2019 Crop Insurance Decisions
During the next few weeks, many farm operators will be finalizing their crop insurance decisions for the 2019 crop year. March 15th is the deadline to purchase crop insurance for the 2019 crop year. Profit margins for crop production this year remain very tight, which makes the 2019 crop insurance decisions even more critical. Producers have several crop insurance policy options to choose from, including yield protection (YP) policies and revenue protection (RP and RPE) policies, as well as other group insurance policy options. There are also decisions with using “enterprise units” versus “optional units”, and whether or not to take advantage of the “trend adjusted” APH yields for 2019.
Yield Protection (YP) insurance policy options provide for “yield only” insurance protection, based on historic actual production history (APH) yields on a given farm unit. YP prices are based on average Chicago Board of Trade (CBOT) prices for December corn futures and November soybean futures during the month of February, similar to revenue insurance products. Producers can purchase YP insurance coverage levels from 50% to 85%, and losses are paid if actual corn or soybean yields on a farm unit fall below the yield guarantees.
Revenue protection (RP) and revenue protection with harvest price exclusion (RPE) insurance policy options provide a guaranteed minimum dollars of gross revenue per acre (yield x price). This minimum guarantee is based on yield history (APH) and the average CBOT prices for December corn futures and November soybean futures during the month of February. The RP and RPE insurance policies function essentially in the same manner, except that the guarantees on RPE policies are fixed at the base price level and are not affected by harvest prices that exceed the base price. The revenue guarantee for RP policies is increased for final insurance calculations, if average CBOT prices during the month of October are higher than the February CBOT prices.
Producers purchase RP and RPE insurance coverage levels from 50% to 85%, and losses are paid if the final crop revenue falls below the revenue guarantee. The final crop revenue is the actual yield on a farm unit times the CBOT December corn futures price and November soybean futures price during the month of October. As of February 1, the 2019 estimated crop insurance base prices in the Upper Midwest for YP, RP, and RPE policies were estimated at $4.02 per bushel for corn and $9.57 per bushel for soybeans. The current 2019 base price estimates are slightly higher for corn and about $.60 per bushel lower for soybeans, as compared to the 2018 base prices. The 2019 base prices will be finalized on March 1.
Most corn and soybean producers have utilized RP policies in recent years; however, in many years the RPE policies can offer similar protection at a lower premium cost. If the “harvest price” (average CBOT price in Oct.) for December corn futures or November soybean futures is lower than the “base price” (average CBOT price in Feb.), the RP and RPE payment calculations function similarly, and RPE policies will likely result at higher net indemnity payment at similar insurance coverage levels. However, it is important to recognize the added risk of utilizing a RPE policy when the final “harvest price” exceeds the “base price” in years when farm units have a yield loss that exceeds the insurance coverage level, such as occurred with the 2012 drought in many areas. This scenario could result in significantly less insurance indemnity payments with RPE policies, as compared to RP policies, and could add significantly more risk to a farming operation.
A historical analysis for the past twelve years (2007-2018) shows that the final crop insurance harvest price for corn has been lower than the Spring base price in nine of the twelve years (75%), including the past six years (2013-2018). The only years that saw an increase in the harvest price were 2010, 2011 and 2012. The range has been from an increase in the harvest price of +$1.82 per bushel in 2012 to a decline of ($1.27) per bushel in 2008 and ($1.26) per bushel in 2013. For soybeans, the harvest price has increased in five years (2007,2009, 2010, 2012 and 2016), decreased in six years (2008, 2011, 2014, 2015, 2017 and 2018) and stayed the same in 2013. The range has been from an increase of +$2.84 per bushel in 2012 to a decline of ($3.00) per bushel in 2008.
Many producers in the Upper Midwest have been able to significantly enhance their insurance protection in recent years by utilizing the trend-adjusted yield (TA-APH) endorsement, with only slightly higher premium costs. The APH yield exclusion (YE) option allows specific years with low production to be dropped from crop insurance APH yield guarantee calculations. Several counties in Central and Northern Minnesota are eligible for YE for corn and soybeans in some of the past ten years. For information on which counties, crops, and years are eligible for YE, go the RMA web site.
Given the tight profit margins for crop production in 2019, some producers may have a tendency to reduce their crop insurance coverage, in order to save a few dollars per acre in premium costs. However, a producer must first ask the question: “How much financial risk can I handle if there are greatly reduced crop yields due to potential weather problems in 2019, and/or lower than expected crop prices?” Many producers in Southern Minnesota and Northern Iowa that had greatly reduced corn and soybean yields in 2018 found out the importance of having solid crop insurance coverage as a risk management tool.
RP crop insurance policies serve as an excellent risk management tool for these situations, because these policies not only provide yield protection regardless of price changes from Spring to harvest, but also provide protection for declines in crop prices during the growing season. At current Spring price levels, many producers will be able to guarantee near $550.00 to $700.00 per acre for corn, and near $375.00 to $475.00 per acre for soybeans at the 85% coverage level in 2019, especially when also utilizing trend-adjusted APH yields. Many private crop insurance companies also offer “buy-up’ options that could enhance crop insurance coverage even further. 2019 may not be the year to reduce crop insurance coverage as part of an overall risk management plan for a farm operation.
A reputable crop insurance agent is the best source of information to find out more details of the various coverage plans, to learn more about the TA-APH yield endorsement, to get premium quotes, and to help finalize 2019 crop insurance decisions. It is also a good idea for farm operators to discuss their crop insurance options with their ag lender before finalizing their decisions. Kent Thiesse has written an information sheet titled: “2019 Crop Insurance Decisions”. To receive a free copy of this information sheet, please forward an e-mail to: [email protected]. Following are some web sites with very good crop insurance information: