $720.00/acre despite the inability to fully deliver the promised amount (see table 2). This finding highlights the benefit of locking in prices during spring time as part of a pre-harvest marketing plan.

Table 1. Calculating Crop Revenue Using a Forward Price and Non-Delivery Penalty

Table 2. Including Crop Insurance in the Crop Revenue Using a Forward Price and Non-Delivery Penalty

Biram, Hunter, Andrew M. McKenzie, and Chanda Bhattrai. “How can crop marketing and crop insurance go together?” Southern Ag Today 5(24.3). June 11, 2025. Permalink

Extreme weather events, like drought, jointly impact agricultural production and rural infrastructure, including transportation infrastructure. An important part of this transportation infrastructure is the Mississippi River. It serves as one of the most critical networks for moving agricultural commodities from production to consumption areas, including export markets. In 2020, U.S. agricultural exports totaled $146 billion, increasing 7 percent year over year (U.S. Department of Agriculture’s Foreign Agricultural Service, 2021). Approximately 46 percent of grain exports were moved by barge in 2020. Soybeans, the leading U.S. agricultural export, rely heavily on barge transportation, with 53 percent of exports and 28 percent of total supplies moved by barge in 2020.

Despite this reliance on barges for moving U.S. grain, little is known about the link between extreme weather, rural transportation infrastructure, and crop prices. In 2022 and 2023, the Lower Mississippi River reached historic lows. In October, the U.S. Geological Survey (USGS) Memphis stream gauge read -12.0 feet and -10.8 feet in 2023 and 2022, respectively. The previous record was set in 1988 when the USGS Memphis stream gauge read -10.7 feet. These record-low water levels increased transportation costs and barge freight rates as documented by previous Southern Ag Today articles (Biram, et al., 2022; Gardner, Biram, and Mitchell, 2023; Biram, Mitchell, and Stiles, 2024). Higher transportation costs are transmitted to row crop producers through lower cash bids or a weakening of local crop basis (calculated as the cash price minus the futures price). Historic lows in Mississippi River levels during the fall harvest of the last three years have highlighted the need to measure the impact of these low river levels on rural infrastructure and communities.

Mitchell and Biram (2025) measure the impact of low water levels on the Mississippi River using Arkansas soybean basis data across 12 regional grain markets from USDA’s Agricultural Marketing Service and stream gauge data from USGS. They use a “low river” status measure that affects a grain market once the river gauge height falls below negative five feet and is weighted by the distance between a grain elevator and the closest public Mississippi River port.  They find that when the river stream gauge in Memphis, Tennessee reads -5 feet, Arkansas soybean basis weakens (widens) by $0.58 per bushel, $0.29 per bushel, and $0.12 per bushel for grain markets that are 5 miles, 10 miles, and 25 miles from the closest Mississippi River port, respectively. Similarly, they find that Mississippi soybean basis weakens (widens) by $0.55 per bushel, $0.28 per bushel, and $0.11 per bushel for the same distances to grain markets. Figure 1 below shows the degree of the impact of low river levels on soybean basis in Arkansas with markets near the river experiencing weaker basis than of those further from the river.

Figure 1. Impact of Low Mississippi River Levels on Soybean Basis in Dollars per Bushel in Arkansas

References

Biram, Hunter, John Anderson, Scott Stiles, and Andrew McKenzie. “Low Water Levels in the Mississippi River Result in Abnormally Weak Soybean Basis“. Southern Ag Today 2(45.1). October 31, 2022. Permalink

Biram, Hunter, James L. Mitchell, and H. Scott Stiles. “Low Rivers Levels on the Mississippi River: Not the Three-Peat We Want.” Southern Ag Today 4(39.3). September 25, 2024. Permalink

Gardner, Grant, Hunter Biram, and James Mitchell. “Low River Levels, Barge Freight, and Widening Basis.” Southern Ag Today 3(39.1). September 25, 2023. Permalink

Mitchell, J. L., & Biram, H. D. (2025). The effects of extreme weather on rural transportation infrastructure and crop prices along the Lower Mississippi River. Applied Economic Perspectives and Policy.

