AgLink

AgLink: Your Connection to Ag Banking Updates

AgLink is a weekly publication of articles and updates on agricultural and rural topics affecting community banks in Minnesota. It is written by Kent Thiesse, Farm Management Analyst and Vice President, MinnStar Bank NA, Lake Crystal, MN.

Most Recent AgLink:

10-5-2018

Crop Insurance Payments Likely for Certain Farmers

Even though USDA is projecting record corn and soybean yields on a national basis in 2018, it is likely that a significant number of corn and soybean producers in some areas of Southern Minnesota, as well as adjoining areas of Iowa and South Dakota, could qualify for crop insurance indemnity payments in 2018. 
 
Much of the region dealt with planting delays last Spring, excessive rainfall during the growing season, and severe storms toward the end of the growing season. Weather will likely cause yield reductions on numerous farms in the area, which together with the price declines from the crop insurance base prices on March 1, increases the likelihood of 2018 crop insurance indemnity payments for many producers.
 
Federal Crop Insurance is different every year. And, with the multiple options available to producers, there are many variables to consider for crop insurance coverage at harvest time. The 2018 crop year will be no exception. With some producers choosing Yield Protection (YP) policies (yield only) versus Revenue Protection (RP) policies (yield and price), and producers having different levels of coverage on various crops. Producers also vary on having “optional units” versus “enterprise units for their crop insurance coverage.” 
 
In the Midwest, most corn and soybean producers in recent years have tended to secure some level of revenue (RP) crop insurance coverage, rather than standard yield-only (YP) policies. Producers like the flexibility of the RP policies that provide insurance coverage for reduced yields, as well as in instances where the harvest price drops below initial base price. 

In 2018, loss calculations for corn crop insurance with YP policies and RP policies will function differently because the Chicago Board of Trade (CBOT) harvest price for corn and soybeans is likely below the 2018 crop insurance base prices finalized on March 1, 2018. 

The established 2018 base prices for 2018 YP and RP crop insurance policies were $3.96 per bushel for corn and $10.16 per bushel for soybeans. Base prices will be the payment rate for 2018 YP policies for corn and soybeans. These base prices will also likely serve as the final price to calculate revenue guarantees for calculating potential RP crop insurance indemnity payments for both corn and soybeans. 

The final harvest price for RP insurance policies with harvest price protection is based on the average CBOT December corn futures and CBOT November soybean futures during October, with prices finalized on November 1, 2018. If the final harvest CBOT price for December corn futures or November soybean futures is higher than the established base prices, the harvest price would then be used to determine the RP insurance guarantees, which is not likely in 2018. The harvest price is also used to calculate the value of harvested bushels for all RP insurance policies. As of October 1, the harvest price estimates for crop insurance were $3.65 per bushel for corn and $8.50 per bushel for soybeans. 

Corn and soybean producers had the option of selecting crop insurance policies ranging from 60% to 85% coverage levels. The level of insurance coverage can result in some producers receiving crop insurance indemnity payments, while other producers would receive no indemnity payments, even though both producers had the same adjusted APH yield and the same final yield. For example, at an adjusted APH corn yield of 190 bushels per acre, a producer with 85% RP coverage would have a yield guarantee of 161.5 bushel per acre, and a revenue guarantee of $639.54 per acre, while a producer with 75% coverage would have a yield guarantee of 142.5 bushels per acre, and a guarantee of $564.30 per acre. If the actual 2018 yield were 155 bushels per acre, with a $3.65 per bushel harvest price, the producer with 85% coverage would receive a gross indemnity payment of $74.04 per acre, while the producer with 75% coverage would receive no indemnity payment.
 
Many growers purchased upgraded levels of Revenue Protection (RP) crop insurance for the 2018 growing season, which included the higher “trend-adjusted” (TA) yields that were available. The lower CBOT prices, especially for soybeans, increases the likelihood of crop insurance indemnity payments on some Upper Midwestern farms that have 80% and 85% RP insurance policies for 2018. Indemnity payments will be most likely to occur when there was a yield loss due to weather problems during the 2018 growing season. However, the meager soybean price also increases the soybean payment likelihood. 
 
At a harvest price of $8.50 per bushel, the “threshold” yield to receive a soybean insurance payment is at 100 percent of APH yield with an 85% RP policy, and at 95 percent with an 80% RP policy. For example, with a 55 bushel-per-acre APH yield and an $8.50 per bushel harvest price, soybean insurance payments would begin if the final soybean yield fall below 55 bushels per acre with an 85% RP policy, and below 52 bushels per acre with an 80% RP policy. Using a harvest price of $3.65 per bushel for corn, the “threshold” yield to receive a corn insurance payment is at 92 percent of APH yield with an 85% RP policy, and 86 percent with an 80% RP policy. 

The majority of Midwest corn and soybean producers utilize “enterprise units” for their crop insurance coverage, which combines all acres of a crop in a given county into one crop insurance unit. By comparison, “optional units” allow producers to insure crops separately in each township section. Premium rates are somewhat higher with optional units. Enterprise units work quite well with RP policies to protect against price drops during the growing season, and when a producer has most of their land in the same general area. Optional units are preferable when a producer has land that’s located in different areas of a county, or when producers have individual farms that are highly susceptible to natural disasters, such as flooding, drought, etc. 

For example, assume that producers A and B both have 5 separate farms in the same county with an APH corn yield of 190 bushels per acre, and with an overall average 2018 corn yield of 165 bushels per acre; however, three of the farms average 175 bushels per acre and two of the farms average 150 bushels per acre. Assume that producer A has an 80% RP policy with optional units and producer B has an 80% RP policy with enterprise units. Producer A would receive no insurance payment on three farms but would receive a gross indemnity payment of $54.42 per acre on two farms. Producer B would receive no insurance payments on any farms. 

Producers that have crop revenue losses in 2018, with potential crop insurance indemnity payments, should adequately document yield losses, regardless of their type or level of insurance coverage. A reputable crop insurance agent is the best source of information to make estimates for potential 2018 crop insurance indemnity payments and to find out about documentation requirements for crop insurance losses. It is important for producers who are facing crop losses in 2018 to understand their crop insurance coverage, and the calculations used to determine crop insurance indemnity payments.
 

Contact Kent Thiesse with questions or comments at kent.thiesse@minnstarbank.com.

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