October 3, 2016
2016 CROP INSURANCE PAYMENT POTENTIAL
Even though USDA is projecting record corn and soybean yields on a national basis in 2016, it is possible that a significant number of corn and soybean producers in some areas of Southwest Minnesota, as well as adjoining areas of Iowa and South Dakota, could qualify for crop insurance indemnity payments in 2016. Much of this region dealt with planting delays last Spring, excessive rainfall during the growing season, severe storms, and in some cases a very dry weather pattern in July and early August. This weather combination will likely result in corn and soybean yield reductions on numerous farms across the region.
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. The 2016 crop year will be no different, with some producers choosing Yield Protection (YP) policies (yield only) versus Revenue Protection (RP) policies (yield and price), with producers having differences in the level of coverage, and with some producers choosing “optional units” rather than “enterprise units” for 2016.
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 2016, corn crop insurance loss calculations with YP policies and RP policies will function differently, due to the likely Chicago Board of Trade (CBOT) harvest price for corn being below the 2016 crop insurance base price, which was finalized on March 1, 2016. Soybean crop insurance loss calculations with both YP and RP policies will function similarly in 2016, due to the CBOT harvest price for soybeans likely being higher than the 2016 base price; however, the payment rate will likely be different.
The established base prices for 2016 YP and RP crop insurance policies on March 1, 2016, were $3.86 per bushel for corn and $8.85 per bushel for soybeans This will be the payment rate for 2016 YP policies for corn and soybeans. The $3.86 per bushel will also likely serve as the final price to calculate revenue guarantees for calculating potential RP crop insurance indemnity payments for corn. The final harvest CBOT price for November soybean futures is likely to be higher than $8.86 per bushel, which would then result in the harvest price being used to determine the RP insurance guarantee for 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 the month of October, with prices finalized on November 1, 2016.
If the average 2016 CBOT December corn futures price in October is below the $3.86 per bushel base price for corn, which seems likely at this point, then the initial base price is used to calculate the RP guarantees for corn. Otherwise, the October harvest price would be used. If the average 2016 CBOT November soybean futures price in October is above the $8.85 per bushel base price for soybeans, which also seems likely, then the harvest price is used to calculate the RP guarantees for soybeans. The CBOT average price for October is used to calculate the value of the actual harvested bushels in 2016 for all RP insurance policies. As of September 30, the CBOT futures prices were $3.36 per bushel for December corn and $9.54 per bushel for November soybeans. If the average CBOT prices stay at these levels, the base prices of $3.86 per bushel for corn, and the harvest price of $9.54 per bushel for soybeans, would be used to calculate the RP insurance guarantees for corn and soybeans in 2016.
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 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% coverage would have a yield guarantee of 161.5 bushel per acre, and a revenue guarantee of $623.39 per acre, while a producer with 75% coverage would have a yield guarantee of 142.5 bushels per acre, and a revenue guarantee of $550.05 per acre. If the actual 2016 yield was 175 bushels per acre, with a $3.36 per bushel harvest price, the producer with 85% coverage would receive a gross indemnity payment of $35.39 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 2016 growing season, which included the higher “trend-adjusted” (TA) yields that were available. The lower CBOT corn prices will also increase the likelihood of crop insurance indemnity payments for corn on several Upper Midwestern farms, which have 80 % and 85 % RP insurance policies for 2016. Soybean crop insurance payments will not be as likely with RP insurance policies in 2016, since the soybean CBOT harvest price is likely to be higher than the base price on March 1. Soybean payments will only occur when there is sufficient yield loss; however, the RP payment rate will likely be slightly higher than the payment rate with YP policies.
A large 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, but are offered at a substantially higher premium rate. 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 a variety of land that is spread across a wide area in a county, or when producers have individual farms that are highly susceptible to natural disasters, such as flooding, drought, frost, etc. Producers that paid the extra premium level for optional units in 2016, and are located in areas with reduced corn and soybean yields, could see a substantial financial benefit from that decision with potential 2016 crop insurance indemnity payments.
RP Crop Insurance Payment Example Table ………
Please refer to adjoining Table for 2016 crop loss examples for corn with an 80 % RP coverage insurance policy, and soybeans with 85% RP coverage, utilizing “enterprise units”, and with TA yields selected. The Table also contains space for producers to put in their own APH yields, insurance coverage levels, premium costs, projected yield and harvest prices, in order to make estimates for potential 2016 crop insurance indemnity payments for corn and soybeans.
Bottom Line On Calculating Potential Crop Insurance Payments :
Producers that have crop revenue losses in 2016, with potential crop insurance indemnity payments, should properly document yield losses for either “optional units” or “enterprise units”. A reputable crop insurance agent is the best source of information to make estimates for potential 2016 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 2016 to understand their crop insurance coverage, and the calculations used to determine crop insurance indemnity payments. The University of Illinois FarmDoc web site contains some good crop insurance information and spreadsheets to estimate crop insurance payments. The FarmDoc web site is located at : www.farmdoc.illinois.edu/
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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/