FOCUS ON AG
February 21, 2022
TIME TO FINALIZE 2022 CROP INSURANCE DECISIONS
The deadline to purchase crop insurance for corn and soybeans for the 2022 crop year is March 15. The crop insurance decision in 2022 is a bit more complicated that in recent years. Due to much higher crop input costs for fertilizer, chemicals, seed, repairs, labor, etc., as well as increased cash rental rates in many areas, the cost of production for corn and soybeans is significantly higher than in recent years. This means that crop producers may need to increase their crop insurance coverage to adequately cover the increased cost of production in 2022. Fortunately, the 2022 Spring prices for corn and soybeans will be near the highest levels ever, which should allow ample opportunities for a solid risk management program through Federal Crop Insurance. However, adequate insurance coverage in 2022 will likely require increased insurance premium costs compared to recent years.
The crop insurance Spring base prices for 2022 revenue protection (RP) and yield protection (YP) insurance policies for corn and soybeans will be finalized on March 1. The estimated base prices (as of 2-21-22) were $5.85 per bushel for corn and $14.23 per bushel for soybeans. At current estimated levels, the 2022 base price for corn would be an increase of $1.27 per bushel above the 2021 base price of $4.58 per bushel and $1.97 per bushel above the $3.88 per bushel Spring price in 2020. The 2022 estimated soybean base price is a large increase of $2.36 per bushel above the 2021 Spring price of $11.87 per bushel and is 55 percent above the 2020 Spring price of $9.17 per bushel. The 2022 Spring price for corn would be at the highest level since the highest-ever Spring price of $6.01 per bushel in 2011. If the current soybean base price holds, it would be the highest Spring price ever in modern times, surpassing $13.49 per bushel in 2011.
Choosing crop insurance coverage is one of the more important risk management decisions that producers make each year. Following are some key items to consider when making 2022 crop insurance decisions:
- There are a wide variety of crop insurance policies and coverage levels available.
Make sure you are comparing “apples to apples” when comparing crop insurance premium costs for various options or types of crop insurance policies, as well as recognizing the limitations and the differences of the various insurance products. 2022 crop insurance premiums for most coverage levels of corn and soybeans in the Midwest will be higher than comparable 2021 premium levels, due to the higher crop insurance guarantees available for 2022 and the higher volatility levels.
- View crop insurance decisions from a risk management perspective.
Given the potentially higher profit margins for crop production in 2022, there may be a tendency to reduce their crop insurance coverage. However, a producer must first decide: “How much potential profit margin do I want to risk if there are greatly reduced crop yields due to potential weather problems in 2022, and/or lower than expected crop prices ?”
- Take a good look at the 80% or 85% coverage levels, especially when using “enterprise units”.
In many cases, the 85% coverage level offers considerably more protection, with a modest increase in premium costs. At the current Spring base price estimates, many producers will be able to guarantee from $800 to over $1,000 per acre for corn, and from $550 to over $750 per acre for soybeans, at the 85% coverage level for 2022, depending on the APH yields on the individual farm units.
- Use caution when considering RPE insurance policies to reduce premium costs.
If the “harvest price” (average CBOT price in Oct.) for corn or soybeans is lower than the “base price” (average CBOT price in Feb.), the RP and RPE payment calculations function similarly, and RPE premium costs are slightly less than RP premiums. However, there is considerable added risk in utilizing a RPE policy when the final “harvest price” exceeds the “base price”, which has occurred in recent years.
- “Supplemental Crop Option” (SCO) insurance is a possibility with the PLC farm program choice.
Producers that choose the “price loss coverage” (PLC) farm program option for 2022 have the option to purchase additional county-level SCO crop insurance coverage up to a maximum of 86 percent coverage. The SCO coverage fills the gap up to the 86% coverage level from the coverage level chosen by the producer (75%, 80%, 85%, etc.) for Yield Protection (YP) or Revenue Protection (RP) insurance coverage. For example, a producer that purchases an 80% RP policy could purchase an additional 6% SCO coverage at fairly low premium costs. SCO calculations utilize the same base and harvest prices as traditional crop insurance policies; however, SCO utilizes county average yields rather than farm-level yields.
- The “Enhanced Coverage Option” (ECO) is another insurance option to increase coverage levels.
ECO provides area-based insurance coverage from 86 percent up to 95 percent coverage, allowing producers to choose either 90 or 95 percent coverage. Similar to SCO coverage, ECO utilizes county-level yields; however, unlike SCO, the purchase of ECO coverage is available with selection of either the PLC or ARC-CO farm program choice. Producers can utilize both ECO and SCO together, in addition to their underlying RP or YP insurance policy. For example, a producer could have an 80 percent RP policy, carry SCO coverage from 80 to 86%, and carry ECO coverage from 86 to either 90 or 95 percent. Approximately half of the premium cost is subsidized. It is possible for a producer to collect on an individual RP policy, but not collect on a SCO or ECO policy, or vice versa. Interested producers should check with their crop insurance agent for details on SCO and ECO coverage.
- Evaluate other “buy-up” crop insurance options.
In addition to the government subsidized SCO and ECO county-based insurance products that allow insurance coverage up to 95 percent coverage, there are also “buy-up” private policies using farm-level yields up to 95 percent coverage. Private companies also offer separate wind and hail insurance endorsements. Of course, any of the “buy-up” or “add-on” insurance options add to the total premium cost. Producers need to ask: “What mix of crop insurance products gives me the best risk protection for the premium amount that I am willing to spend for protecting my 2022 crop investment ?”
- Analyze the value of “Optional” versus “Enterprise” crop insurance units.
Many times, producers automatically opt for “enterprise units” due to the lower premium cost per acre for similar coverage. They may not totally understand the difference in coverage between “enterprise units” and “optional units”. It is important to analyze the yield risk on each individual farm unit, when determining if the extra premium for insurance coverage with “optional units” makes sense. If a producer has farm units that are more spread out geographically, with more variation in soil types and drainage, and has greater concerns with yield variability, they may want to consider “optional units” for 2022.
- Where to get more information on 2022 crop insurance alternatives.
A reputable crop insurance agent is the best resource to find out more details of the various coverage plans and to more information regarding 2022 crop insurance decisions. Kent Thiesse, Farm Management Analyst, has written an information sheet titled: “2022 Crop Insurance Decisions”. To receive a free copy of the information sheet, please forward an e-mail to: kent.thiesse@minnstarbank.com.
Following are some very good web sites with crop insurance information:
> USDA Risk Management Agency (RMA): http://www.rma.usda.gov
> University of Illinois FarmDoc: http://www.farmdoc.illinois.edu/cropins
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Note — For additional information contact Kent Thiesse, Farm Management Analyst and Sr. Vice President, MinnStar Bank, Lake Crystal, MN. (Phone — (507) 381-7960)
E-mail — kent.thiesse@minnstarbank.com) Web Site — http://www.minnstarbank.com/