Farm Risk Exposure Grows

Ag's Incredible Shrinking Safety Net

Marcia Zarley Taylor , DTN Executive Editor
Because federal crop insurance adjusts to current commodity prices, coverage for a typical dryland Kansas corn grower could tumble from $678 per acre in 2013 to $448 per acre in 2017, KSU's Allen Featherstone estimates. (Graph courtesy KSU)

HADDONFIELD, N.J. (DTN) -- Farmers know they must weather the lean years to benefit from the occasional fat ones. But erosion in federal crop revenue insurance guarantees since 2013 is compounding the risks for farm operators during this downturn.

"In times like this, we aren't worried about making money. Our goal is to make darn sure we don't lose too much," said Mark Bryant, who raises wheat, corn and soybeans with brother Mike and other family members in Washington Courthouse, Ohio.

Bryant's problem is the crop insurance floor keeps falling with commodity prices, exposing his farm to ever bigger losses. Ohio winter wheat producers, who face a 2017 crop insurance sale closing date of Sept. 30, will be guaranteed only $4.74 per bushel next year, down 45% from the same coverage four years ago.

Winter wheat isn't alone. Back in 2013, a typical non-irrigated Kansas corn grower could guarantee about $678 per acre (thanks to a $5.65 base price and 120 bpa historic yield with 80% coverage.) By 2016, that protection had dipped 32% -- to a base price of $3.86 and $463 per acre coverage, observed Kansas State University economist Allen Featherstone.

Sadly, production costs haven't retreated nearly as far or as fast as prices, leaving farmers to self-insure those revenue gaps.

Based on futures prices in late September, Featherstone expects that same 80% corn coverage to shrink to only $448 per acre coverage with a $3.73 guarantee in his Kansas example. That's an additional $230-per-acre operator risk compared to four years earlier.

Soybeans also have suffered from a similar safety net shrinkage, although they stand to get a small bump upward come spring. Featherstone projects 2017 spring insurance prices at $9.31 for soybeans, down from $12.87 per bushel in 2013 but up from $8.85 per bushel in 2016.

Bryant is exploring private insurance products that will help him boost the floor on coverage. University economists also continue to recommend options like Yield Exclusion (YE), Yield Adjustment (YA) and Trend Adjustment (TA), which may significantly boost a grower's Actual Production History (APH) and ultimately, their revenue per acre.

Land grant university economists have promoted YE as a no-brainer, if a grower is eligible. Essentially, it excludes a yield from a grower's APH if the county or a contiguous county suffers a county yield that is 50% below normal. That's much like ignoring an "F" from your college grade-point average, crop insurance agents say, and can frequently boost insured Midwest corn yields by 10 bpa. The downside is that as APHs increase, so do premiums.

Kansas State University economist Art Barnaby argues farmers can save premium dollars with YE if they focus on revenue per acre. A dryland Kansas wheat farm with 33 bpa history chooses enterprise units, 80% Revenue Protection. He's covered for $121.18 per acre for a premium of $6.89. If this farmer adds YE, his coverage increases to $143.21 per acre.

"This effectively increases the coverage from 80% to 94.5%," Barnaby said, but the premium jumps to $10.76. "Many farmers with tight cash flows may decide it's not worth the extra premium."

Solution: Take YE, but cut coverage from 80% to 70%. This brings the dollar guarantee to $125.31 per acre, but the premium drops to $4.73 per acre, thanks to a more generous premiums subsidy from the Risk Management Agency.

"So does more coverage cost more? No, it costs less," Barnaby noted.

While it sounds too good to be true, that's the kind of strategy that may help risk-averse growers live to farm another day.

"Agriculture has been really good, but it runs in cycles," Bryant said. "I know I'm not going to make money every year. It's about averages over a lifetime. The goal is to manage your risks so you can come out on the other side."

See Barnaby's analysis at http://www.agmanager.info/…

Marcia Taylor can be reached at Marcia.taylor@dtn.com

Follow her on Twitter @MarciaZTaylor

(AG/CZ)