Crop insurance decisions must be made
During the next few weeks, many farm operators will be finalizing their crop insurance decisions for this crop year.
March 15 is the deadline to purchase crop insurance for 2019.
Profit margins for crop production this year remain very tight, which makes 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 2019.
Yield protection 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 prices for December corn futures and November soybean futures during February, similar to revenue insurance products. Producers can purchase YP insurance coverage levels from 50 percent to 85 percent, 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 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 October are higher than the February CBOT prices.
Producers purchase RP and RPE insurance coverage levels from 50 percent to 85 percent, 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 multiplied by the CBOT December corn futures price and November soybean futures price during October.
As of Feb. 1, the estimated crop insurance base prices in the Upper Midwest for YP, RP and RPE policies were estimated at $4.02 per bushel for corn and $9.57 per bushel for soybeans. The current 2019 base price estimates are slightly higher for corn and about 60 cents per bushel lower for soybeans, as compared to the 2018 base prices. The 2019 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 October) for December corn futures or November soybean futures is lower than the base price (average CBOT price in February), 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 many areas. This scenario could result in significantly less insurance indemnity payments with RPE policies, as compared to RP policies, and could add significantly more risk to a farming operation.
Given the tight profit margins for crop production in 2019, 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 2019, and/or lower than expected crop prices?” Many producers in southern Minnesota and northern Iowa that had greatly reduced corn and soybean yields in 2018 learned the importance of having solid crop insurance coverage as a risk management tool.