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Don't Ignore Crop Insurance, Despite Lower Guarantees

Crop insurance guarantees will be below cost of production for corn and soybeans this year but some of the pain will be eased by ARC (Agriculture Risk Coverage) payments on last year’s crops that will be sizable in many Midwest counties.

That's a key takeaway from University of Illinois economists Gary Schnitkey, Nick Paulson, and Bruce Sherrick, during a webinar Tuesday. The webinar is archived on the Farmdoc website.

“From a crop insurance standpoint right now, we’re looking at a scenario where we’re not going to be insuring a profit but minimizing losses,” Schnitkey said.

The average of new crop futures this month is used to set the insurable value of spring-planted crops each year. Although February isn’t over, Schnitkey and his colleagues estimate that the projected price for corn for insurance purposes will be $3.87 a bushel. For soybeans it will be around $8.87 a bushel.

That’s below Illinois break-even prices of $3.91 a bushel for corn with a 200 bushel-an-acre yield and $9.70 for soybeans at 56 bushels an acre.

Schnitkey advises against trying to cut costs by lowering your coverage level and, in fact, suggests buying the highest coverage level possible, 80% or 85% for revenue protection, to increase your crop insurance guarantee. If you want to cut costs, you could buy revenue protection with the harvest price exclusion. Dropping the harvest price eliminates coverage for higher prices at harvest set by futures prices in October and only provides downside risk.

In one example for a Logan County, Illinois, farm with a 190 bushel/acre APH (Actual Production History), revenue protection (RP) cost $16.56 per acre at the 85% coverage level. Buying RP with the harvest price exclusion costs only $8.17 per acre for 85% coverage.

Schnitkey cautions that because you have little protection against a drought-year type of rally, “you should be doing a minimal amount of pre-harvest hedging” if you opt for the harvest price exclusion.

You should also look at other crop insurance tools to raise your revenue guarantee, if they’re available to you, including the yield exclusion that can drop a low-yield year from your APH and the trend adjusted yield that may also bump up your APH, the Illinois economists suggest.

If there’s a silver lining to today’s low prices, it’s USDA’s county-level ARC program, which most farmers in the Corn Belt chose when new farm bill commodity programs became available.

Right now, the University of Illinois economists are projecting an ARC payment of about $40 an acre for this year’s corn crop, although the exact number won’t be known until the fall of 2017.

For this year’s cash flow, ARC payments for the 2015 crop already look substantial halfway through the marketing year for old crop corn and soybeans.

Economist Nick Paulson expects “a lot of counties with ARC payments, a lot of counties with big payments.”

That’s because current prices are well below the benchmark price of $5.29 a bushel for corn and $12.27 a bushel for soybeans that are used to calculate ARC payments.

Price is only part of the calculation, which also includes county average yields. But for a Midwest county to not get a payment on last year’s corn, the county average would have had to be 26% above the average used in the benchmark, Paulson said. Illinois had only three counties with yields that high last year.

He expects farmers in many counties in the Midwest and northern Plains to receive ARC payments on corn of between $60 an acre and $80 an acre (paid on 85% of a farm’s corn base.)

For more information on crop insurance, the University of Illinois farmdoc website offers premium calculators and tools to estimate potential payments for most counties in the Corn Belt and northern plains. 

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