MT. JULIET, Tenn. (DTN) -- Crop insurance revenue guarantees are shaping up to be the highest in years, and while that translates into higher premiums, there's a new supplemental option that, while pricey, offers an additional layer of coverage that experts say makes it worth consideration.
In most parts of the Corn Belt, the deadline to purchase crop insurance is March 15. Projected prices for revenue protection (RP) policies, which are used by a majority of corn and soybean farmers, are established by averaging the daily close of the December corn and November soybean contracts throughout February. Those are shaping up to be near $4.50 per bushel for corn and $11.70 for soybeans, the highest since 2015 and 2014 respectively.
That's up from last year's guarantee of $3.88 per bushel for corn and $9.17 per bushel for soybeans.
"So, if you have a 200-bushel APH (actual production history) yield, and last year if you selected 80% coverage, the guaranteed minimum per acre would have been $621. This year, it's going to be $720, almost $100 higher," University of Illinois economist Gary Schnitkey said in a FarmDoc webinar. "And a higher RP policy increases our guarantee. It also increases the premium."
Higher guarantees and higher volatility are why Schnitkey expects crop insurance premiums to nearly double for 2021. While some farmers may consider lowering their coverage levels to reduce the budget impact of the premium, he cautions that doing so also reduces the amount of coverage you'd have in a prevented planting situation or if yields or prices suffered major setbacks. Generally, he recommends sticking with the coverage level you've purchased in the past.
There are two supplemental options to consider, the Supplemental Coverage Option (SCO) and the Enhanced Coverage Option (ECO).
SCO was created in the 2014 farm bill, but many Midwestern farmers couldn't use it until 2019 because one of its requirements is farmers cannot be enrolled in the Agricultural Risk Coverage (ARC) program, which was initially a five-year decision. While SCO is still not widely used -- Schnitkey said only 11% of Illinois' acres carried the coverage in 2020 -- it has been useful.
SCO lets a farmer buy an additional band of coverage from 86% to the coverage level of their policy, which is usually 75%, 80% or 85% in the Corn Belt. Unlike revenue policies that pay based on the farm's yield history, SCO payments are triggered by county yields.
ECO also pays based on county yields, but it covers a higher band, from 86% to your choice of 90% or 95%. Farmers can purchase it regardless of their farm bill program selection, and they don't have to purchase SCO first.
"So, ECO rides on top of the SCO coverage, and SCO rides on top of the RP coverage," Schnitkey said.
Because ECO covers a relatively shallow level of loss, Schnitkey expects it will pay out often. For example, if a farmer chooses the 90% coverage option on corn, he or she will pay about $10.74 per acre in out-of-pocket premium. A historical analysis suggests it will pay out 50% of the time with an average indemnity payment of $22.
The 95% option on corn is expected to trigger payment 67% of the time. The premium is more than double at $28.69, but the average indemnity payment is $58.21.
Schnitkey said ECO doesn't pay out quite as often on soybeans, about 27% of the time with 90% coverage and 50% of the time with 95% coverage.
"I would think about adding ECO before SCO, and here's why. Before you get any payment on SCO, you get the maximum ECO payment," he said.
In the webinar, Schnitkey walks through a number of examples, including side-by-side comparisons of premium prices for RP, SCO and ECO. You can view a replay of the webinar here: https://farmdocdaily.illinois.edu/….
He said ECO and SCO tend to be good choices for farmers that like using options strategies. Since they're based on county yields, they may also be a good choice for farms that tend to strongly reflect their county yields or vice versa. The area component provides a little extra protection against more general economic uncertainties.
Bruce Sherrick, director of the TIAA Center for Farmland Research at the University of Illinois, said that, empirically, area crop insurance products have paid out more often than revenue policies.
"They just don't necessarily pay back in the years where you need coverage," Sherrick said. "I think SCO and ECO have some of those same features in that, even if they pay you back more than they cost, they may not occur in the same years that you have the actual revenue shortfall."
Schnitkey said these supplemental options are not "game changers" and that farmers need to make sure their underlying crop insurance policy and protection levels are adequately suited to their operation. "But they're good. They will provide useful coverage. They're worth considering, and whether you want to, it's largely a matter of costs."
Katie Dehlinger can be reached at firstname.lastname@example.org
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