Using Revenue Protection As a Marketing Aid01/12/2017
In a time of tight margins, crop insurance is one farming tool that isn’t changing much for 2017. Premium costs may drop slightly, experts believe. The crop values you can insure aren’t likely to differ much from 2016, either. Yet, some argue that many producers still aren’t using the most popular type of insurance—Revenue Protection (RP)—to its full advantage as a marketing aid.
One change will affect a few producers. Last fall, USDA’s Risk Management Agency lowered coverage for prevented planting for corn from 60% of your insurance guarantee to 55%, which drew criticism from the North Dakota Corn Growers Association in a state where wet weather has led to prevented planting claims.
One of the most important facets of crop insurance hasn’t changed, at least under the current farm bill.
“The key to crop insurance is inside Revenue Protection. The next farm bill debate will likely be around the subsidy that farmers receive and whether they should pay more for this harvest price option (RP),” says Steve Johnson, Extension farm management specialist with Iowa State University. “After 16 years, it still offers that ability to preharvest market above that projected price each spring, since the revenue guarantee uses the higher of the projected or harvest price.”
Each year, the insurable value of new-crop corn and soybeans is set at the end of February, based on new-crop futures average prices during the month. Most years, that provides reasonable protection since prices usually fall by harvest. But before several versions of Revenue Protection came along, if farmers forward-contracted corn at, say, $2 a bushel and a nationwide drought raised prices to $4, they could be stuck having to buy replacement bushels at that higher price to deliver to the elevator. Now, Revenue Protection resets the insurable value of your crop if new-crop futures are higher in October than they were in February. That indemnity payment makes it easy to cover a shortfall of delivery bushels.
Johnson argues that Revenue Protection allows you to sell more of your crop in the spring, when prices usually hit the high point for the year, with less risk than you’d have without Revenue Protection.
“Just don’t sell more bushels for delivery than your APH [actual production history] times your level of coverage,” he says.
The highest level of coverage for Revenue Protection is 85%.
That’s how much of his 2016 corn crop Jeff Bruene sold from one of his farms last spring, after insuring it at the 85% coverage level.
“This last year was the first time I got up to 85% of the corn sold on one farm,” say Bruene, who farms with his wife, Cheryl, near Gladbrook, Iowa.
With multiple sales early in the year, he averaged $3.89 a bushel cash price for corn from that farm. That’s well above the range of $3.05 to $3.65 that USDA has projected for the 2016 crop.
“You’ve just got to take advantage of that stuff, now. You can’t just sit and wait,” Bruene says. With low commodity prices, “I never pushed the envelope like I did last year,” he says.
Bruene and his wife attend a marketing club organized by Steve Johnson and the Grundy County Extension office. It’s there that he’s gotten ideas to help refine his marketing and learn to combine it with the Revenue Protection crop insurance offers. “Farmers need to take advantage of this stuff. Extension is your friend – not your foe,” Bruene says. (For more ISU Extension marketing resources, visit http://tinyurl.com/iacrops.)
Johnson offers this review of how the revenue guarantee works for corn under Revenue Protection.
Let’s say your farm has a 200-bushel-per-acre actual production history (APH) and you buy 80% coverage. That means you’ve got 160 bushels an acre insured. If corn futures price average is $4 in February, your revenue guarantee is $640 an acre (160 x $4).
If widespread drought hits the corn crop in 2017, perhaps the futures price average rises to $6 a bushel next October. Then the guarantee rises to $960 an acre. If your farm is in a pocket of good weather and your yield is your 200-bushel average, then your revenue to count would be $1,200, above the guarantee. “As long as you have revenue to count above your revenue guarantee, you don’t get paid from insurance,” Johnson says. If your yield is lower, say 100 bushels an acre, your revenue would be $600 and your indemnity claim would be about $360 an acre minus the premium.
Johnson says some farmers worry that if they sell early and a drought hits, they won’t be able to find corn or soybeans to buy in order for delivery on contracts – even if the Revenue Protection pays for it.
“I know of no farmers who actually had to buy any bushels in the drought of 2012,” he says. Most all elevators and processors allowed farmers to buy out of their contracts for a small fee that was more than covered by their indemnity claim.
There’s always a chance of selling too soon and missing out on a rally, which Bruene feels he did last year with his soybeans – although exceptional yields offset his lower selling price. Bruene is now looking into another way to protect against part of such a rally, by purchasing out-of-the-money call options in the futures market. He also started to sell part of his 2017 soybean crop last fall, when new-crop bean futures were above $10.
Where will premiums land?
Before the final premiums were set by USDA’s Risk Management Agency, University of Illinois economist Gary Schnitkey projected that premiums might be slightly lower for corn and soybeans in 2017, if prices and futures volatility stayed the same as in 2016.
“For corn, premiums for DeKalb and McLean Counties [in Illinois] are slightly lower in 2017 than in 2016. For example, the 85% premium for corn in DeKalb County is $13.44 per acre in 2016, while the 2017 premium is 3.4% lower at $12.98 per acre,” Schnitkey wrote on the University’s Farmdoc website. He also expected about a 3% drop in soybean premiums.
Of course, prices might not be exactly the same, so premiums could rise, he points out. “Increasing the projected price for soybeans from $8.85 to $10.30 (the current level of November futures contract) would increase the 2017 RP 85% premium in DeKalb County from $9.06 per acre to $10.24 per acre,” Schnitkey estimates.
Another crop insurance expert, Kansas State University economist Art Barnaby, also expects similar premiums for the 2017 corn and soybeans.
“I’ll bet we’ll be pretty close to what 2016 was, in terms of insurance cost and coverage, too,” says Barnaby.
The futures prices in February are only part of the calculation of the premium farmers pay for insurance. The other part is the insurance rate, which is tied to volatility in futures prices for each crop. Barnaby says last year’s volatility number was near historic lows for corn and he doesn’t expect it to go up much this year.
Shortly after February futures prices and volatility are known, the University of Illinois will put those numbers into its online crop insurance premium calculator.
You’ll be able to check crop insurance premiums for major corn- and soybean-producing counties in the Corn Belt, Great Plains, and eastern states. Buying the highest 85% level of coverage isn’t always cheap, and premiums nearly double when going from 80% to 85%, due to smaller USDA subsidies at the highest level. In DeKalb County, Illinois, 80% coverage for corn costs about $6 per acre, while 85% coverage is nearly $13, according to Schnitkey’s estimates. In counties with lower APH and higher risk, those levels of coverage can bring sticker shock. Saline County in southern Illinois has an APH of 133 bushels, with 80% coverage running at about $24 per acre; 85% coverage runs nearly $42 per acre.
In Agriculture.com’s discussion groups, some farmers have posted a desire to skip crop insurance and self-insure.
Schnitkey considers that a high-risk way to lower production costs. Barnaby agrees, adding, “If you’re going to drop your crop insurance, you’d better run it by your banker, who may not agree.”