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Manage crop risk in 2013

STEVE JOHNSON 02/05/2013 @ 9:46am 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.

Despite the worst Corn Belt drought in a generation, net farm incomes reached near-record levels in 2012, thanks to crop insur­ance indemnity payments and high crop prices. You can expect tremendous crop revenue risk in 2013 because of crop yield uncertainty and appre­hension concern about how long record crop high prices will last.

A lot of the groundwork for another year of high net farm incomes from crops will be tied to the crop insurance decisions farmers make before March 15, the deadline to sign up for make chang­es in crop insurance coverage for spring planted crops.

The 2012 drought caused grain prices to surge, boosting net farm incomes to high levels as over 90% of Iowa’s tillable acres are covered by revenue protection (RP) crop insurance. That product guar­antees a percentage of the farm’s Actual Production History or APH times the higher of the spring pro­jected price (average futures prices in the month of February for December 2013 corn futures and No­vember 2013 soybean futures). If the harvest price (average futures prices in the month of October) is higher than the projected price, the insured gets to use the higher of the two prices to determine their revenue guarantee. This is what happened in 2012, as the final harvest price was $7.50 per bushel for corn and $15.39 for soybeans.

The revenue protection levels provided by crop insurance means farmers are protecting against either a decline in yield or a drop in futures price. There will be a lot of ups and downs in grain prices in 2013 but using revenue protection provides a predictable net return protection revenue guarantee per acre, notes Johnson. In addition, the pre-har­vest sale of bushels for delivery covered by revenue protection provides a guaranteed price (the pro­jected price) and thus, the ability to sell in advance of harvest to meet next fall and winter’s cash flow needs.

Projected prices in February 2013 near $6 per bushel for corn and $12.50 per bushel for soybeans would result in guarantees at or above 2012 levels. Again providing many farms with the opportunity to insure positive revenue guarantees by taking high levels of crop insurance coverage. In addi­tion, many farmers will may increase their level of coverage up to 85% of their APH yields, and also use the Trend-Adjusted APH Yield Endorsement or TA-Option again in 2013 to increase their revenue guarantee.

While non-land crop cost estimates forecast by ISU in 2013 aren’t expected to increase significantly, perhaps farms at the most risk for low and nega­tive net farm incomes are grain farms that don’t use crop insurance or perhaps those that cash rent a large portion of their farmland at high cash rent levels. Many of these farms paying high cash rent can’t assure themselves positive revenue guarantees in 2013 even if they take high levels of crop insur­ance and use the TA-Option. That’s because the high cash rental rates are so large, the crop insur­ance revenue guarantee is still less than the overall farm’s total costs.

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