Focus on Ag: Considerations for margin protection insurance policies

Kent Thiesse
Farm Management Analyst
Kent Thiesse

A relatively new crop insurance option that was added in the past few years by the U.S. Department of Agriculture's Risk Management Agency (RMA) are “Margin Protection” (MP) crop insurance policies. Given the expectation for much higher crop input costs for 2023, together with some fairly strong projections for 2023 commodity prices in the Fall of 2023, there is currently a bit more interest in the Midwest regarding the potential for utilizing MP crop insurance policies for the 2023 corn and soybean crop.

Margin Protection (MP) is an area-based crop insurance plan that provides protection against an unexpected decrease in the crop production margin (crop revenue minus input costs) and an be purchased up to a 95 percent coverage level. The decrease in the margin could be caused by reduced county average yields or commodity prices, increased crop input expenses on selected variable crop input costs, or any combination of these occurrences.

Since MP insurance is based on county-level yields and average input costs, the final yield and input costs on an individual farm may or may not result in a crop insurance indemnity payment for a given year. The deadline to purchase Margin Protection crop insurance policies for 2023 is September 30, 2022.

How Margin Protection functions

  • MP insurance policies for corn and soybeans are available in Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin. MP policies for spring wheat are available in Minnesota, Montana, North and South Dakota.
  • MP insurance policies use county average yields, similar to other Federal area-based crop insurance policies, rather than farm-level crop yields.
  • MP insurance determines a minimum (or “trigger”) margin, which is determined by the following:
    • Expected revenue (county yield x projected price) minus expected costs = “Trigger Margin”
    • The projected commodity prices and expected costs for MP policies are determined during a “discovery period” from mid-August to mid-September, with data finalized on September 15, in the year prior to the crop production year.
  • The projected price for is the average Fall price for the following year (ex. --- the 2023 corn and soybean projected price was the average price of Dec. 2023 corn futures and 2023 Nov. soybean futures) during the discovery period that ended on Sept. 15. The 2023 projected prices for MP policies are $6.11 per bushel for corn and $13.56 per bushel for soybeans.
  • The projected input costs for corn and soybeans are set during the discovery period and are divided into two types of costs:
    • Fixed costs --- Seed, chemicals, lime, machinery, etc. (Fixed costs are set and do not change.)
    • Variable Costs (subject to change) --- Diesel, DAP, potash, interest, and urea (corn only)
  • The variable cost projections are set by September 15 but may be adjusted either higher or lower by the RMA the following April, based on actual costs for the variable crop inputs. The costs of diesel and fertilizer inputs are based on futures prices for those inputs and interest costs are based on average Federal Reserve interest rates. There can be some variation in the crop input costs from county-to-county and between irrigated and non-irrigated crop acres when determining MP variable costs.
  • A 2023 MP insurance policy can be purchased as either a stand-alone policy or as an add-on policy to a 2023 revenue protection (RP) or yield protection (YP) policy, which utilize farm-level yields. The RP or YP policy on an individual farm unit becomes the base insurance policy and the MP policy is the “add-on” policy. Producers carrying both a base policy (RP or YP) and an add-on MP policy will owe the full crop insurance premium on the base policy; however, there will a premium adjustment on the MP policy depending on the coverage levels that are selected.
  • The Federal government subsidizes the purchase of MP insurance policies at a subsidy rate of 55 percent for 75-80% MP policies, 49 percent for 85% MP policies, and 44 percent for 90-95% MP policies.
  • County RMA harvest yields are not finalized until mid-June the year after the crop is harvested, so any MP indemnity payments will not occur until that time. (Example --- 2023 corn and soybean RMA county yields will not be finalized, and MP indemnity payments would not occur until June 2024.) By comparison, RP and YP indemnity payments for a given year can be made any time after the commodity harvest price is finalized (November 1 for corn and soybeans) and the farm-level yield has been verified.
  • It is possible for producers to receive a MP indemnity payment, but not receive a RP or YP payment or vice versa, since MP policies are based on county yields and RP and YP policies are based on farm-level yields. Producers cannot “double-dip” on receiving indemnity payments from the base insurance policy (RP or YP) and the MP policy. If the producer qualifies for indemnity payments for both policies, they will get the higher of the two policies. If the producer had already received an indemnity payment or a RP or YP policy, which would likely be paid first, that payment amount would be subtracted from the eligible MP indemnity payment if the MP payment amount is higher.
  • Advantages of utilizing MP insurance policies for corn and soybeans for 2023:
    • Allows producers to have higher coverage levels and protection than standard RP and YP policies.
    • Includes protection against rising crop input costs, as well as yield and price protection.
    • Provides an earlier “price discovery” period (mid-September) for corn and soybean insurance base prices, rather than the traditional February time frame for RP and YP insurance policies.
    • The Federal government provides premium subsidies for the MP insurance policies.
  • Disadvantages of considering MP insurance policies for corn and soybeans for 2023:
    • The decision for MP insurance needs to be made by September 30 (in the year prior to planting).
    • An additional crop insurance premium and administrative fee will be charged for MP insurance.
    • Do not know the status of any potential indemnity payments on a MP policy until June the following year (more than six months after harvest).
    • Individual farm yields and crop input costs are not considered in MP “margin” calculations, which could be a factor for some farm operations when considering MP insurance coverage.
    • Producers cannot utilize Supplemental Crop Option (SCO or Enhanced Coverage Option (ECO) insurance policies with MP insurance policies, since they also insure against county-level yields.
    • If producers are not concerned about the input cost or price protection offered by MP insurance coverage, there may be better alternatives for enhanced insurance coverage with Spring-based insurance products such as SCO, ECO or “add-on” insurance products offered by private insurance companies.
    • MP insurance coverage can be difficult to understand, especially how MP insurance coverage interacts with the more traditional RP and YP insurance policies.

Margin protection (MP) insurance policies are not for everyone, but they may fit into the risk management plan for some corn and soybean producers as they plan ahead for the 2023 crop year.

Farm operators should consult with a reputable crop insurance agent before deciding on utilization of a MP insurance policy for 2023 in order to make sure that they understand all aspects of MP policies and how the MP policies interact with traditional RP and YP insurance policies. Iowa State University has a very good information sheet on MP insurance coverage, which includes some examples for MP insurance policies titled: “Margin Protection (MP) Crop Insurance” that is available at: extension.iastate.edu/agdm.

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.