Crop insurance guarantees for 2016 won't offer much financial comfort, if preliminary prices for the first week of February are any indicator. Unless that scenario changes radically in the next few weeks, expect repercussions on how much operating credit lenders are willing to finance for the most stretched operations.
For about 80% of the country, federal crop insurance sets planting guarantees based on the monthly average of Dec corn and Nov soybean futures during the month of February. Spring wheat is calculated on the September contract average at Minneapolis.
Through February 5, those preliminary averages put corn at $3.92, soybeans at $8.90 and spring wheat at $5.18. That would be the lowest guarantee for corn since 2006's $2.59 spring price. It would also expose farmers (and their lenders) to more revenue risk than they've seen in recent history.In 2011, corn's spring price hit $6.01.
"At current levels, crop insurance will not guarantee revenue sufficient to cover variable costs plus land rents," point out Purdue economists Brent Gloy and David Widmar in a recent post (see full article at http://goo.gl/…). Add fixed costs and the tab would look even worse.
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Purdue's estimated variable costs for Indiana corn run $417/acre plus fixed costs and rent of $480/acre, for a total cost of $897/acre. In fact, Gloy and Widmar estimate that an Indiana operator with a 200-bu APH yield guarantee would generate only $627/acre corn revenue guarantees at 80% insurance coverage this year. Bottomline, the operator's crop insurance payout would fall short by $270/acre in the event of a worst-case scenario.
The obvious problem is that production costs--including cash rent--have not collapsed anywhere near as fast as the market prices that determine insurance coverage.
It's one reason why so much success in 2016 rides on (1)higher than average yields (2)cost controls (3)nimble marketing and (4)making sure you remain eligible for government payments.
While it's too early to bet the farm on 2015 ARC-County payments (due in October), others anticipate some payouts. Lenders in states like Ohio expect maximum 2015 Agriculture Risk Coverage-County(ARC-CO) payment rates of $60-$80/acre on corn and $40-$55/acre on soybeans at this stage. That would definitely fill some of the cash gap this fall, but is no sure thing: In 2014, ARC payments were extremely variable, with some counties hitting over $100/acre on corn and adjoining counties collecting nothing.
"ARC and PLC payments are tricky. Payments from these programs alone are unlikely to push producers into profitability," Widmar says.
With crop insurance guarantees running about half of what they did three or four years ago, insurance levels "are not where we'd hoped they'd be," Farm Credit Services Mid-America's Jason Alexander, vice president of crop insurance, told me a few weeks ago. He thinks growers will need to examine what kind of loss they could stomach. In some cases, that might mean raising crop insurance coverage a notch or two, even if it hikes premiums.
Editor's Note: DTN subscribers can find a daily running average of February futures prices used to set crop insurance guarantees in the Ag News section.
Follow Marcia Taylor on Twitter@MarciaZTaylor
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