FOCUS ON AG
November 9, 2020
LIMITED CROP INSURANCE PAYMENTS IN 2020
Since September 1, there has been some noticeable improvement in both the Chicago Board of Trade (CBOT) and local corn and soybean prices in the Midwest. The price improvement has certainly been welcomed by producers that were facing crop prices that were well below breakeven levels as recently as August of this year. Producers that had crop losses in 2020 are now wondering what impact, if any, this rise in crop prices may have on potential crop insurance payments in 2020. For many other farm operators in the Upper Midwest, the above average corn and soybean yields in 2020 will eliminate any potential crop insurance payments.
Crop producers in Central Iowa and surrounding States which were impacted by the derecho storm in mid-August are likely to have final 2020 corn and soybean yields that are well below their crop insurance actual production history (APH) crop yields. Some other areas of the Upper Midwest that had yield reductions due to excessive rainfall and severe storms during the growing season, as well as drought late in the growing season, may have also had yield reductions on some farms. Any of these areas could potentially realize some 2020 crop insurance indemnity payments, due to reduced crop yields this year. A yield reduction below APH yields will be necessary in order to receive any 2020 crop insurance payments, due to the final corn and soybean harvest price being higher than the Spring base price for both crops.
The final 2020 crop insurance harvest prices were $3.99 per bushel for corn and $10.55 per bushel for soybeans, which were finalized by the USDA Risk Management Agency (RMA) on November 1. The crop insurance harvest prices are based on the average CBOT price for December corn futures November soybean futures, during the month of October. The harvest prices will be used to calculate the value of the 2020 harvested crops for all Revenue Protection (RP) crop insurance policies, as well as to determine the revenue guarantee for the RP corn and soybean soybean policies that include harvest price protection.
The established base (Spring) prices for 2020 RP and Yield Protection (YP) crop insurance policies were $3.88 per bushel for corn and $9.17 per bushel for soybeans. The base price will be used to calculate and crop insurance indemnity payments on farms insured by a YP policy in 2020, as well to determine the revenue guarantee for corn and soybeans that were insured by a RP policy that did not include the harvest price option. For corn and soybean RP policies with the harvest price option, the higher harvest price will be used for RP crop insurance calculations.
The level of crop insurance coverage will be a big factor in determining the amount of insurance indemnity payment that is received for crop revenue reductions, with most producers having 75%, 80%, or 85% RP insurance coverage on their 2020 corn and soybeans. For example, a producer with a soybean APH yield of 60 bushels per acre, carrying a 75% RP insurance policy in 2020, would have a revenue guarantee of $412.65 per acre without harvest price protection, and $474.75 with harvest price protection. By comparison, a producer with the same APH yield and harvest price protection with an 80% RP policy, would have a 2020 revenue guarantee of $506.40 per acre, and a producer with an 85% RP policy with harvest price protection would have a revenue guarantee of $538.05 per acre.
If the actual farm yield for 2020 is 45 bushels per acre, which could be common on some farms in the areas that were impacted by the excessive rainfall and severe storms, the producer with a 75% RP policy with the harvest price option would not receive a 2020 crop insurance indemnity payment for soybean revenue losses. By comparison, the producer with an 80% RP policy in 2020 would receive a gross indemnity payment of $31.65 per acre, and the producer with an 85% RP policy would receive a gross indemnity payment of $63.30 per acre.
RP policies with harvest price protection will function similarly to a yield only (YP) policy, with payments based on yield reductions; however, the insurance indemnity payments will be based on the harvest price for the RP policies. For example, a producer with a 200 bushel per acre APH corn yield would have either YP or RP insurance payments initiated below 170 bushels per acre with an 85% RP policy. The insurance payments would be initiated below 160 bushels per acre with an 80% RP policy and below 150 bushels per acre with a 75% RP policy. The difference would be that the YP insurance indemnity payments would be calculated at the 2020 crop insurance base corn price of $3.88 per bushel, while the payments for the RP policy with the harvest price option would be calculated at the 2020 corn harvest price of $3.99 per bushel.
Producers that chose not pay the extra premium to include the harvest price option on their 2020 RP policy will receive less crop insurance indemnity payments for the same yield loss. For example, a producer with a corn APH yield of 200 bushels per acre that had an 85% RP policy with harvest price protection would have a revenue guarantee of $678.30. If that same producer did not have the harvest price protection the revenue guarantee drops to $659.60. If the actual corn yield is 160 bushels per acre, the final crop value would be $638.40 (160 bu./a x $3.99/bu.). The gross crop insurance indemnity payment would be $39.90 per acre with the 85% RP policy with the harvest price protection versus $21.20 per acre on the policy without the harvest price option.
The difference between carrying the harvest price option and not having harvest price protection for soybeans in 2020 on a RP crop insurance policy is even more dramatic. For example, a producer with a soybean APH yield of 60 bushels per acre that had an 85% RP policy with harvest price protection would have a revenue guarantee of $538.05. If that same producer did not have the harvest price protection the revenue guarantee drops to $467.67. If the actual soybean yield is 40 bushels per acre, the final crop value would be $422.00 (40 bu./a x $10.55/bu.). The gross crop insurance indemnity payment would be $116.05 per acre with the 85% RP policy with the harvest price protection versus only $45.67 per acre on the policy without the harvest price option.
Farm operators in areas with some yield losses that chose “optional units” for their 2020 crop insurance coverage, rather than “enterprise units”, will likely be in a more favorable position to collect indemnity payments on this year’s crop losses. “Enterprise units” combine all acres of a crop in a given county into one crop insurance unit, as compared to “optional units”, which allow producers to insure crops separately in each township section. In recent years, a high percentage of crop producers have opted for “enterprise units”, due to substantially lower crop insurance premium levels. Crop losses in many areas in 2020 were highly variable from farm-to-farm within the same county and township, which would favor the “optional units”.
Producers that had crop yield losses in 2020, with the potential crop insurance indemnity payments, should properly document yield losses, regardless of their type or level of insurance coverage. It is also important for producers that did not have crop losses in 2020 to understand the dynamics of the various insurance options when making crop insurance decisions in future years. A reputable crop insurance agent is the best source of information to make estimates for potential 2020 crop insurance indemnity payments and to find out about documentation requirements for crop insurance losses, as well as to evaluate future crop insurance options.
Details on various crop insurance policies can be found on the USDA Risk Management Agency (RMA) website at: https://www.rma.usda.gov/. There is also some good crop insurance information and spreadsheets to estimate crop insurance payments available on the University of Illinois FarmDoc web site, which is located at: http://www.farmdoc.uiuc.edu/
Note — For additional information contact Kent Thiesse, Farm Management Analyst and Senior
Vice President, MinnStar Bank, Lake Crystal, MN. (Phone — (507) 381-7960);