Author's note: Plan to attend my February 28 conference, Managing Weather and Marketing Risk in 2013. Details and registration information are at: www.AgEngage.com.
The evolution of crop insurance took a markedly positive turn when Revenue Protection (RP) was created, and now RP provides the higher of the spring or harvest price, without having to pay a higher premium. By opting out of the harvest price, there is some premium savings, but with the majority of farmers choosing Revenue Protection, the only choice left is the coverage level, and whether that is 75 percent, 80 percent, or 85 percent. However, conservative thinking for 2013 may leave only one choice.
With prospects for high production and land costs and the potential for lower market prices, a careful selection of crop insurance options is a wise use of time for Cornbelt producers. While not everyone will have a potential 180 bushel yield and $350 cash rent used in an example provided by University of Illinois farm management specialist Gary Schnitkey, it depicts the need for a good choice on coverage level for Revenue Protection.
Using a 180 bushel trend-adjusted yield and the 2012 (correct) spring guarantee of $5.68, Schnitkey works through the potential for production expenses to be covered with the various coverage choices. Granted his use of $5.68 is below the current $5.90 per bushel, it is close to the cash price when the basis is deducted from the futures price-based spring guarantee.
Schnitkey says in addition to the basis, estimate the value of the crop insurance guarantee. That can be done by multiplying the 180 bushel yield by the $5.68 (minus the basis), and then multiplied by the coverage level, such as 80 percent. From that $761 per acre result, the premium must be deducted. At 80 percent coverage, that is $13.64, a cost that will be doubled if the coverage level rises to 85 percent or a cost that will be cut in half if the coverage level drops to 75 percent.
After the premium is deducted from the guarantee, a producer with a 180 bushel yield using the 2012 spring price would be guaranteed $720 per acre for 75 percent coverage, $761 per acre for 80 percent coverage or $796 per acre for 85 percent coverage. Which will best cover your production costs, land costs, and provides a return to labor and management? Or will any of them do that?
If your only expense is an estimated $500 cost per acre, the lower coverage level would be adequate. But as land costs are added, such as a $350 per acre cash rent, then even the higher coverage level will not cover an $850 cost, much less provide any return to labor and management.
While some producers may have a problem with the assumptions, such as the $5.68 spring guarantee price, use a different figure to see how that changes your guarantee. Lower cash rent will also change the amount needed for coverage. However, Schnitkey says, “In many situations, the highest coverage level will not provide a guarantee above the total costs of production.”
The majority of farmers may select Revenue Protection as their crop insurance tool for protecting profitability in 2013, but selection of coverage level will determine how far it can go. The spring price guarantee has not yet been determined, and will not be for another month, however, fading prices in the corn market could push the guarantee to levels below what is needed to cover reasonable production costs.
Source: FarmGate blog