Insuring a loss: Revenue guarantees may not cover all
February is the month when many of us will obsess over new-crop soybean and corn futures. The February average of those futures sets the minimum insurable value for crop insurance. We’ve known for months that it will be a contrast to recent years when revenue protection (RP) could cover production costs. As winter began, it looked as though even high RP coverage levels would leave risks of losses.
Recently, University of Illinois agricultural economist Gary Schnitkey estimated that even insuring corn at the highest (85%) coverage level would not protect against all costs for many Illinois farms that are paying cash rent for land.
“Unless very unlikely events occur, the minimum guarantee in 2014 will be much lower than in 2013,” he writes on the university’s farmdoc daily website.
He uses a central Illinois example farm to show a likely minimum revenue guarantee for corn for 2014. The farm has a 177-bushel actual production history, boosted by a trend-adjusted yield to 187. Schnitkey uses a $4.60 projected price. Multiply 187 by $4.60; take 85% of that, and the minimum revenue guarantee is just over $731 an acre. Last year, the farm could acquire similar RP ($740) with cheaper 75% coverage.
With nonland costs for corn in that area at $537 an acre and average cash rent at $371 per acre, the farm’s total costs of $908 per acre (assuming it’s all cash rent) exceed the top guarantee of $731. Schnitkey advises, “. . . farmers who have not purchased at the highest coverage levels should consider higher coverage levels due to lower guarantee levels.”
That makes sense for many in the Corn Belt. Avoiding a $24.41-per-acre premium for 85% coverage could be false economy. It costs almost $12 an acre more for that example farm to jump from 80% to 85% coverage, but $12 buys a $43-per-acre jump in revenue guarantee.
This logic may not apply everywhere, however. Art Barnaby, the Kansas State University ag economist who developed one of the predecessors of revenue protection, says that in some areas of the Great Plains, the marginal cost of increasing that last 5% of coverage can almost be 100% – you pay $1 for each $1 of higher revenue guarantee.
Barnaby also says that crop futures in February could rise from where they were in December. The odds are 50/50. Yet, no one looks for anything like revenue guarantees of 2013. Clearly, you’ll self-insure more risk this year. You may feel pressure to insure more. A few companies offer private add-on policies that let you pick a revenue guarantee from different months. (Some are already closed for 2014.) Another company, The Climate Corporation, offers a product that correlates weather conditions to yields.
These products aren’t subsidized like federal crop insurance, so the cost of coverage will be more. Another add-on worthwhile in some areas – crop hail – has been around for years. These other products haven’t, and they’re more difficult to compare.
Steve Johnson, an Extension farm management specialist with Iowa State University who helps producers analyze insurance, points out that universities and Extension haven’t taken an in-depth look at add-ons. In the marketplace, “those products are not making much headway,” he says, although he sees the industry moving that direction.