Implied Probabilities for Corn and Soybeans Prices for 201607/29/2016
RMA establishes Projected Prices (PP) each year at the end of February for crop insurance contracts that serve as minimum indemnification prices for crop insurance contracts. For revenue insurance contracts not specifically designated with Harvest Price Exclusion (HPE), the PP can be supplanted by a Harvest Price if prices during the month of October average higher levels than the PP. During the time between the determination of the Projected Price and the final Harvest Price, market prices move in response to changes in growing conditions, expected usage, and remaining future supply and demand risks. It is important to understand the evolving probabilities of future price levels to effectively manage revenue risk. The purpose of this post is to introduce a new tool available at the farmdoc crop insurance evaluation site that helps to understand the market’s implied price distribution at any point in time and the implication for possible levels of crop revenue.