During the next few weeks, many farm operators will be finalizing their crop insurance decisions for the 2016 crop year. March 15th is the deadline to purchase crop insurance for the 2016 crop year. Profit margins for crop production this year are the tightest that they have been for several years, which makes the 2016 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, as well as several other group insurance policy options. There are also decisions with using “enterprise units” versus “optional units”, and whether or not to take advantage of the “trend adjusted” APH yields for 2016.
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) insurance policy options provide for a guaranteed minimum dollars of gross revenue per acre (yield x price), based on yield history (APH) and the average CBOT prices for December corn futures and November soybean futures during the month of February. The revenue guarantee 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 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. The Revenue Protection with Harvest Price Exclusion (RPE) policy options function the same as RP policies, except RPE policies have a minimum revenue guarantee (yield and price) that is fixed, based on the February CBOT corn and soybean prices, and can not be increased later.
In recent years, a high percentage of crop insurance policies for corn and soybeans in the upper Midwest have been RP policies, because of the combination of yield and price protection. As of February 8, the 2016 estimated crop prices in the Upper Midwest for YP, RP, and RPE policies was $3.92 per bushel for corn, $8.90 per bushel for soybeans, and $5.18 per bushel for spring wheat. 2016 YP prices and RP base prices will be finalized on March 1.
Some Important Considerations Regarding 2016 Crop Insurance Decisions :
- Crop Insurance premium reductions for 2016. 2016 Crop Insurance premiums for most coverage levels of corn and soybeans in the Midwest should be the same, or slightly lower, than comparable 2015 premium levels, due to lower insurance guarantees for 2016, as well as RMA premium adjustments that are based on updated crop insurance actuarial data for several years.
- There are a wide variety of crop insurance policies and coverage levels available. Make sure you are comparing “apples to apples” when comparing crop insurance premium costs for various options or types of crop insurance policies, and recognize the limitations of the various crop insurance products.
- View crop insurance decisions from a risk management perspective.
Given the tight profit margins for crop production in 2016, some producers may have a tendency to reduce their crop insurance coverage, in order to save a few dollars per acre. However, a producer must first decide : “How much financial risk can I handle if there are greatly reduced crop yields due to potential drought and weather problems in 2016, and/or lower than expected crop prices ?” RP crop insurance policies serve as an excellent risk management tool for these situations, and 2016 may not be the year to reduce insurance coverage. - In most instances, utilize the Trend Adjusted (TA)-APH endorsement for 2016.
Many producers in the Upper Midwest have been able to significantly enhance their insurance protection in recent years by utilizing the TA-APH option, with only slightly higher premium costs. Using the TA-APH endorsement is a very good crop insurance strategy for most eligible corn, soybeans, and wheat producers. - Utilizing “Enterprise Units” is generally favorable, but know the limitations.
“Enterprise units”, which combine all acres of a crop in a given county into one crop insurance unit, are generally favorable to “optional units”, which allow producers to insure crops separately in each township section. “Enterprise units” usually have significantly lower premium costs compared to “optional units” for comparable RP policies. However, “enterprise units” are based on larger coverage areas, and do not necessarily cover losses from isolated storms or crop damage that affect individual farm units, so additional insurance, such as hail insurance, may be required to insure against these type of losses. - Take a good look at the 85% coverage levels, especially when using “enterprise units” with RP insurance policies.
Most Midwest corn and soybean producers have been utilizing a minimum of 80 % RP coverage with “enterprise units” in recent years. 206 may be the time to consider upgrading to the 85% coverage level. In many cases, the 85% coverage level offers considerably more protection, with a modest increase in premium costs. Many producers will be able to guarantee near $600.00 to $650.00 per acre for corn, and near $350.00 to $400.00 per acre for soybeans at the 85% coverage level for 2016, when also utilizing trend-adjusted APH yields. - Where to get more information on 2016 crop insurance alternatives.
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 2016 crop insurance decisions.
The following are some very good web sites with crop insurance information:
Note — For additional information contact Kent Thiesse, Farm Management Analyst and Vice President, MinnStar Bank, Lake Crystal, Minnesota. Phone: (507) 381-7960); Email: kent.thiesse@minnstarbank.com; Web Site: www.minnstarbank.com