I have been on the road a lot the last two months, so I haven't had a lot of time to study the crop insurance alternatives for my own small operation. Of course, with the revenue coverage based on the February average prices, it really was impossible to make an educated decision until last week anyway.
Being home most of this week and staring the March 15 deadline in the face, it was time to look at the alternatives and decide on the program for the 2007 crop. I knew from information I picked up in the marketing workshops that premiums would be a lot higher than last year for the same policy. Deciding on which coverage to buy would involve weighing the higher premiums against the higher price coverage in the event of yield or price losses.
Higher premiums are accompanied by higher returns in the event of a loss. However, I do not want to pay out so much in premium that the cost substantially reduces my net income if there is no loss. I have had only one year since 1995 in which I got back more from my crop insurance coverage than I paid in premium. Therefore I needed to carefully weigh the potential loss of the premium against the possibility of a big payback this year.
For the past two years, I had 90% GRIP with 100% price coverage. In 2004 I had GRP at the same level. Prior to that, I carried 70% CRC with the enterprise option. I carried GRIP when it became available because in the last ten years, my yields have beaten the county average six times.
The worse the year, the more I can beat the county average. Therefore, insuring for 90% of the county average greatly increases my odds of getting a return. In addition, my farming operation is very small and I do live on the income, so I can stand a loss. Hail is not a factor because it is so rare in this area.
The premium for the same policy I had last year would have gone from $24 per acre to $40 per acre for corn. The premium on soybeans went from $12 to $14. Paying $40 per acre for coverage that I have low odds of collecting on did not seem like a good gamble, even though I did get my premium hack in 2005. I can cut my premium back to $24 by taking the GRIP with only 60% price coverage.
That still leaves me covered at a level roughly equal to the cash corn price, since the GRIP price is calculated by taking the base price times 1.5. Saving $16 for a lower price guarantee seemed like a good trade off, since the guarantee is still at a very good level. I can be satisfied at that price, especially since the coverage goes up if the price is higher at harvest.
Understanding the exact prices and coverages is very complicated, as I discovered when I sat down to write this column from the notes I took yesterday during the conversation with my agent. That fact has not changed from the days when I farmed a thousand acres, which included some high risk land on the river bottom.
My decision for 2007 is to take 90% GRIP at the 60% price level for corn, and 90% GRIP with the 100% price level for soybeans. Even with the reductions, the premium seems expensive. However, this combination gives me the best odds for a positive return and fits my risk tolerance.