Focus on Ag: 2020 crop insurance decisions
During the next few weeks, many farm operators will be finalizing their crop insurance decisions for the 2020 crop year. March 16 is the deadline to purchase crop insurance for the 2020 crop year. Profit margins for crop production this year remain very tight, which makes the 2020 crop insurance decisions even more critical. Producers have several crop insurance policy options to choose from, including yield protection (YP) policies and revenue protection (RP and RPE) policies, supplemental crop option (SCO), and other insurance policy options. There are also decisions with using “enterprise units” versus “optional units,” as well as decisions on the use of “trend adjusted” APH yields.
Yield Protection (YP) insurance policy options provide for “yield only” insurance protection, based on historic actual production history (APH) yields on a given farm unit. YP prices are based on average Chicago Board of Trade (CBOT) prices for December corn futures and November soybean futures during the month of February, similar to revenue insurance products. Producers can purchase YP insurance coverage levels from 50% to 85%, and losses are paid if actual corn or soybean yields on a farm unit fall below the yield guarantees.
Revenue protection (RP) and revenue protection with harvest price exclusion (RPE) insurance policy options provide a guaranteed minimum dollars of gross revenue per acre (yield x price). This minimum guarantee is based on yield history (APH) and the average CBOT prices for December corn futures and November soybean futures during the month of February. The RP and RPE insurance policies function essentially in the same manner, except that the guarantees on RPE policies are fixed at the base price level and are not affected by harvest prices that exceed the base price. The revenue guarantee for RP policies is increased for final insurance calculations, if average CBOT prices during the month of October are higher than the February CBOT prices.
Producers purchase RP and RPE insurance coverage levels from 50% to 85%, and losses are paid if the final crop revenue falls below the revenue guarantee. The final crop revenue is the actual yield on a farm unit times the CBOT December corn futures price and November soybean futures price during the month of October. As of February 10, the 2020 estimated crop insurance base prices in the Upper Midwest for YP, RP, and RPE policies were estimated at $3.92 per bushel for corn and $9.19 per bushel for soybeans. The current 2020 base price estimates compare to 2019 base prices of $4.00 per bushel for corn and $9.54 per bushel for soybeans. The 2019 crop insurance base prices will be finalized on March 1.
Most corn and soybean producers have utilized RP policies in recent years; however, in many years the RPE policies can offer similar protection at a lower premium cost. If the harvest price (average CBOT price in Oct.) for December corn futures or November soybean futures is lower than the base price (average CBOT price in Feb.), the RP and RPE payment calculations function similarly, and RPE policies will likely result at higher net indemnity payment at similar insurance coverage levels. However, it is important to recognize the added risk of utilizing a RPE policy when the final harvest price exceeds the base price in years when farm units have a yield loss that exceeds the insurance coverage level, such as occurred with the 2012 drought in many areas. This scenario could result in significantly less insurance indemnity payments with RPE policies, as compared to RP policies, and could add significantly more risk to a farming operation.
A historical analysis for the past thirteen years (2007-2018) shows that the final crop insurance harvest price for corn has been lower than the spring base price in ten of the thirteen years, including the past seven years (2013-2019). The only years that saw an increase in the harvest price were 2010, 2011 and 2012. The range has been from an increase in the harvest price of +$1.82 per bushel in 2012 to a decline of ($1.27) per bushel in 2008 and ($1.26) per bushel in 2013. For soybeans, the harvest price has increased in five years (2007, 2009, 2010, 2012 and 2016), decreased in seven years (2008, 2011, and 2014-2019) and stayed the same in 2013. The range has been from an increase of +$2.84 per bushel in 2012 to a decline of ($3.00) per bushel in 2008.
Many producers in the Upper Midwest have been able to significantly enhance their insurance protection in recent years by utilizing the trend-adjusted yield (TA-APH) endorsement, with only slightly higher premium costs. The APH yield exclusion (YE) option allows specific years with low production to be dropped from crop insurance APH yield guarantee calculations. Several counties in Central and Northern Minnesota are eligible for YE for corn and soybeans in some of the past several years. For information on which counties, crops, and years are eligible for YE, go the RMA web site.
Given the tight profit margins for crop production in 2020, some producers may have a tendency to reduce their crop insurance coverage, in order to save a few dollars per acre in premium costs. However, a producer must first ask the question: “How much financial risk can I handle if there are greatly reduced crop yields due to potential weather problems in 2020, and/or lower than expected crop prices?” Many producers in portions of the Upper Midwest that had greatly reduced corn and soybean yields in 2018 and 2019 found out the importance of having solid crop insurance coverage as a risk management tool.
RP crop insurance policies serve as an excellent risk management tool for these situations, because these policies not only provide yield protection regardless of price changes from spring to harvest, but also provide protection for declines in crop prices during the growing season. At current spring price levels, many producers will be able to guarantee near $550.00 to $700.00 per acre for corn, and near $375.00 to $475.00 per acre for soybeans at the 85% coverage level in 2020, especially if the trend-adjusted APH yields are utilized. Many private crop insurance companies also offer “buy-up” options that could enhance crop insurance coverage even further. 2020 may not be a good year to reduce crop insurance coverage as part of an overall risk management plan for a farm operation.
A reputable crop insurance agent is the best source of information to find out more details of the various coverage plans, to learn more about the TA-APH yield endorsement, to get premium quotes, and to help finalize 2020 crop insurance decisions. It is also a good idea for farm operators to discuss their crop insurance options with their ag lender before finalizing their decisions.
To receive a free copy of an information sheet titled: “2020 Crop Insurance Decisions,” written by Kent Thiesse, Farm Management Analyst, please forward an e-mail to: firstname.lastname@example.org. Following are some web sites with very good crop insurance information:
• University of Illinois FarmDoc: http://www.farmdoc.illinois.edu/cropins/index.as.
• USDA Risk Management Agency (RMA) : http://www.rma.usda.gov/.