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Economics of Prevented Planting in Corn

May 26, 2011
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Editor’s Note: The following is an abbreviated version of this article. You can read the entire article on the farm doc daily site.
 

Issued by Gary Schnitkey, University of Illinois Farm Management Specialist

 
Farmers will be able to take prevented planting payments once the “final planting date” is reached in late May or early June.
 
Listen to Schnitkey visit with Univeristy of Illinois Extension’s Todd Gleason on the topic:
 

 
In this article, net returns from taking a prevented planting are compared to expected net returns from planting corn and soybeans. Examples suggest prevented planting have returns competitive with planting corn or soybeans. Hence, farmers could have large incentives to take prevented planting payments once the final planting date has been reached.
 
Number of acres on which prevented planting are taken will depend on 1) weather and 2) expected commodity prices at harvest-time.
 

Net Returns from Prevented Planting

Farmers can take prevented planting payments when:
  1. The final planting date has been reached
  2. The crop has not been planted for insurable reasons
  3. The farmer has purchased one of the plans within the COMBO product (RP, RP with exclusion, or YP).
 
Final planting dates are county specific. Common final planting dates are May25, May 31, or June 5 (See Prevented Planting Provision in Crop Insurance for more details on prevented planting). When considering prevented planting, farmers should consult with crop insurance agents to assure that all requirements are met and to make sure that prevented planting can be taken on the desired number of acres as historical plantings may limit prevented planting acres.
 
Unless prevented planting buy-up coverage has been purchased, prevented planting payments equal 60% of the minimum guarantee for crop insurance. Higher coverage levels have higher prevented planting payments.
 
Net returns from prevented planting are compared to expected net returns from planting corn and soybeans.

 

Considerations Other than Net Returns

Planting either corn or soybeans has more risks than taking the prevented planting payment because expected yields and expected prices are not known. Theory suggests expected net returns from corn and soybeans should exceed net returns from prevented planting to compensate the farmer for bearing risk.
 
If corn is planted, there will be an insurance guarantee; however, the guarantee will decrease by 1% per day for each day after the final planting date, reaching 60% of the original guarantee when 25 days have passed from the final planting date. The decreasing guarantee increases risk the more days after the final planting date.
 
Hence, the lowering guarantee, as well as lowering expected yields, will create more incentives to take prevented planting the later prospective planting takes place.
 

Factors Impacting Number of Prevented Planting Acres

From this point on, prevented planting acres will be impacted by two factors:
  1. Weather. Dry weather in the eastern Corn Belt of upper Midwest would allow farmers to plant corn.
  2. Expectations of harvest-time commodity prices. Higher commodity prices will increase expected returns from planting, leading to more incentives to plant. Hence, increases in Chicago Mercantile Exchange (CME) futures likely would lead to increases in prevented planting and vice versa.
 

Summary

For farmers who have purchased the COMBO product with high coverage levels, taking a prevented planting payment will be a viable alternative compared to planting corn and soybeans. Weather and expected prices will impact the number of prevented planting acres.
 
 
Editor’s Note: The following is an abbreviated version of this article. You can read the entire article on the farm doc daily site.
 

 

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