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2013 Crop Insurance Calculations

Written by: Kent Thiesse

 

With Federal Crop Insurance, every year is different, and with the multiple options available to producers, there are many variable results from crop insurance coverage at harvest time. 2013 will be no different, with some producers choosing Yield Protection (YP) policies (yield only) versus Revenue Protection (RP) policies (yield and price), and also having differences in the level of coverage chosen, “optional units” or “enterprise units”, etc. that affect final insurance payments.

 

Many growers purchased upgraded levels of Revenue Protection (RP) crop insurance for the 2013 growing season, which included the higher “tend-adjusted” (TA) yields that were available. 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 2013, corn crop insurance losses with YP policies and RP policies will function differently, due to the current level of Chicago Board of Trade (CBOT) corn prices being well below the 2013 crop insurance base price, while the soybean YP and RP policies will likely function similarly, due to the current CBOT soybean harvest price being close to the RP base price. 

 

The established base prices for 2013 YP and RP crop insurance policies were $5.65 per bushel for corn and $12.87 per bushel for soybeans This will be the payment rate for 2013 YP policies for corn and soybeans, and will serve as the final price to calculate revenue guarantees to calculate potential RP crop insurance indemnity payments for corn at current price levels, as well as possibly for soybean RP policies with harvest price protection. The final harvest price for RP insurance policies with harvest price protection is based on the average CBOT December corn futures price and CBOT November soybean futures price during the month of October. Producers with RPE policies, with a harvest price exclusion, will use the base price for both corn and soybeans.

 

If the 2013 CBOT price in October is below $5.65 per bushel base price for corn and $12.87 per bushel base price for soybeans, the initial base price is used to calculate the RP guarantees; otherwise, the October harvest price will be used. The CBOT average price for October is used to calculate the value of the actual harvested bushels in 2013 for all RP and RPE policies.The CBOT average October futures prices was $4.39 per bushel for December corn and $12.87 per bushel for November soybeans. If these average CBOT prices stay at these levels, the base price of $5.65 per bushel will be used to calculate RP insurance guarantees for corn. The base price of $12.87 per bushel will also be used to calculate RP guarantees for soybeans with harvest price protection, since the soybean base price and harvest price were exactly the same at $12.87 per bushel.

 

The lower CBOT corn prices will also increase the likelihood of crop insurance indemnity payments on corn RP insurance policies, and possibly on soybean RP policies, if November CBOT soybean futures prices drop further. If the final harvest price is below the base price on a RP insurance policy, divide the revenue guarantee per acre by the final harvest price, in order to determine the yield “threshold” where crop insurance indemnity payments would be initiated. For example, corn with a 190 APH yield, with an 80 % RP insurance policy for 2013, and the $5.65 /Bu. base price, would have an insurance guarantee of $858.80 per acre. If the final harvest price is $4.39 per bushel, divide $858.80 by $4.39, and you get 195.63 bu./acre, which would be the “threshold” yield. Any yield below that level on that particular insurance unit would likely result in a crop insurance indemnity payment.

 

Since the final soybean harvest price is the same as the base price of $12.87 per bushel, the “threshold” yields will be the same as a “yield only” policy. For example, at a soybean APH of 50 bushels per acre, with an 80 % RP insurance policy, the “threshold” yield for crop insurance indemnity payments is 40 bushels per acre. Remember, with calculating potential corn and soybean crop insurance indemnity payments, every situation is different. In addition to the final harvest price, there are a lot of variables as far as APH yields, coverage levels units, etc., so producers need to consult their crop insurance agent for specific details for their own farm units.

 

Enterprise Units or Optional Units

Producers that have 2013 crop losses on individual farms, and have crop insurance coverage with “optional units”, may be able to collect crop insurance indemnity payments on their 2013 corn or soybean crop on some farm units, while not on others. Meanwhile, producers with crop insurance policies with “enterprise units” in 2013, may be less likely to qualify for 2013 crop insurance indemnity payments, unless they had crop losses on a significant portion of crop acres in a County. Due to the very low corn and soybean yields in some areas, resulting from the delayed Spring planting and the late season drought conditions in 2013, along with the drop in CBOT corn prices in the past couple of months, there are likely to be more producers with “enterprise units” that qualify for crop insurance indemnity payments in 2013, as compared to previous years.

