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Use 2011 crop insurance as price risk management tool

STEVE JOHNSON 03/11/2011 @ 11:24am Farm Management Specialist with ISU Extension housed in Polk County, Iowa. Areas of expertise include crop marketing, grain contracts, government farm programs, crop insurance, farmland leasing and other crop risk management strategies. Reach Steve by e-mail at sdjohns@iastate.edu.

The crop insurance revenue guarantees for federal crop insurance coverage in 2011 increases the odds that insured farmers and crop share landowners will receive payouts for revenue losses this year. However, the size of the premiums to be paid next October could provide a sticker shock.

Projected price guarantees finalized by the USDA Risk Management Agency (RMA) on March 1st are a record $6.01 per bushel for corn, $13.49 for soybeans, $5.87 for sorghum and $9.89 for spring wheat. Prices vary in some states depending on planting dates. High volatility factors during February used to determine the final premiums also increased the cost of 2011 insurance premiums versus those experienced in 2010.

Higher 2011 Premiums

With projected prices approximately 50% higher, so too will be the premiums for the same product, level of coverage and unit of coverage elected. However, these lofty price guarantees for crop revenue insurance increases the potential to trigger large indemnity payments. This could occur even if your 2011 yields are just below your average yield, but futures prices plunge by October, as they did in 2008.

Moving to enterprise units rather than optional unit coverage on your farms would provide a lower premium. However, individual farms planted to say corn throughout the county are combined as one unit for crop insurance loss purposes.

The enterprise unit discount provided by the RMA since 2009 means there is a greater risk should a peril occur on one farm and not all farms in the county. This is why many farmers add hail coverage to their existing federal crop policies, especially when they elect to insure using enterprise units.

Revenue Protection Guarantee

While 2011 premiums are steep, insureds are buying both yield and price insurance when they elect a Revenue Protection product. They have the added comfort to pre-harvest sell bushels that have a guaranteed price.  The number of bushels committed to delivery using crop revenue protection should not exceed your Actual Production History (APH) times the level of coverage you elect.  Say you have a corn APH of 160 bushels per acre and you are using Revenue Protection (RP) with a 75% level of coverage. You are guaranteed 120 bushels per acre at $6.01 per bushel. That’s a guarantee of $721 per acre. Any shortfall in bushels on your farm or farms below a combination of $721 can trigger and indemnity payment.

Let’s say by October the average harvest price using December corn futures has dropped to $5 per bushel.  A final corn yield below 144 bushels per acre would actually trigger an indemnity payment. Using a higher level of coverage, say 85%, increases your premium but also your revenue guarantee to $817 per acre. Should harvest price drop to $5 per bushel, a final yield below 163 bushels per acre would trigger an indemnity payment.

Pre-harvest marketing with bushels that can be committed to delivery goes hand-in-hand with the record 2011 revenue guarantees. The Revenue Protection product guarantees your APH yields times the level of coverage you elect at the higher of the February average projected price or October average harvest price. Both prices reflect the daily futures average closes for December corn and November soybean contracts.

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