Focus on Ag: 2021 crop insurance payments likely in some areas

Kent Thiesse
Farm Management Analyst and Vice President, MinnStar Bank
Kent Thiesse

Since Sept. 1, both corn and soybean prices on the Chicago Board of Trade have been fairly steady, as have local cash prices being offered to crop producers across the Midwest.

Steady corn and soybean prices at favorable levels are certainly welcome news to all producers, especially those facing reduced crop yields due to the drought this year.

However, the higher level of crop prices may have an impact on potential 2021 crop insurance payments for some farmers. Farm operators in the Upper Midwest that have final corn and soybean yields at or slightly below their 2021 crop insurance actual production history (APH) crop yields will likely not receive any crop insurance indemnity payments.  

Crop producers in North Dakota, South Dakota, Western Minnesota and portions of Iowa, Nebraska and other states that were impacted by the varying degrees of drought conditions during the 2021 growing season may have final corn and soybean yields that are well below their APH crop yields.

Some other areas of the Upper Midwest may have been impacted by severe storms that caused some yield reductions. Farmers in any of these areas could potentially realize some 2021 crop insurance indemnity payments, due to the reduced crop yields this year. A yield reduction below APH yields will be necessary in order to receive any 2021 crop insurance payments, due to the final corn and soybean harvest price being higher than the spring base price for both crops.

The federal crop insurance harvest prices for corn and soybeans are based on the average CBOT price for December corn futures and November soybean futures, during the month of October. The harvest prices will be finalized by the USDA Risk Management Agency (RMA) on Nov. 1. The final harvest prices will be used to calculate the value of the 2021 harvested crops for all Revenue Protection (RP) crop insurance policies, as well as to determine the revenue guarantee for the RP corn and soybean policies that include harvest price protection.

The estimated 2021 harvest prices as of late September are approximately $5.27 for corn and $12.85 for soybeans.

The established base (Spring) prices for 2021 RP and Yield Protection (YP) crop insurance policies were $4.58 per bushel for corn and $11.87 per bushel for soybeans. The base price will be used to calculate crop insurance indemnity payments on farms insured by YP policies in 2021, as well to determine the revenue guarantee for corn and soybeans that were insured by a RP policy that did not include the harvest price option (RPE). For corn and soybean RP policies with the harvest price option, the expected higher harvest prices will be used for RP crop insurance calculations.

The level of crop insurance coverage will be a big factor in determining the amount of insurance indemnity payment that is received for crop revenue reductions, with most producers having 75%, 80% or 85% RP insurance coverage on their 2021 corn and soybeans.

For example, a producer with a soybean APH yield of 60 bushels per acre, carrying a 75% YP insurance policy or a RPE policy without revenue protection in 2021, would have a revenue guarantee of $534.15 per acre, which would increase to $569.76 at the 80% coverage level and $605.37 at 85% coverage.

By comparison, a producer with the same APH yield and a RP policy with harvest price protection would have 2021 revenue guarantees of $578.25 per acre at 75% coverage, $616.80 per acre at 80% coverage and $655.35 at 85% coverage.

If the actual farm yield for 2021 in the previous example is 45 bushels per acre, which could be common on some farms in the areas that were impacted by moderate drought conditions or severe storms, a producer with a 75% YP policy would not receive a 2021 crop insurance indemnity payment for soybean losses. By comparison, the producer with an 80% YP policy in 2021 would receive a gross indemnity payment of $35.61 per acre, and the producer with an 85% YP policy would receive a gross indemnity payment of $71.22 per acre.

RP policies with harvest price protection will function similarly to a yield only (YP) policy, with payments based on yield reductions; however, the insurance indemnity payments will be based on the harvest price for the RP policies.

For example, a producer with a 200 bushel per acre APH corn yield would have either YP or RP insurance payments initiated below 170 bushels per acre with an 85% RP policy. The insurance payments would be initiated below 160 bushels per acre with an 80% RP policy and below 150 bushels per acre with a 75% RP policy. The difference would be that the YP insurance indemnity payments would be calculated at the 2021 crop insurance corn base price of $4.58 per bushel, while the payments for the RP policy with the harvest price option would be calculated at the 2021 estimated final corn harvest price of $5.27 per bushel. 

Producers that chose not pay the extra premium to include the harvest price option on their 2021 RP policy will likely receive less crop insurance indemnity payments for the same yield loss.

For example, a producer with a corn APH yield of 200 bushels per acre that had an 85% RP policy with harvest price protection would have a revenue guarantee of $895.90. If that same producer had a RPE policy that did not have the harvest price protection the revenue guarantee drops to $778.60.

If the actual corn yield is 150 bushels per acre, the final crop value would be $790.50 (150 bu./a x $5.27/bu.). The estimated gross crop insurance indemnity payment would be $105.40 per acre on the 85% RP policy with the harvest price protection versus zero on the RPE policy without the harvest price option.  

The difference between carrying the harvest price option and not having the protection for soybeans in 2021 on a crop insurance policy could also be quite large.

For example, a producer with a soybean APH yield of 60 bushels per acre that had an 85% RP policy with harvest price protection would have a revenue guarantee of $655.35. If that same producer had a RPE policy without the harvest price protection the revenue guarantee drops to $605.37. If the actual soybean yield is 40 bushels per acre, the final crop value would be $514.00 (40 bu./a x $12.85/bu.). The estimated gross crop insurance indemnity payment would be $141.35 per acre on the 85% RP policy with the harvest price protection versus $91.37 per acre on the RPE policy without the harvest price option.  

Farm operators in areas with variable yield losses on different farm units that chose “optional units” for their 2021 crop insurance coverage rather than “enterprise units” may be in a more favorable position to collect potential indemnity payments on this year’s crop losses.

“Enterprise units” combine all acres of a crop in a given county into one crop insurance unit, as compared to “optional units”, which allow producers to insure crops separately in each township section. In recent years, a high percentage of crop producers have opted for “enterprise units,” due to substantially lower crop insurance premium levels. Crop losses in many areas in 2021 were highly variable from farm-to-farm within the same county and township, which would favor the “optional units”.

Producers that had crop yield losses in 2021, with the potential crop insurance indemnity payments, should properly document yield losses, regardless of their type or level of insurance coverage. It is also important for producers that did not have crop losses in 2021 to understand the dynamics of the various insurance options when making crop insurance decisions in future years.

A reputable crop insurance agent is the best source of information to make estimates for potential 2021 crop insurance indemnity payments and to find out about documentation requirements for crop insurance losses, as well as to evaluate future crop insurance options.

Details on various crop insurance policies can be found on the USDA Risk Management Agency (RMA) website at: https://www.rma.usda.gov/. There is also some good crop insurance information and spreadsheets to estimate crop insurance payments available on the University of Illinois FarmDoc web site, which is located at: http://www.farmdoc.uiuc.edu/

For additional information contact Kent Thiesse, farm management analyst and senior vice president, MinnStar Bank, Lake Crystal, Minn., at (507) 381-7960 or kent.thiesse@minnstarbank.com, or visit www.minnstarbank.com.