 

CALCULATING  POTENTIAL  2013  CROP  INSURANCE  PAYMENTS  

Some farm operators in Minnesota, Iowa, and surrounding States will be facing reduced yields on some farm units in 2013, due to very late planting, severe storms, and very hot and dry weather late in the growing season. Many growers purchased upgraded levels of Yield Protection (YP) or Revenue Protection (RP) crop insurance for the 2013 growing season, which included the higher “tend-adjusted” (TA) yields that were available. The lower CBOT corn prices will also increase the likelihood of crop insurance indemnity payments on corn RP insurance policies. The higher CBOT soybean prices should result in higher RP harvest prices and higher 2013 crop insurance indemnity payments for producers with qualifying losses with soybean RP policies. Following is an analysis of potential 2013 crop loss scenarios that could result in likely crop insurance indemnity payments with RP policies  :

RP Insurance Policies :

An initial “Price Guarantee” is established for each crop prior to the Crop Insurance enrollment deadline on March 15th each year. The final “Price Guarantee” is determined a harvest time in the Fall. The “Price Guarantees” are based off of Chicago Board of Trade (CBOT) grain futures prices.

 

Following is how Revenue Protection (RP) “Price Guarantees” are calculated :

 

CORN

Base Price is the average settlement price for December CBOT corn futures in February.

Harvest Price for RP policies is the average settlement price for December CBOT corn futures in October during the year of harvest.  

  

         SOYBEANS

Base Price is the average settlement price for November soybean futures in February.

Harvest Price for RP policies is the average settlement price for November CBOT soybean futures in October during the year of harvest.    

 

 

  • 2013 RP Base Prices are :

                                               Corn  ------------  $ 5.65 per bushel

                                               Soybeans  ------   $12.87 per bushel   

 

  • 2013 RP Harvest Prices are :

                             Corn RP Harvest Price -----------  $ 4.39 per bushel

                            (The Corn RP Harvest Price was final after 10-31-13.)

                             Soybean RP Harvest Price (Est.)  ------  $ 12.87 per bushel   

                            (The Soybean RP Harvest Price was final after 10-31-13.)

 

  • The higher of the base price or the harvest price is used to calculate revenue guarantee per acre used to determine crop indemnity payments with RP policies, which will likely be the base price for 2013 corn, and the harvest price in 2013 soybeans. The harvest price is always used to determine the value of the harvested crop for RP insurance policies.
  • RP Crop Loss Example Worksheet  ………

Please refer to adjoining Worksheet for crop loss examples for corn and soybeans, with 80% and 85%  coverage RP crop insurance policies, on either “optional units” or “enterprise units”. The premium estimates are for “enterprise units” with TA yields. The Worksheet also contains space for producers to put in their APH yields, insurance coverage levels, premium costs, projected yield and harvest prices, in order to make estimates for potential 2013 crop insurance payments.

  • The following Tables show the example “threshold” harvest yields where crop insurance indemnity payments would be initiated at various final harvest prices and insurance coverage levels for corn and soybeans.
  •  

CORN  (190 Bu./A. APH; $5.65/Bu. Base Price)

Shows the approximate “threshold” corn yield where crop insurance indemnity payments would be initiated at various insurance coverage and harvest price levels.     

                                                HARVEST  PRICE  (Oct. Ave. of CBOT Dec. Corn Futures)

Crop Insurance Coverage Level

$ 4.60/Bu.

$4.40/Bu.

$4.20/Bu.

75 %

175.0

183.0

191.7

80 %

186.7

195.2

204.5

85 %

198.4

207.4

217.3

 

 

SOYBEANS  (50 Bu./A. APH; $12.87/Bu. Base Price)

Shows the approximate “threshold” soybean yield where crop insurance indemnity payments would be initiated at various insurance coverage and harvest price levels.       

                                               HARVEST  PRICE  (Oct. Ave. of CBOT Nov. Soybean Futures)

Crop Insurance Coverage Level

$ 12.87/Bu. or above

$12.75/Bu.

$12.50/Bu.

