Minding Ag's Business

Prepare for Crop Insurance 'Sticker Shock'

Katie Micik Dehlinger
By  Katie Micik Dehlinger , Farm Business Editor
A new supplemental crop insurance coverage product called the Enhanced Coverage Option (ECO) may add to farmers' premiums, but they also add an additional layer of coverage. (Photo courtesy of Purdue University's Center for Commercial Agriculture)

Between strong crop prices and government payments in 2020, grain farm tallied strong incomes. It was the first time in many years that net returns to land met or exceeded cash rental rates, and that's likely to repeat in 2021, Purdue University ag economist Michael Langemeier said in a recent webinar.

"2021 looks like it's going to be a pretty good year. That increases the importance of developing a marketing plan and thinking about your crop insurance decisions. There's quite a bit to lose," he said.

With more to protect, Langemeier and fellow Purdue ag economist Jim Mintert urge farmers to think carefully about their crop insurance decisions. With guaranteed prices for revenue products set at $4.58 for corn and $11.87 for soybeans -- up about 15% and 25% respectively from last year -- farmers need to be prepared for a bit of "sticker shock" when they make their insurance selections this year.

"Crop insurance premiums are going to be substantially higher this year," Mintert said. "There's really two big factors driving those premiums up. One is the dollars of revenue that you're covering, and as the dollars of coverage goes up, those premiums go up. The second factor is volatility. Prices this year in February were more volatile than they were in February a year ago, so those two factors are driving premiums up."

For more on this year's insurance guarantees, please read "Spring Crop Insurance Guarantees Set at $4.58 for Corn, $11.87 for Soybeans" here: https://www.dtnpf.com/…

Mintert and Langemeier offered some general advice to farmers:

-- Consider what type of unit you buy carefully. Enterprise units, which combine all basic units of one crop in one county together, are usually the least expensive since they're subsidized at about 80%. Optional or basic units cost more but are more likely to pay overtime. They may be a good choice if your farms within a county have substantial variation in yield potential.

-- Let revenue protection be your workhorse. While there are several types of yield protection products, revenue protection protects against decline in prices as well as yields. In recent years, farmers have tended to purchase higher levels of coverage, although it varies regionally. In Indiana, northern parts of the state tend to buy 85%, while farmers in southern regions, where yields are more variable and premiums more expensive, tend to buy 80%.

"Even though premiums are higher this year, we do not recommend that you reduce coverage this year to try and save on premium," Langemeier said. "I think there's enough downside risks this year, and you still want that protection that you get with the coverage level you've been using in the past."

-- Harvest prices matter. Several years ago, the Risk Management Agency changed up the rules around harvest prices. Instead of having to opt-in to have harvest prices considered in coverage, now farmers have to opt-out. Essentially, revenue calculations will be made based on whichever is higher -- the average price during February or the average price during October.

Langemeier says purchasing revenue protection with the harvest price exclusion is not worth the reduced premium. "The projected price versus the harvest price is extremely powerful. If the harvest price increases, you get a higher revenue guarantee as you're protecting those more expensive bushels," he said. When harvest prices are higher, it tends to be by a significant margin.

-- Supplemental products aren't for everyone, but they can be useful. Farmers have two choices, the Supplemental Coverage Option (SCO) and the Enhanced Coverage Option (ECO). ECO is new this year, and provides a very high level of coverage, from your choice of 95% or 90% down to 86%. SCO covers from a farmer's policy level (typically 85% or 80% in the Corn Belt) to 86%. For more details on these two products, please read "New Crop Insurance Option Provides Higher Levels of Coverage" here: https://www.dtnpf.com/…

However, both products pay out based on county-level guarantees, which can make it difficult to really get a firm grasp on what kind of coverage you have. Mintert and Langemeier do not recommend lowering your revenue protection if you are considering purchasing these products.

"It's certainly not a no-brainer on whether it's worth it," Mintert said. "This is something for individual farms to look carefully at to determine if the additional revenue guarantee is worth the additional premium." Please see the illustration accompanying this blog for a comparison of potential premiums based on a hypothetical farm in White County, Indiana.

Farms with yield histories that closely track their county averages may have an easier time evaluating ECO. Langemeier also said that farms that have very tight working capital and can't afford even a small loss may also want to look closely at ECO.

You can view a replay of the webinar here: https://www.youtube.com/…

Katie Dehlinger can be reached at katie.dehlinger@dtn.com

Or you can follow her on Twitter @KatieD_DTN


To comment, please Log In or Join our Community .