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What's new with crop insurance in 2008

Agriculture.com Staff 02/21/2008 @ 10:42am

Corn and soybean producers in the Midwest need to make decisions about crop insurance by March 15 each year. If they don't advise their agent to make any changes, coverage will be the same as last year. However, changing market conditions make it advisable to review policy specifications each year.

Last year indemnity prices, available guarantees and premiums were all much higher than in 2006. That is not surprising, since all of these are based on expectations for harvest time prices as measured prior to March each year. Current corn and soybean market conditions make it likely that even higher levels will be reached in 2008.

Another new feature is a premium discount that is available to corn producers who plant a certain type of genetics, based on an expected decrease in yield risk.

Even if producers don't alter their percent protection level from year to year, the dollar value of their guarantee will change according to market prices. The price used to calculate the guarantee and determine the payment in case of a loss is called the "indemnity price." Where the indemnity price is set each year depends on market projections and the type of policy purchased.

Last year's revenue insurance (RA, CRC, GRIP) indemnity prices of $4.06 per bushel for corn and $8.09 per bushel for soybeans allowed many producers to lock in very attractive guarantees. Indemnity prices for 2008 will not be announced until March 1, but will likely be even higher than last year, especially for soybeans. Maximum indemnity prices for yield insurance (APH, GRP) have already been announced at $4.75 for corn and $11.50 for soybeans, an increase from the 2007 rates of $3.50 and $7.00, respectively.

The downside, of course, is that higher indemnity prices mean higher premiums. The average farmer premium for all corn policies in Iowa last year was $17.05 per acre, compared to just $9.62 per acre in 2006. The average soybean premium jumped from $7.03 to $8.27. And, despite the high value guarantees that were purchased in 2007, payouts for losses in Iowa were equal to only about four percent of the premiums that farmers paid in.

Iowa farmers have gradually been shifting their crop insurance away from yield insurance and toward revenue insurance over the last decade. Only about 15 percent of the insured acres in Iowa last year were covered with yield-based policies (APH and GRP). When indemnity prices are high by historical standards, revenue insurance makes even more sense, because the risk of declining prices is greater relative to the risk of low yields.

This also makes group risk insurance protection (GRIP) somewhat more attractive than in low price years, since it offers exactly the same price risk protection as individual revenue insurance policies. GRIP’s yield risk protection, however, is based on county level rather than farm level yields.

Producers who like to forward price much of their production prior to harvest can use CRC, or RA insurance with the "harvest price option," to protect themselves against harvesting fewer bushels than they contract. As long as they don't commit more bushels than they have insured, they can rely on the insurance indemnity payment to cover the cost of any shortfall. This year they need to consider carefully the odds that prices at harvest will be higher than in February. If there is only a small chance that the market will be higher in October or November, it may not be necessary to spend the extra premium to buy CRC or RA with the harvest price option instead of basic RA.

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