Biram, Hunter, and James L. Mitchell. “Estimating the Impact of Low Mississippi River Levels on Soybean Basis in the Midsouth.” Southern Ag Today 5(12.3). March 19, 2025. Permalink

Producers can keep track of their price risk protection through revenue insurance in a given growing season by comparing the Harvest (Fall) Price to the Projected (Spring) Price determined by USDA-RMA. In the broader picture of a marketing plan, revenue crop insurances provide a form of price guarantee at a premium expense similar to locking in a price guarantee using a put option contract (Biram and Smith, 2022). A previous article examined the price protection offered by Revenue Protection (RP), Supplemental Coverage Option (SCO), and Enhanced Coverage Option (ECO) crop insurance for corn and rice (Biram, 2023). That article only considered the change in prices and did not consider the potential change in yield. This article builds on the previous one by considering both the price and yield protection offered by ECO, and providing a snapshot of how changes in county yields can also trigger indemnities.

ECO is an area-based crop insurance product and must be paired with farm-level insurance like Yield Protection (YP) or RP. The liability insured by ECO is calculated using the same parameters as RP (e.g., APH farm yield and futures prices) at coverage levels of 90% and 95%. The futures price used is based on the higher of the Projected Price and the Harvest Price determined by USDA-RMA. Unlike RP – which triggers indemnities based on farm-level losses –ECO triggers an indemnity based on county-wide losses and will trigger a full indemnity when county-level revenue losses fall to 86%.

A county-level map is provided in Figure 1, which shows the extent that the final county yield can change relative to the expected county yield and still trigger an indemnity for corn that is equal to the producer paid premium (i.e., breakeven indemnity). In other words, this map answers the question of how much the county yield must change to trigger an indemnity that will at least cover the producer-paid premium. The producer premium was determined for RP at the 75% coverage level (RP-75) under optional units paired with ECO at the 95% coverage level (ECO-95) with the associated premium subsidy rate applied. Projected and Harvest Prices reported by the RMA Price Discovery Tool are used with theassociated price volatility. 

As an example, a county shaded in the darkest green shows that the final county yield may increase at least 21-26% for an indemnity to trigger which covers the producer premium. This suggests the price decline in the futures market was severe enough to allow for yield upside risk that would offset indemnities triggered on price alone. Conversely, a county shaded in the darkest red indicates that the final county yield must decline at least 6-11% before a large enough indemnity to cover producer premium is triggered. This implies that the price decline was not severe enough to trigger an indemnity on price alone. Most counties have experienced severe enough price declines in corn that yield can increase in comparison to the expected yield and potentially obtain a net indemnity above zero (e.g., yellow and green shaded counties).

A similar pattern exists for cotton and soybeans (Figures 2-3). Nearly all counties insuring cotton under ECO-95 and RP-75 allow for yield upside risk, or favorable potential, to determine an indemnity equal to producer premium with most counties allowing for 7-10% yield upside risk. The same story holds for soybeans with potential yield upside risk of 9-14% for most counties which indicates the extent of futures price declines for both cotton and soybeans in 2024. Rice is the exception with no counties allowing for yield upside potential in determining an indemnity equal to producer premium (Figure 4). This is expected given there was virtually no change (i.e., $0.002/lb) in the rough rice futures price between planting and harvest.

This analysis shows that price risk protection, which does not require a crop insurance premium, could be provided through ECO-95 if yields do not increase by more than 5% across most counties. However, given the potential for record yields across most of the U.S., this potential may be largely eclipsed. While this yield upside could be beneficial, it only considers one half of the profit equation, gross revenue. Further, price declines, paired with elevated production expenses, have not been met by risk protection from other farm bill programs, such as Price Loss Coverage and Agriculture Risk Coverage. This underscores the lack of price risk mitigation provided by current farm policy tools and the need for an updated farm safety net.

Figure 1. Percentage Change in County Yield for ECO-95 to Result in Zero Net Indemnity (Corn)

Figure 2. Percentage Change in County Yield for ECO-95 to Result in Zero Net Indemnity (Cotton)

Figure 3. Percentage Change in County Yield for ECO-95 to Result in Zero Net Indemnity (Soybeans)

Figure 4. Percentage Change in County Yield for ECO-95 to Result in Zero Net Indemnity (Rice)

References

Biram, Hunter, and S. Aaron Smith. “The Option to Augment the Crop Insurance Price Floor“. Southern Ag Today 2(35.1). August 22, 2022. Permalink

Biram, Hunter. “Comparing the Harvest Price and Projected Price in Revenue Protection Crop Insurance for Rice and Corn.” Southern Ag Today 3(35.1). August 28, 2023. Permalink

Biram, Hunter. “Can Yield Upside Risk Eclipse Price Downside Risk Protection in ECO Crop Insurance?” Southern Ag Today 4(47.3). November 20, 2024. Permalink