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Time to think of crop insurance

For some people February means Valentine’s Day. But for farmers, it’s one of the most important  business planning months of the year.  When this month ends, USDA’s Risk Management Agency will set the insurable value of crops based on the average new crop futures prices during February. And this year, due to higher prices, the premiums will cost considerably more than a box of chocolates and a bouquet of roses.

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 The RMA’s website is already tracking the crop price averages, even though it’s only a few days into the month. 

And at the University of Illinois, ag economists Gary Schnitkey and Bruce Sherrick have already crunched some ball park estimates of premium costs in their state, based on projected prices.

“Overall, 2011 premiums are estimated to be 70% higher in 2011 than in 2010,” they report.   “Increases vary across counties.  Counties with the lowest increases are in central Illinois.  The five counties with the lowest increases are Moultrie (36%), Douglas (38%), DeKalb (41%), and McLean (42%) Counties.”  But not far away some counties in west central Illinois will see premiums almost double.

The actual estimated prices for coverage vary widely.  For Revenue Protection at the 80% coverage level for corn, it ranges from $12 an acre in DeWitt and Douglas counties in the central part of the state to $32 an acre in Gallatin Gounty in southern Illinois. For yields, the economists used the county Group Risk Income Plan (GRIP) yields minus 5 bushels. Much of the premium price difference is due to differing yield risk.

The University of Illinois farmdoc website also offers premium calculators for crop insurance for the 12 north central states.

This is the first year for the RMA’s new COMBO (or Common Crop Insurance Policy) that standardizes coverage. One of the main changes affecting the Corn Belt is that Revenue Protection combines aspects of the old Crop Revenue Coverage and Revenue Assurance with the Harvest Price Option.

In some areas, changes in COMBO are a slight factor in premiums.

“RMA-developed rates for 2011 spring crops vary widely from county to county and the overall impact is estimated to be up or down by 5%,” says Scott Arnold, vice president at Rain and Hail, LLC, in a article on COMBO appearing in the mid-February issue of Successful Farming magazine.

But most of the increase in premiums will be due to the higher prices themselves as well as  volatility.

According to Kansas State University ag economist Art Barnaby, some crop insurance agents are suggesting that farmers concerned about high premium costs consider shifting from revenue protection to yield protection, the new name for APH (actual production history) or multi-peril coverage of crop losses only.

COMBO’s Yield Protection coverage is an improvement over the old APH since the insurable value of your crops is now determined by February futures, not set by the Risk Management Agency. Those values are likely to be higher than the old APH, says Barnaby.

Still, yield protection offers no protection against either a crash in prices from the current level or a rise in prices at harvest that could make delivering on forward contracts difficult if you have a short crop.

In a paper that Barnaby will soon post on K-State’s Ag Manager website he argues that the revenue protection from crop insurance is a bargain compared to going to the futures market and buying put or call options yourself.

Barnaby calls the protection against a crash in prices a yield-adjusted Asian  (YAA) put. (Asian options, first introduced in Japan, are based on an average of prices, not a specific strike price as are CME options on corn and soybeans)

“The YAA put is very cheap downside price protection!” Barnaby writes. “The YAA corn puts are less than 3 cents in almost all cases, compared to CME puts with December premiums of about 75 cents.”

Barnaby adds:

“Changing from Revenue Protection to Yield Protection in nearly all cases means farmers are foregoing some very cheap price protection.  Farmers with option trading experience will soon discover they can sell off part of the options built in to RP and reduce their insurance costs and still have more protection than provided by YP.  However, selling options does reduce the net protection provided by RP, i.e. there is no “’free lunch.’ “

Barnaby doesn’t suggest that everyone try selling options to lower their crop insurance costs. If you haven’t already had enough experience in the options market to have lost money at it, you shouldn’t consider it, he says. . Those who want to find out more on this strategy can register for one of  the remaining K-State risk-assessed management workshops in Wichita on February 23 and in eastern Wyoming in early March.