75 %

37.5

37.8

38.6

80 %

40.0

40.4

41.2

85 %

42.5

42.9

43.8

 

 

Bottom Line On Calculating Potential Crop Insurance Payments :

Producers that have crop losses in 2013, with potential crop insurance indemnity payments, should properly document yield losses for either “optional units” or “enterprise units”. There will likely be a difference in how 2013 corn and soybean Revenue Protection (RP) policies will function for potential crop insurance indemnity payments, due to the differences in CBOT harvest prices for corn and soybeans. A reputable crop insurance agent is the best source of information to make estimates for potential 2013 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 2013 to understand their crop insurance coverage, and the calculations used to determine crop insurance indemnity payments. The University of Illinois Farm Management web site has some good Crop Insurance information, and an on-line  “What-If” Crop Insurance Payment Calculator. The web site is located at :   http://www.farmdoc.uiuc.edu/

 

 

Deferring 2013 Crop Insurance Payments to 2014

Due to expected higher income levels in 2013, especially for producers that sold a large amount of 2012 grain in 2013, there have been questions regarding the potential for the deferring of 2013 crop insurance payments to 2014 for income tax purposes. Here is a summary from some tax experts :

  • Crop insurance proceeds received in 2013 for crop production losses, but not market price reductions, may qualify to be deferred until 2014, if the farm operator’s normal business practice is to collect 50 percent or more of the crop proceeds in the year after harvest. This must be documented; otherwise, the crop insurance proceeds must be claimed in 2013. 
  • The potential crop insurance deferral is for all crops, and there is not a partial deferral. The 50 percent means test for crop proceeds is for all crops (corn, soybeans, and other crops) in aggregate, even if one crop (soybeans) is normally sold at harvest, and sales from another crop (corn) are usually delayed until the following year.
  • If the crop insurance claim is filed late enough, and the crop insurance proceeds are not received until after 1-01-14, the crop insurance proceeds will be counted as 2014 income.
  • If you delay your crop insurance proceeds until 2014, those proceeds can not be transferred back into 2013 for income tax calculations, and must be counted as 2014 income.

 

Producers that are expecting significant crop insurance payments are encouraged to contact their tax advisor before finalizing any crop insurance payment deferral decisions.

 

 

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Note --- For additional information contact Kent Thiesse, Farm Management Analyst and

              Vice President, MinnStar Bank, Lake Crystal, MN. (Phone --- (507) 381-7960) ; 

            E-mail --- kent.thiesse@minnstarbank.com)  Web Site --- http://www.minnstarbank.com/

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CALCULATING  EST.  2013  RP  CROP  INSURANCE  PAYMENTS                                                                  

 

                                                                   CORN                  SOYBEANS___     

    

                                                                      Sample     Actual             Sample     Actual                           

                                                                        

A.  2013 TA APH Yield                                  190.0        _____               50.0          _____ 

 

B.  RP Policy % Coverage                            .80           _____                 .85           _____

 

C.  Coverage Yield (A x B)                           152.0        _____                 42.50        _____

 

D.  RP Base Price                                         $5.65/Bu.                           $12.87/Bu.

 

E.  Guaranteed Ins. Coverage/Acre           $858.80      _____              $546.98      _____      

          (C x D)

 

F.  RP Harvest Price (Final)                       $4.39/Bu.    _____             $12.87/Bu.  _____

 

G.  Harvest Guarantee/Acre (C x F)         $667.28       _____              $546.98       _____

 

  1. Final Guarantee /Acre                          $858.80       _____              $546.98       _____           

(Higher of E or G)                            

 

            I.  Actual Harvested Yield/Acre                    180          _____                  35             _____

 

            J.  RP Harvest Price (Final)                      $4.39/Bu.     _____              $12.87/Bu.   _____

 

            K.  Crop Value/Acre  (I x J)                      $790.20         _____             $450.45        _____

 

            L.  Gross Insurance Payment/Acre          $  68.60         _____             $  96.53        _____

                     (H – K)

 

            M.  RP Ins. Policy Premium/Acre            $  15.00         _____             $  16.00       _____

                   

  1.           Net Insurance Indemnity               $  53.60         _____             $  80.53        _____

Payment Per Acre  (L – M)    

 

          

           NOTES --- These estimates are for Revenue Protection (RP) insurance policies.

                              Harvest Prices for RP policies are based on the average price during

                              October for December CBOT corn futures, and for November CBOT

                              soybean futures. Harvest prices were final as of 10-31-13.

                              Premium estimates are for “enterprise units” in Southern Minnesota, 

                              using Trend-Adjusted (TA) yield calculations.

 

***  Prepared by Kent Thiesse, Farm Management Analyst  ***