MT. JULIET, Tenn. (DTN) -- Prepare for sticker shock when you talk to your crop insurance agent this year.
Spring crop insurance guarantees set new records for soybeans and wheat for the 2022 season, and corn guarantees are the highest since 2011. The corn projected price is $5.90 per bushel, while soybeans are $14.33 per bushel and spring wheat $9.19 per bushel. You can read more on those here: https://www.dtnpf.com/….
Those projected prices are one of the top components in how crop insurance is priced. Higher prices mean stronger coverage, but it also carries a higher premium.
"If you keep the same level of coverage you had last year, you're going to have a really high level of revenue guarantee because of two things. One is the projected prices that are either record high or near record highs. Even in 2011, when we had that record corn projected price, we didn't have these high APHs (actual production history)," said Steve Johnson, a retired Iowa State University Extension farm management field specialist.
In 2012, USDA's Risk Management Agency began using a trend-adjusted actual production history (APH) in calculations to make sure insurance coverage levels kept up with the improvement in yield potential from advanced crop genetics. Several consecutive years of strong yields will also contribute to higher APH yields for many farms.
Another key component to premium calculations is market volatility. Volatility is about even with last year, but is higher than historical averages, a reflection of global market uncertainty surrounding the war between Russia and Ukraine, drought in South America and ongoing supply chain disruptions.
Travis Johnson, a marketing representative for Rain & Hail out of Bismarck, North Dakota, told DTN at the National Farmers Union annual meeting in Denver that premiums are likely to be one-third higher than last year.
Iowa State's Steve Johnson said farmers should think carefully about how their crop insurance decisions fit in their risk management strategy. There are some changes farmers can make to lower their premiums, but it's important to know how those decisions would affect their coverage and the risk involved.
He suggests farmers start by evaluating their unit structure. Enterprise units, which combine all acres of a particular crop in one county, get a higher government subsidy, which makes them cheaper than optional or basic units. Optional units allow a farmer to purchase insurance field by field, while basic units help allocate insurance in crop share rental situations. The larger area involved in enterprise units generally means yields are less variable, making it less likely that an average yield falls enough to trigger a payment.
Next, farmers should assess their level of coverage. Revenue protection policies are the most popular among corn and soybean farmers, who often choose 75%, 80% or 85% coverage. Buying a lower coverage level means that if there's a significant yield loss or price change, the indemnity will be smaller.
If a farmer lowers his coverage level but also purchases a supplemental insurance policy, it could result in a lower premium, but it also changes how indemnities are calculated. The Supplemental Coverage Option and Enhanced Coverage Option are subsidized add-on policies. Unlike revenue protection policies, which are calculated based on a farm's yield history, these products use county averages. The Supplemental Coverage Option allows a farmer to buy up from their revenue protection policy to 86%, while the Enhanced Coverage Option covers a band from 86% to a farmer's choice of 90% or 95%. For more on the differences between these products, see: https://www.dtnpf.com/….
"There's no right answer, but there is a sweet spot," Steve Johnson said, adding that farmers he's worked with see an advantage to add-on products.
Travis Johnson said the Supplemental Coverage Option and Enhanced Coverage Option's higher protection levels mean they're more likely to trigger indemnity payments if there's a county-wide disaster or steep drop in prices.
"The way we are pitching this to our producers is, if you feel prices will drop come this fall, then those are products that you certainly should be looking at," Travis Johnson told DTN. "Or if you feel that you don't have adequate moisture going into the planting season to sustain a county yield base."
Steve Johnson said it's important to work with your crop insurance agent to analyze what choices make the most sense for your farm. Most farmers have until March 15 to make their elections.
"The other side of all of this is the importance of pre-harvest marketing," he said. If prices are lower at harvest time, it could trigger an indemnity even without a yield loss, but farmers would still have left money on the table by not selling bushels for higher prices ahead of time.
DTN Lead Analyst Todd Hultman said this year's high crop insurance guarantees establish a pretty good floor for farmers' marketing, and it largely negates the benefits of a put option, a common early marketing strategy, for now. "But that could change if prices spike even higher later in the year; there could be an opportunity to enhance crop insurance coverage with put options."
Hultman said it's easy to be paralyzed by uncertainty about the markets, especially when fear of what might happen is a main driver. DTN's Six Factors Strategies uses a combination of factors when making selling recommendations, and Hultman said one of those factors will be key to success this year.
"If we are going to successfully navigate prices in 2022, I'm convinced we will need to have more respect for the price trends of the market, even when they don't start with the strongest fundamental evidence," Hultman wrote in last week's Todd's Take column. You can read the entire column here: https://www.dtnpf.com/….
DTN Ag Policy Editor Chris Clayton contributed to the reporting of this article.
Katie Dehlinger can be reached at firstname.lastname@example.org
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