Not all farm management specialists are recommending options sales to reduce your premium cost.

Iowa State University Extension Farm Management specialist Steve Johnson suggests asking your crop insurance agent, or RMA, about the Good Performance Refund. RMA will pay farmers a 10%  refund on the net premiums (the amount minus the federal subsidy) they’ve paid over the last decade if they had no losses and bought coverage between 4 and 6 of those 10 years. Those who bought coverage for seven years or more and had one loss are also eligible. And there are special rules for beginning farmers.

RMA estimates these payments will average about $1,000 per qualifying farmers and ranchers.

Finally, there’s another private, unsubsidized insurance available for the first time this year.

It’s add-on coverage based only on weather, not your actual yields. Like hail coverage, the new Total Weather Insurance (TWI) , has no premium subsidy. But, because it pays out more often, than RMA-backed crop insurance, your net cost over time will be less than the premium, says Greg Smirin, chief revenue officer for WeatherBill,  the company that sells TWI.

In Iowa, for example, Total Weather Insurance might cost you $25 to $35 an acre on corn, he says, but over time, your net cost will be $10 to $17 an acre.

That’s because total weather coverage is going to pay out every two to three years compared to every seven to 10 years for RMA-backed crop insurance, he says.

Smirin says the coverage is being well received in today’s high risk environment. Crop insurance still leaves farmers profit margins exposed, he says.

“The high level of adoption is because fundamentally, farmers are exposed on 100% of their profit” with regular crop insurance, he says.

With Total Weather Insurance, you can insure against up to six different types of weather events that lower yields:

 

 --Excessive early season rainfall

 --Cold weather throughout the season

 --Drought throughout the growing season

 --Heat stress during mid-season/pollination period

 --Excessive mid-season rainfall (where applicable)

 --Killing freeze before harvest

   --Disruptive harvest rains

 

There’s no crop adjustment process and farmers don’t have to show a loss. Payments go out if WeatherBill’s mix of public and private weather stations show a weather event in your area, which is a 12 mile by 12 mile grid.

“I hope to God no one gets such bad weather, but you could get up to five checks (or 6 where excess mid-season rain applies) by the end of the season,” Smirin says.

You can tailor the coverage for the risks most likely in your area. In one example provided to Agriculture.com by Smirin, a farm in Wright County, Iowa would pay $35.12 an acre for corn coverage up to $250 an acre. Because the policy pays something 38% of the time, the net cost of the insurance would be $16.52 an acre.

The mix of coverage in this example includes early season rain protection up to $75 an acre, drought protection up to $100 an acre, heat stress protection up to  $60 an acre, midseason protection up to $75 an acre and harvest rain protection of $60 an acre.

Here’s how one of those risks, early season rainfall, would pay out. Each time there’s excess rainfall above a half-inch per day, TWI pays $25 an acre. There’s an 8 event deductible. In other words, it has to rain above a half-inch eight days before you collect the first $25 payment. On the ninth day you get $25, on the tenth, another $25 and on the 11th, the third and final payment of $25.

The drought protection starts when rainfall over the coverage period (June 5 through August 31) falls below the start coverage level (9 inches in Wright County) paying $10 for each .3 inch shortfall, until the rainfall level hits 6 inches.

Iowa State University ag economist William Edwards has looked at the WeatherBill information on Total Weather Insurance.

One important factor to consider, he says, is your own farm’s response to the weather data the company tracks. In some ways, the 12 by 12 mile grid is a smaller version of county-based group risk policies offered with RMA-backed crop insurance.

“I think the real key here is how closely their guarantee correlates with your actual losses,” Edwards says.

Like federal crop insurancc, the deadline for buying WeatherBill Total Weather Insurance is March 15.

Between now and then, there’s no shortage of crop insurance decisions, whether they involve COMBO or private coverage. It may take some research and consulting with your crop insurance agent to find the perfect match for your farm.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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