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Take a new approach with crop insurance

When you sign up for federal crop insurance or revenue protection this year, think long-term.

The 2014 safety net for crop revenue created by the just-passed farm bill has some nuances that should change how you think about the programs for which you sign up soon, according to Ohio State University ag economist Carl Zulauf. The paper you sign this year won't just cover the 2014 crop -- it will reach further down the road.

"The decision, to be made in 2014, covers five crop years, 2014-18. It is not a one-year decision," Zulauf says in a university report. "The 2014 farm bill encourages farmers to think strategically about their farms through at least 2018. An important strategic risk management question is the ability of a farm to withstand multiple years of low farm prices and revenue. Managing multiple-year risk involves a set of interrelated considerations, including the expected path of prices and revenue until 2018. The multiple-year nature of this assessment points to the value of consulting decision calculators.

"Expectations about prices over the 2014-18 crop years will likely be an important consideration. Expectation that market price will stay above the Price Loss Coverage (PLC) reference price in most years will likely lead to an initial look at ARC. In contrast, expectation that market price will be below the PLC reference price in most years will likely lead to an initial look at PLC," Zulauf adds.

What other changes are worth noting this time around? Here are a few from the economist, according to a university report:

  • ARC is a revenue program. Thus, ARC's implied price is only a rough, simple indicator of potential payments. Above-normal yields reduce the chance of ARC payments, hence ARC's implied price. Below-normal yields increase the chance of payments, hence ARC's (Agricultural Risk Coverage) implied price.

  • Payment entities may choose different programs for different crops, a feature allowed in PLC and county ARC but not in individual ARC. Thus, operators may want to consider diversification of program choice as a risk management strategy.

  • Expectations about prices over the 2014-18 crop years will likely be an important consideration. Expectation that market price will stay above the PLC reference price in most years will likely lead to an initial look at ARC. In contrast, expectation that market price will be below the PLC reference price in most years will likely lead to an initial look at PLC.

  • Because 2009 was a low price year and an Olympic average discards the high and low prices, ARC's implied price will not change much in 2015 compared with 2014. Moreover, ARC's implied price in 2016 does not change by much and often increases if the 2013 crop year price continues during the 2014 and 2015 crop years (see Table 1).  Thus, ARC may provide more risk protection than expected. However, if market prices decline notably in 2014 and 2015 from current levels, ARC's implied price will decline notably by 2017 and 2018.  This discussion underscores the importance of expectations about the path of prices through 2018.

  • Payment limits could be a bigger issue than in the past because risk management programs can make large payments when a risk occurs.  Moreover, these years are never known in advance and these payments may be needed due to the low revenue resulting from the occurrence of a risk.  It is worth underscoring that peanuts has a separate payment limit but all other program crops have a combined, single limit of $125,000 per payment entity.

  • The Supplemental Insurance Coverage Option (SCO) is available only to crops in PLC.  The county-based SCO could be an important consideration is this decision, but individual farm insurance is more specific to an individual farm's risk than is county insurance.  Moreover, SCO's subsidy rate of 65% exceeds the subsidy rate for the commonly-chosen enterprise insurance only at the 85% coverage level (53% subsidy).  When combined, these considerations suggest that the use of SCO could be limited to the 80% to 86% range of insurance coverage.

  • Individual ARC is in essence a whole program crop farm safety net for all FSA farms that an individual payment entity elects into individual ARC.  Because of this feature and because payment will be made on only 65% of base acres, it seems reasonable to speculate that individual ARC may be most attractive for relatively small farms with contiguous acres in a microclimate and soil profile not representative of the county and in areas with variable yields.

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