What crop insurance strategy should farmers use in 2019?

Farmers will soon be finalizing their crop insurance decisions for 2019—the deadline is March 15—the decision is especially critical as profit margins remain very tight. Producers have several crop insurance policy options to choose from, including yield protection (YP) policies and revenue protection policies. There are also decisions with using enterprise units versus optional units, and whether or not to take advantage of the trend-adjusted actual production history (APH) yields for 2019.

YP insurance policy options provide for “yield only” insurance protection, based on historic actual production history yields on a given farm. YP prices are based on average Chicago Board of Trade prices for December corn futures and November soybean futures during February, similar to revenue insurance products. Producers can purchase YP insurance coverage levels from 50 percent to 85 percent, and losses are paid if actual corn or soybean yields on a farm unit fall below the yield guarantees.  

Revenue protection (RP) and revenue protection with harvest price exclusion (RPE) insurance policy options provide a guaranteed minimum of gross revenue per acre. This minimum guarantee is based on APH and average CBOT prices for December corn futures and November soybean futures during February. The RP and RPE insurance policies function essentially in the same manner, except that guarantees on RPE policies do not increase if harvest prices exceed the base price. The revenue guarantee for RP policies is increased if average October CBOT prices are higher than February CBOT prices.

Producers purchase RP and RPE insurance coverage levels from 50 percent to 85 percent, and losses are paid if the final crop revenue falls below the guarantee. The final crop revenue is the actual yield times the CBOT December corn futures price and November soybean futures price during October. As of February 1, estimated crop insurance base prices in the Upper Midwest were $4.02 per bushel for corn and $9.57 per bushel for soybeans. The estimates are slightly higher for corn and about $.60 per bushel lower for soybeans compared to 2018. They will be finalized March 1.

Most corn and soybean producers have chosen RP policies in recent years, but RPE policies often offer similar protection at a lower premium cost. If the harvest price (average October CBOT price) is lower than the base price (average February CBOT price), RPE policies will likely result in higher net indemnity payments at similar insurance coverage levels. This changes, however, if the final harvest price exceeds the base price when a yield loss exceeds the insurance coverage level, such as the 2012 drought. This scenario could result in significantly less insurance indemnity payments with RPE policies, and could add significantly more risk.

Over the past twelve years, the final crop insurance harvest price for corn has been lower than the spring base price 75 percent of the time, including the past six years (2013-2018). Only 2010, 2011 and 2012 had an increase in harvest price. The range has been from an increase of $1.82 per bushel in 2012 to a decline of $1.27 per bushel in 2008. For soybeans, the harvest price increased in five years (2007, 2009, 2010, 2012 and 2016), decreased in six years (2008, 2011, 2014, 2015, 2017 and 2018) and stayed the same in 2013. The range has been from an increase of $2.84 per bushel in 2012 to a decline of $3.00 per bushel in 2008.

Many producers in the Upper Midwest significantly enhanced their protection in recent years with the trend-adjusted yield (TA-APH) endorsement, with only slightly higher premium costs. The APH yield exclusion (YE) option allows specific years with low production to be excluded from APH yield guarantee calculations. Several counties in central and northern Minnesota are eligible for YE for corn and soybeans in some of the past ten years. The USDA’s Risk Management Association offers a list of eligible counties, crops and years.

Given tight profit margins in 2019, some producers may be tempted to reduce crop insurance coverage to save on premium costs. However, a producer must first ask the question: “How much financial risk can I handle if there are greatly reduced crop yields due to potential weather problems in 2019 and/or lower than expected crop prices?” Many producers in southern Minnesota and northern Iowa with greatly reduced yields in 2018 found out the importance of having solid crop insurance coverage.

RP crop insurance is an excellent risk management tool for these situations because it not only provides yield protection regardless of price changes, but also protection for declines during the growing season. At current spring price levels, many producers will be able to guarantee near $550.00 to $700.00 per acre for corn, and $375.00 to $475.00 per acre for soybeans at 85 percent coverage, especially with TA-APH. Many private crop insurance companies also offer buy-up options to enhance coverage.

A reputable crop insurance agent is the best source of information, and farmers should discuss their options with their ag lender before finalizing decisions. Kent Thiesse has written an information sheet titled: “2019 Crop Insurance Decisions”. To receive a free copy, email Kent Thiesse. The University of Illinois FarmDoc and the USDA RMA also both offer good information on crop insurance. 

For additional information email Kent Thiesse, Farm Management Analyst and Senior Vice President, MinnStar Bank, Lake Crystal.  
To subscribe to BankWise for weekly Ag Lending News updates email Kristi Ploeger or call 651-789-3997. 

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