February 5, 2018
2018 CROP INSURANCE CONSIDERATIONS
During the next few weeks, many farm operators will be finalizing their crop insurance decisions for the 2018 crop year. March 15th is the deadline to purchase crop insurance for the 2018 crop year. Profit margins for crop production this year remain very tight, which makes the 2018 crop insurance decisions even more critical. Producers have several crop insurance policy options to choose from, including yield protection (YP) policies and revenue protection (RP and RPE) policies, as well as other group insurance policy options. There are also decisions with using “enterprise units” versus “optional units”, and whether or not to take advantage of the “trend adjusted” APH yields for 2018.
Yield Protection (YP) insurance policy options provide for “yield only” insurance protection, based on historic actual production history (APH) yields on a given farm unit. YP prices are based on average Chicago Board of Trade (CBOT) prices for December corn futures and November soybean futures during the month of February, similar to revenue insurance products. Producers can purchase YP insurance coverage levels from 50% to 85%, 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 dollars of gross revenue per acre (yield x price). This minimum guarantee is based on yield history (APH) and the average CBOT prices for December corn futures and November soybean futures during the month of February. The RP and RPE insurance policies function essentially in the same manner, except that the guarantees on RPE policies are fixed at the base price level, and are not affected by harvest prices that exceed the base price. The revenue guarantee for RP policies is increased for final insurance calculations, if average CBOT prices during the month of October are higher than the February CBOT prices.
Producers purchase RP and RPE insurance coverage levels from 50% to 85%, and losses are paid if the final crop revenue falls below the revenue guarantee. The final crop revenue is the actual yield on a farm unit times the CBOT December corn futures price and November soybean futures price during the month of October. As of February 5, the 2018 estimated crop prices in the Upper Midwest for YP, RP, and RPE policies were $3.93 per bushel for corn and $10.02 per bushel for soybeans, which are very similar to the 2017 base prices. The 2018 base prices will be finalized on March 1.
Most corn and soybean producers have utilized RP policies in recent years; however, in many years the RPE policies can offer similar protection at a lower premium cost. If the “harvest price” (average CBOT price in Oct.) for December corn futures or November soybean futures is lower than the “base price” (average CBOT price in Feb.), the RP and RPE payment calculations function similarly, and RPE policies will likely result at higher net indemnity payment at similar insurance coverage levels. However, it is important to recognize the added risk of utilizing a RPE policy when the final “harvest price” exceeds the “base price” in years when farm units have a yield loss that exceeds the insurance coverage level, such as occurred with the 2012 drought in some areas. This scenario could result in significantly less insurance indemnity payments with RPE policies, as compared to RP policies.
Many producers in the Upper Midwest have been able to significantly enhance their insurance protection in recent years by utilizing 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 dropped from crop insurance 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. For information on which counties, crops, and years are eligible for YE, go the RMA web site at: http://www.rma.usda.gov/
Given the tight profit margins for crop production in 2018, some producers may have a tendency to reduce their crop insurance coverage, in order to save a few dollars per acre in 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 2018, and/or lower than expected crop prices?” RP or RPE crop insurance policies serve as an excellent risk management tool for these situations, and 2018 may not be the year to reduce insurance coverage. Many producers will be able to guarantee near $550.00 to $650.00 per acre for corn, and near $350.00 to $450.00 per acre for soybeans at the 85% coverage level in 2018, especially when also utilizing trend-adjusted APH yields.
A reputable crop insurance agent is the best source of information to find out more details of the various coverage plans, to learn more about the TA-APH yield endorsement, to get premium quotes, and to help finalize 2018 crop insurance decisions. Following are also some very good web sites with crop insurance information:
> University of Illinois FarmDoc : http://www.farmdoc.illinois.edu/cropins/index.as
> USDA Risk Management Agency (RMA) : http://www.rma.usda.gov/
Note — For additional information contact Kent Thiesse, Farm Management Analyst and Senior
Vice President, MinnStar Bank, Lake Crystal, MN. (Phone — (507) 381-7960);
E-mail — email@example.com)