Minding Ag's Business

Crop Insurance Got You Covered?

High crop insurance guarantees (in light green) have helped to cover production costs for corn in recent years, but big spikes in land costs are exposing operators to more risk. In 2013, a typical Indiana farmer needs an insurance guarantee of about $6.30/bushel to breakeven.

 

Not since the 1950s has the U.S. experienced severe drought on the scale of 2012. So even if soil moisture levels begin to recharge, it could take at least 18 months to return to normal in drought afflicted regions, DTN Ag Meteorologist Bryce Anderson told attendees at the DTN-Progressive Farmer Ag Summit earlier this month. No wonder growers in the parched Corn Belt already are keeping a close eye on whether 2013 crop insurance will cover their production costs should severe or extreme drought linger through another growing season.

In early December, it looked like corn's 2013 crop insurance guarantee could average $6.30/bu., based on Dec 2013 futures at the time. If that price held through February 2013, crop insurance guarantees would just cover estimated costs before family living or labor for a typical Indiana farmer, pointed out Erick Schminke, John Deere Insurance Co. He assumed the producer had a 170-bu. yield guarantee for insurance purposes, and a 75% Revenue Protection policy with a trend-adjustment option.

Those calculations used Purdue University estimated costs and returns for a typical corn grower on high productivity soil, but do not include costs for family or hired labor.

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Now that Dec 2013 futures have tumbled about 25 cents/bu., however, growers may need to consider higher levels of insurance to cover their costs. At guarantees of $6 for corn and $12.50 for soybeans, many farms could insure positive incomes by taking 80% or 85% Revenue Protection policies. But as University of Illinois Economist Gary Schnitkey wrote in a recent farmdoc daily post, farms most at risk for low and negative incomes are grain farms that cash rent a large portion of their farmland at above-average rent levels. In many cases, typical cash rents throughout central Illinois now exceed $300 an acre and some top-dollar cash rent auctions bring in excess of $500.

High-rent farms "cannot assure themselves positive incomes in 2013 even if they take high levels of crop insurance," Schnitkey said.

For perspective, crop insurance guaranteed about $766/acre in 2011 when a record spring price hit $6.01. But as input prices and cash rents have escalated, crop insurance isn't always able to keep pace. As one Summit attendee told the crowd, "I don't buy crop insurance to cover my banker. It's net worth insurance--I buy it because it costs so much to put a crop in the ground."

To see Purdue's estimated costs and returns go to http://www.agecon.purdue.edu/…

To see Schnitkey's University of Illinois analysis go to http://farmdocdaily.illinois.edu/…

Read and comment on all DTN Ag Business Benchmarks on the Minding Ag's Business blog.

Follow Marcia Taylor on Twitter@MarciaZTaylor.

(SK/CZ)

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