Yield Exclusion Can Boost Your APH01/19/2016
If you farm in a region that’s been hammered by years of drought – or maybe too much rain – you already know that your actual production history (APH) has been falling. Because the APH is used to set the insurable value of your crop, this problem has made crop insurance a less useful risk-management tool for some producers.
Now, due to the 2014 Farm Bill, you may be able to toss out at least one year in the 4- to 10-year average of yields used to calculate your APH. You just can’t pick a year you don’t like. It has to be one when the average yield for that crop in your county was less than 50% of the 10-year county average. If you have a 10-year APH and your county’s yields were below average in one of those years, you can toss out your yield from that low year and calculate your APH by dividing the remaining years’ total by nine. If the county had two bad years, you can toss out your own two bad yields and divide the sum of the rest by 8. The effect of this is to raise your APH.
“This is the biggest improvement to crop insurance as far as I’m concerned since we added the harvest price (to revenue coverage) in 1996,” says Art Barnaby, a Kansas State University economist who played a role in creating revenue coverage but had little to do with this latest change.
“From a farmer perspective, I don’t see any reason why this yield exclusion wouldn’t be used,” he says.
Barnaby sees the biggest benefit going to farmers in the Great Plains. Your crop insurance agent will know if your county has any eligible years. You can also visit USDA’s Risk Management Agency website and look for maps. One shows a large chunk of counties eligible for dryland corn yield exclusion in Ohio, Indiana, Illinois, and most of the southern and western border counties of Iowa. All of Kansas and most of Nebraska and the Dakotas can exclude at least one year from the APH.
Barnaby says some farmers who have looked at the effect of raising APH complain about sticker shock at the higher premiums that come with a bigger APH. Barnaby says the yield exclusion can save premium costs if you use it to drop to a lower percentage coverage level.
This simplified example shows how it can work:
Your farm has a 140-bushel-per-acre APH for corn. Multiply that by a $4-per-bushel insurable value (which is set every February based on average new-crop futures) and by 75% for the coverage level. That gives you a revenue guarantee of $420 per acre.
Now, suppose that tossing out one bad year from your APH raises it to 150 bushels. You could lower your coverage level to 70%. Multiply 150 by $4 by that 70%, and you get the same $420-per-acre guarantee. It will cost you less, however, because the USDA subsidy for your premium goes up as the coverage level drops. (The exact savings varies by county and coverage level.)
“You don’t want to pay attention to the percentage coverage level any more. It’s the dollar guarantee that matters,” Barnaby says.
The yield exclusion is flexible and user-friendly, Barnaby believes. You can opt in this year and opt out for 2017. You could use the exclusion for just one year in your county, even if it has more than one year with yields below 50% of average. Maybe in one of those years the county had low yields from drought, but you lucked out with a timely shower. You could keep your average from that year in your APH. Your crop insurance agent can help you make comparisons.