February 26, 2018
USE CROP INSURANCE AS A RISK MANAGEMENT TOOL
Due to the continued tight margins in crop production for the 2018 crop year, some farmers are contemplating reducing their crop insurance coverage in order to save on premium costs. While there may be a small savings in the premium costs per acre, that decision could add considerable risk to the farm operation for the coming year. Many farm operators remember a few years ago when crop insurance coverage virtually guaranteed a profit from crop production in a given year. Crop price guarantees have changed, and that may be no longer possible; however, the risk protection provided by crop insurance coverage may be more important now than ever.
The price guarantee for revenue protection (RP) crop insurance coverage for corn in 2013 was $5.65 per bushel. At that base price, a farm operator with a 180 bushel per acre actual production history (APH) yield could guarantee over $860 per acre with an 85% RP insurance policy, and over $810 per acre with an 80% RP policy. The average corn costs per acre on rented land in Southern and West Central Minnesota for direct expenses, overhead costs, and land rent, based on the University of Minnesota FINBIN web site, was approximately $870 per acre in 2013.
The situation with soybeans and RP insurance coverage in 2013 was similar to corn. The 2013 price guarantee for RP soybean crop insurance of $12.87 per bushel. At that price guarantee, a farm operator with a 50 bushel per acre actual production history (APH) yield could guarantee nearly $550 per acre in 2013 with an 85% RP insurance policy, and approximately $515 per acre at 80% RP insurance coverage. The average soybean costs per acre for direct and overhead expenses, and land rent was near $525 per acre in 2013. The revenue guarantees per acre provided by RP crop insurance policies in 2013 virtually covered all expenses and land rental costs, and even provided a small profit margin.
By 2016 things had changed, the RP corn price guarantee dropped to $3.86 per bushel, which lowered the guarantee with a 180 bushel per acre APH yield to near $635 per acre with 85% RP insurance coverage, and to just below $600 per acre with 80% RP coverage. Similarly, for soybeans, the RP price guarantee for 2016 was $8.85 per bushel, lowering the guarantee to just below $415 per acre with a 50 bushel per acre APH yield and 85% RP insurance coverage. The 2016 average expense for land rents, direct and overhead expenses was near $750 per acre for corn and $500 per acre for soybeans.
As of February 26, the RP price estimates for 2018 were $3.95 per bushel for corn and $10.13 per bushel for soybeans. Using those price guarantees, and a 190 bushel per acre APH corn yield, the resulting revenue guarantee would be near $640 per acre with an 85% RP policy and just over $600 per acre with an 80% RP policy. If we assume a 52 bushel per acre APH soybean yield, the resulting revenue guarantee would be just over $450 per acre with an 85% RP policy and near $420 per acre with an 80% RP policy. Estimated average 2018 production costs for land rent, direct and overhead expenses are expected to be near $700 per acre for corn, and $475 per acre for soybeans.
Some producers tend to overlook crop insurance as an important risk management tool, since the available revenue guarantees are lower than the cost of production in many situations. However, the overall financial risk in 2018 may be far greater than it was in back or 2013, when overall crop revenues were much higher. Crop insurance premiums for 85% RP coverage for corn and soybeans in many areas are much more favorable now than they were in previous years. Some producers have been able to increase their APH corn and soybean yields in recent years by using the trend-adjusted yield (TA-APH) yield endorsement for their crop insurance coverage, with very little added cost per acre.
Farm operators that have an adequate RP insurance policy are able to more aggressively take advantage of favorable crop pricing opportunities prior to planting and early in the growing season. Utilizing a RP crop insurance policy responds very similarly to having a “Put option” in place as a marketing tool to forward price grain prior to harvest. The RP insurance policy essentially establishes a “floor price” on a percentage of the crop production, based on the percent level of RP insurance selected, but still allows the producer the opportunity to potentially capture a higher price level.
We continue to have very tight crop margins for the 2018 crop year, and in some cases even negative margins on cash rental acres to cover land rents, direct and overhead costs. Before reducing crop insurance coverage for 2018, a producer needs to assess whether they want to take on the extra risk of the reduced revenue guarantee of the lower crop insurance coverage. Reducing from an 85% RP policy to a 75% RP policy will reduce the insurance guarantee by $70-$80 per acre for corn, and $50-$60 per acre for soybeans. Producers are also encouraged to discuss this with their ag lender, before finalizing their 2018 crop insurance decisions.
The deadline to purchase crop insurance for corn and soybeans for the 2018 crop year is March 15, 2018. For more information on various crop insurance policies and alternatives for 2018, producers should contact a reputable crop insurance agent. Kent Thiesse has written an information sheet titled: “2018 Crop Insurance Decisions”. To receive a free copy of this information sheet, please forward an e-mail to: kent.thiesse@minnstarbank.com. Some other very good web sites with timely crop insurance information are :
> University of Illinois FarmDoc : http://www.farmdoc.illinois.edu/cropins/index.as
> USDA Risk Management Agency (RMA) : http://www.rma.usda.gov/
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Note — For additional information contact Kent Thiesse, Farm Management Analyst and Senior
Vice President, MinnStar Bank, Lake Crystal, MN. (Phone — (507) 381-7960);
E-mail — (kent.thiesse@minnstarbank.com)