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Crop Insurance: An Underused Tool?

Revenue Protection Plan has real value for farmers.

You’ve likely fine-tuned your crop insurance to get the type of coverage you want at a tolerable premium cost. As you plan for 2018, experts offer ways some farmers may be able to tweak coverage.  They also urge using Revenue Protection insurance to back up better marketing.

“I’m not expecting much change in the premiums from this year to next year,” says Kansas State University economist Art Barnaby, who helped develop insurance that evolved into today’s popular revenue protection policies.

USDA’s Risk Management Agency will set premiums based on new crop futures prices next February and on their implied price volatility. When we visited with Barnaby, December 2018 corn futures were almost identical to last February’s insurance price guarantee of $3.96 a bushel.  Volatility remains near historic lows, Barnaby says.

A quick review of Revenue Protection: It guarantees you a level of revenue, based on that price guarantee multiplied by your farm’s average yields, called annual production history (APH). You can buy coverage between 50% and 85% of that guarantee. Last year, in a typical Corn Belt county, that guarantee ranged from under $400 to more than $600 an acre depending on coverage. Revenue Protection also includes a higher price guarantee that’s set in the fall, if prices rise above the February average. You used to have to choose that, which is why some people still call it the harvest price option.

Currently, if you don’t want that harvest price, you can buy Revenue Protection with the Harvest Price Exclusion (RPwHPE). In some areas, that would almost cut your premiums in half. 

Barnaby warns against that.

“Anybody in the Corn Belt is crazy if they don’t buy the harvest price,” he says. Typically, about the only time Corn Belt growers get widespread indemnity payments is after a drought. If drought is widespread enough to affect the Corn Belt, corn prices usually rise.  Growers with the cheaper RPwHPE would collect little or no indemnity payments.

Barnaby suggests another way to cut premiums.  Use the APH Yield Exclusion authorized by the 2014 Farm Bill. It allows you to toss out a low-yield year from your APH, if your county also had average yields at least 50% lower than the previous ten-year average.

That will raise your APH. If it goes up more than 6%, you could lower your coverage level from 85% to 80%, for example, and pay a lower premium.

“You’ll have the same dollar guarantee but you’ll pay less for it because of the higher subsidy rate for lower coverage levels,” Barnaby says.

For most Corn Belt counties, the Yield Exclusion isn’t an option, says Steve Johnson, Extension farm management specialist for Iowa State University. Those counties haven’t had yields below 50% of average. Johnson believes most Corn Belt farmers have already used available crop insurance tools, such as shifting from smaller optional units to an enterprise unit that includes all of a farm’s fields in a county and has lower premiums. 

Yet, Johnson estimates that only about half of farmers use Revenue Protection to lock in commodity prices in the spring, when prices are normally higher than in the fall.  In one example Johnson uses, a farm with 80% coverage and an APH of 174 bushels an acre could sell up to 139 bushels an acre and have those bushels protected either by the February price guarantee or the harvest price.

Each year for five straight years futures prices have traded above the crop insurance projected prices (usually peaking in April to early July), Johnson says.

“When you miss selling into the futures price rallies that occur each spring and peak by mid-July, it makes for a long fall and winter in the Corn Belt,” Johnson says.

Johnson estimates that farmers can often add $50 an acre to gross revenue through pre-harvest sales.

“Farmers won’t be able to store their way or borrow their way out of a liquidity crisis,” he says. The flexibility that Revenue Protection gives for earlier crop pricing is the real value of that insurance, he says.

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