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Big Yields + Low Prices = Insurance Payout?

Early October futures for new-crop corn and soybeans suggested that even with record yields, prices may be low enough to trigger modest crop insurance indemnity payments this year.  

“Even with high yields, revenue crop insurance payments will occur for some farmers insuring at high coverage levels,” says University of Illinois agricultural economist Gary Schnitkey in a recent posting on farmdoc Daily.  “Overall, crop insurance payments likely will be low in Illinois. In contrast, payments in the western Corn Belt will be higher than in Illinois, as yields in the western Corn Belt are not expected to be as high as in Illinois.”  

Why expect payments at all during a year of likely record yields? Prices have fallen so much from the average of new-crop futures last February. That corn price of $4.62 per bushel was used to set the crop insurance revenue guarantee. Schnitkey multiplies that price by a farm’s trend-adjusted actual production history (TA-APH) of 185 bushels per acre in his example. 

If October futures average $3.20 a bushel,  that example farm would trigger modest payments with yields below 227 bushels an acre under 85% coverage. If insured at the 70% level, yields would have to be about the same as the TA-APH to trigger payments if new-crop futures prices averaged $3.20 per bushel in October. 

Yields in some Illinois counties will be exceptional, so Schnitkey didn’t expect large indemnity payments in his state. A preharvest estimate of average corn yield for Champaign County, for example, was 221 bushels per acre. Using his example with 185-bushel APH and a $3.20 harvest price, if that farm actually harvested 221 bushels per acre, a modest indemnity payment of about $22 an acre under 85% coverage can be calculated. If the farm had just an average yield (185 bushels), the payment would be much higher ($134 per acre.)

Any kind of futures rally in October isn’t great news for crop insurance payments, however. After starting out the month at about $3.20, new-crop corn futures were soon above $3.40. Dustin Johnson of EHedger LLC tells Agriculture.com, “The only problem with that is the corn rally is going to affect farmers’ insurance payouts negatively.”

Schnitkey’s formula for calculating break-even yields can be found in his October 3 posting, “Modest Crop Insurance Payments Likely in Illinois for 2014: Calculation of Break-Even Yields” (farmdocdaily.illinois.edu).

Find a refresher on calculating indemnity payments at the Iowa State University Ag Decision Maker Web page (extension.iastate.edu/agdm). Look under the September 2014 updates for the article, “Revenue Protection Crop Insurance.”

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