Minding Ag's Business

Secrets Your Crop Insurance Agent Should Share

By Marcia Zarley Taylor , DTN Executive Editor
Only a fraction of the acres eligible to "forgive and forget" extremely low yields chose the option in 2015. But of those who did, cotton growers raised their APH 22% and corn growers 7%.

Because spring crop insurance guaranteed prices have tumbled much faster than input costs this season, even those who buy the highest level of Revenue Protection policies by the March 15 closing date may feel underinsured in the event of a loss in 2016. For example, with a $3.86/bu. crop insurance guarantee on corn, it might not be unusual for Illinois growers to see guarantees per acre falling $150/acre or more short of their expenses (See "Play Crop Insurance Defense" on the home page or Farm Business page.)

So when price fails, the pressure is on to make sure your 10-year Actual Production History (APH) is as close to your yield potential as possible.

Unfortunately, many growers may be unaware of tools that could boost insurance coverage without much extra cost.

One of the most under used benefits in 2015 was APH-Yield Exclusion, according to Risk Management Agency Administrator Brandon Willis.

Originally designed to help Texans whose 10-year Actual Production History had been decimated by repeat droughts, the YE tool actually benefits a number of crops outside the Great Plains. For example:

--100% of the grain sorghum acres were eligible for YE last year, but only 17% participated (see table). Those who did were able to boost their APH by 12%, Willis says (seetable).

--About 66% of the nation's corn acres were also eligible, but only 17% selected YE. Those who did bumped their APH by about 7%.

--Cotton growers who participated actually lifted APHs by 22%, yet only 23% of eligible cotton acres participated.

FORGIVE AND FORGET

YE excludes your personal yields from the APH average in years when your county, or a contiguous one, suffered county yields at least 50% below average. For example, dryland cotton in parts of New Mexico, Texas and Oklahoma could erase at least 5 disaster years from the books in 2015.

As one crop insurance agent told me, imagine how your college Grade Point Average would have improved if you could "forget" the one or two Fs in your report card. When Iowa farmer Ray Gaesser excluded his 124 bpa from the 2012 drought, his 187 bu. APH jumped by 10 bu. Iowans hadn't seen that kind of response to an APH booster since the release of Trend-Adjusted yields (a factor that adjusts for average increase in yields over time, thanks to better technology).

YE was such a good deal for those pummeled by repeat drought, "every cotton policy in West Texas should have it," says Mississippi State University economist Keith Coble.

University of Illinois economist Gary Schnitkey agrees. "YE is exactly like Trend-Adjusted Yields," he says. "There's seldom a reason not to take it."

TIME WILL TELL

RMA's Willis takes low 2015 YE participation rates "with a grain of salt." Because it was so new, it's possible not all agents or producers understood the benefits. He believes growers could have hiked their APH even higher than the 7%-22% mentioned here, but says they might have been discouraged by higher premiums.

Now that 50 crops will be eligible for YE protection in 2016--up from 11 crops in the debut 2015 year--it's certainly worth asking your agent if it works for you.

If cost is a concern, consider dropping a coverage level (say from 80% to 75%), both Coble and University of Illinois economist Gary Schnitkey recommend. In some instances, you may get the same revenue protection per acre with the adjusted APH as you did at the 80% unadjusted rate.

Given the high-risk year ahead, Coble and Schnitkey advise operators to ask their insurance agents several questions before the March 15 insurance deadline:

1. What about enterprise units? Because the government subsidizes so much of the cost relative of optional units (53%-80% depending on your coverage level), it can help you afford the recommended high coverage levels of 75% and above.

2. Will Trend-Adjusted Yields let you insure similar dollars-per-acre but at a lower coverage level?

3. How much will the APH-Yield Exclusion raise your APH?

4. What is the premium for different coverage levels?

5. What about separate coverage levels by irrigated and non-irrigated practices?

6. If you think the risk of higher prices this harvest is small, how much could you save by dropping the Harvest Price adjustment? That's risky in drought years like 2012, especially if you forward price much crop. This year, maybe not so much.

Cotton closing dates have passed, but cotton growers may also want to discuss county-indexed insurance offered by the new Stacked Income Protection Plan (STAX) for next season. It's a heavily subsidized add-on policy that reduces deductibles to as small as 10%. What's different is that it is based on an index of county yields, not your actual farm results. However, in a study of representative farms in 145 major cotton producing counties, some STAX would have been optimal in all 145 cases, Coble says. The average increase in risk-adjusted returns was $9.15/acre, with a range of $3.79 to $19.07/acre.

Willis believes a flurry of farm program and crop insurance changes may have overwhelmed the farm community in 2015. Participation in both area-wide programs--STAX and the Supplemental Coverage Option (SCO)--failed to meet expectations. Growers may have found the coverage too expensive, or preferred to buy individual coverage rather than insure based on an index of county yields. YE may have been more attractive.

Area coverage is so different, it may take a while for growers to familiarize themselves with the concept, Willis says. "As they see results, it will give them time to react and draw conclusions."

"History tells us it takes 2-4 years for these new programs to catch on," Willis adds.

In the meantime, make sure your agent has the answers.

For more background information on your best crop insurance buys, go to http://farmdocdaily.illinois.edu/… and search for crop insurance under categories.

For a discussion of Trend Adjustment, Yield Exclusion and Yield Adjustment go to

http://farmdocdaily.illinois.edu/…

Follow Marcia Taylor on Twitter @MarciaZTaylor

Comments

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Lewis Flohr 3/24/2016 | 9:49 AM CDT
YE is NOT the answer for everyone especially if one is in a county that is NOT allowed YE. The RMA should make it avaliable to everyone, not just a select few.
Mr. Brandy 3/17/2016 | 8:35 PM CDT
AMEN Pedro. If you are a farmer and have not been presented the above information, then you should find a new agent. LIKE ME:) Just kiddin. No, really.
Pedro Sanchez 3/14/2016 | 8:35 AM CDT
I can't imagine that your insurance agent hasn't went through this information with you already. And if you haven't had this conversation with your agent already (and in past years) you need to find a better agent that is looking out for you and not his own pocketbook. My agent and I go through this every year to make sure I am protected properly at reasonable expense.