Ag Policy Blog

Should You Consider Margin Protection Insurance?

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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Crop insurance decisions across most of the Corn Belt are normally made in March just as farmers are preparing to plant, and after the February price determination.

However, USDA's Risk Management Agency shook things up a bit this year with approval of its Margin Protection insurance. It's a new product available for corn, soybeans and spring wheat for the 2018 crop. The deadline for buying the insurance is Sept. 30.

Margin Protection was designed to help cover the spread between expected revenue and inputs. The margin formula comes from the expected county yield multiplied by the projected county price. The margin projected price is the average settlement price of the December 2018 CME contract from Aug. 15 to Sept. 14. It settled at $3.97 for corn and $9.66 for soybeans The expected yield is set by RMA for every county.

The expected cost is based on a formula of input cost expected to generate that county yield. The inputs factors are a little different for each crop, but inputs for corn would include: diesel, urea, diammonium phosphate (DAP), potash and interest. The soybean inputs does not include urea.

Coverage levels are offered from a range of 70% to 95%.

Margin Protection is comparable to Area Risk Protection, (ARP) but Margin Protection has a coverage level up to 95%. Like ARP, Margin Protection is a county plan. And while Margin Protection is meant to be a complement to a Revenue Protection plan, farmers have to buy Margin Protection months in advance with a Sept. 30 deadline.

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Margin Protection also comes with a harvest-price option and without.

Gary Schnitkey, an agricultural economics professor at the University of Illinois, wrote about Margin Protection last week on farmdocdaily. https://www.rma.usda.gov/…

Schnitkey then followed up with Ohio State agricultural economist Carl Zulauf to look at how Margin Protection works with a Revenue Protection policy. http://farmdocdaily.illinois.edu/…

The pair noted that adding Margin Protection has some risk management benefits. The tradeoff is relatively high premium costs for adding Margin Protection.

Coverage for corn and soybeans is allowed in Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin.

For spring wheat, Margin Protection is offered in Minnesota, Montana, North Dakota and South Dakota.

Rice also has Margin Protection, which is allowed in Arkansas, California, Louisiana, Mississippi, Missouri and Texas. The closing dates for rice are in January and February of next year, depending on the state.

One downside with the policy is time. Farmers would buy it right now and not potentially collect until spring 2019. That's because the harvest yield is the county yield. The 2018 county yields are not released until spring. So an indemnity payment for a Margin Protection with the harvest price option would not happen until after those harvest yields are released. This is another similarity to ARP.

Schnitkey said Margin Protection with the harvest price option will have some benefits for certain farmers, especially those that already buy ARP. ARP policies were added to about 1.24 million acres of corn this year and 1.16 million acres of soybeans.

The challenge, though, is whether farmers have time now to engage on insurance options for 2018 when they are just working to get the 2017 crop out of the ground.

Both Schnitkey and RMA have detailed equations and examples highlighting expected margin, and margin losses based on coverage levels.

RMA Q&A on Margin Protection https://www.rma.usda.gov/…

Chris Clayton can be reached at Chris.Clayton@dtn.com

Follow him on Twitter @ChrisClaytonDTN

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