Crop Insurance — When, What, How, & WhyFebruary 8, 2013
Part 1 of a multi-part series. Read Part 2 to learn more about the difference between yield and revenue protection.
The annual deadline to sign up for Federal Crop Insurance for the following year’s Spring seeded crops such as Corn, Soybeans, Spring Oats and Grain Sorghum, (Referred to as the Sales Closing Date, SCD) usually falls on March 15 of each year. This date is established by the Risk Management Agency, a federal entity that administers and regulates the Crop Insurance program. Other types of crops carry other deadlines. In the case of the above-mentioned Spring seeded crops, this March 15th date is the cut off for 1) purchasing a new policy, 2) adding a new crop for coverage that a farmer has never grown before, or 3) changing the coverage on a currently insured crop. It is also important to remember that a Crop Insurance policy is a continuous policy that renews automatically. If a crop producer does not want his policy to continue, he must cancel his policy by the March 15th deadline.
Crop Insurance is Valuable
All Crop Producers are aware of the high cost of production. Seed cost has increased with the advent of improved hybrids due to the stacking of Genetic Modified Organisms, GMO’s. Seed costs now can vary from $100 to $150 or more per acre. Fertility expense has reached new highs due to energy cost. Also coupled with energy cost are machine and equipment costs. And then land values have skyrocketed which brings the cost to produce an acre of corn in excess of $500 to $600 and soybean costs can easily exceed $400. With this initial investment, few farms can afford less than an average crop.
Weather patterns seem to vary over very short distances and it is not uncommon to see excellent crops literally less than a mile from very poor or marginal crops. Most, if not all crop producers cannot sustain any type of substantial reduction in production for any reason. Crop Insurance is the Risk Management Tool available to mitigate these unplanned and uncontrollable crop production outcomes.
Types of Crop Insurance Plans
There are two basic types of Crop Insurance plans for small grains, wheat and barley, and coarse grains, corn and soybeans. The first type is Yield Protection, (YP). This plan gives protection strictly for a loss due to a low yield on insured acreage. For example, if a grain producer has a guarantee of 100 bushels of corn per acre, and he harvests 80 bushels per acre, then he would receive a payment for 20 bushels per acre, 100-80, at the established price per bushel which is set each spring. So if the price was set at $6 per bushel, he would receive a check for $120 per acre of corn that was insured. If he had 100 acres the check would be $12,000.
The second type is Revenue Protection, (RP). This plan is based on the value of the crop per acre and not on the number of bushels harvested. To begin, the grain producer has a bushel guarantee per acre but because the policy is protecting a dollar value per acre of the crop, that bushel guarantee is multiplied by the established price set in the Spring. For example, if the grain producer has a bushel guarantee of 100 bushels per acre, and the price per bushel is set at $6, then his dollar or revenue guarantee is $600, (100 x $6). This is providing a revenue base for the producer’s operation by insuring that he will receive at least $600 of gross income per acre of insured crop. If the value per bushel of the crop is lower than $6 at harvest time, then it will take more than 100 bushels to make $600 of value. The grain producer then would have a revenue loss even though he may not have a production loss.
We believe that Revenue Protection is the best way to insure your grain crops. It provides security for an aggressive marketing strategy because it provides a way to guarantee bushels or a cash stream to meet and fulfill sales contracts purchased even before the crop would be planted. You can purchase Crop Insurance from an Independent Insurance Agent such as our agency, Ruhl Insurance.
2013 Crop Insurance Outlook
In spite of the widespread drought in the Midwest, Crop Insurance Premium Rates are generally holding steady for the 2013 crop year. Premium rates are calculated on a regional basis and since the Northeast did not see the severe claim activity in 2013 as they did in 2012, premium rates are holding steady in 2013. With that being said, the uncertainty of the weather patterns, the volatility of the grain markets due to global economic conditions and diminished grain reserves creates the potential for the perfect storm in the life of a grain producer.
What does this mean for the 2013 growing season? If there is a bumper crop then we may see commodity prices drop and there could be potential for a large revenue loss. If 2013 delivers less than an average yield as we saw in 2012, then there is potential for yield loss as well as revenue loss. Crop Insurance is the Risk Management Tool that will allow you to manage these unknown factors. If you say we cannot have two bad years in a row, then you are a speculator because you have no guarantee of a definite outcome. For a few dollars an acre, Crop Insurance removes the speculation and creates a floor related to production and revenue for your farm operation. You have taken control of your future!
Disclaimer: Information and claims presented in this content are meant for informative, illustrative purposes and should not be considered legally binding.