Trend-Adjusted yield coverage offers added protection
Want more crop income protection for less money? Think TA APH option, in the sometimes mysterious world of crop insurance. It’s short for Trend-Adjusted Actual Production History yields, and for most producers with at least a few years worth of yield history, it’s a good deal, says Steve Johnson, farm management expert with Iowa State University Extension.
In its second year, USDA’s Risk Management Agency has expanded the availability of the TA APH program for corn, soybeans, sorghum, cotton, rice and spring wheat to include more counties nationwide.
You need to move quickly if you haven’t yet made the election: You only have until your federal crop insurance closing date to make changes to your federal crop insurance selections. Non-subsidized insurance options for hail and wind might be added later, however.
"For most producers with at least a few years of yield history, the TA option is a good deal."
On a sample farm using a projected price of $6 per bushel, the numbers tell the story. When dealing with APH and enterprise units, in which losses in all fields are combined in the county, a 175.5 bu. per acre APH yield and an 85% coverage level (149.17 bu. per acre), the guarantee is $895 per acre with a $22.28 per acre premium. With the TA yield option, however, the APH is increased to 194.2 bu. per acre with a boost from a trend yield county factor for each of the past 10 years of corn production.
Reducing the coverage level to 80% results in a guarantee of 155.36 bu. per acre, thus a higher guarantee of $932 per acre, again with a $6 projected price. That’s a $37 per acre larger revenue guarantee than under the APH and enterprise unit calculation. The best news of all is that the premium is $18.78 per acre when you choose the TA APH option, so producers get more coverage for less money.
Outstanding Benefit. "The biggest benefit of insurance is to cover as many bushels as you can," says Jamie Wasemiller, analyst and crop insurance agent with the Gulke Group. "If you purchase the 85% policy and attached the trend adjusted yield, you effectively have 90%-plus of your bushels covered through a subsidized program."
This route greatly reduces the amount of money farmers have to spend finding methods to cover the remaining bushels. "Even if producers purchase the 85% policy along with the TA APH option and hail insurance, etc., most are still going to spend less than 5% of total costs on insurance," Wasemiller says.
Johnson says that the numbers come out differently using optional units for which loss is calculated by section of land. An optional unit classification with an APH of 175.5 bu. per acre, an 85% coverage level (149.17 bu.) and a $6 per bushel projected price results in an $895 per acre guarantee and a premium of $37.60 per acre.
With the TA option, the APH increases to 194.2 bu. per acre. Again, reducing the coverage level to 80% results in a 155.36 bu. per acre guarantee or $932 per acre and a premium just 2¢ per acre more. In other words, producers get a $37 per acre higher guarantee for virtually the same premium with the TA yield option versus the APH and the optional unit coverage.
Should everyone then elect the TA APH option? "With very few exceptions, yes," Johnson says. However, it may not be a good decision for producers with fewer years of APH or several years of significant losses. Johnson suggests that a portion of premium money saved by using the TA option be used to purchase non-subsidized protection for hail on corn and soybean acres and a wind policy on corn acres. This is especially true if you’re using enterprise unit coverage.
The TA APH option also might not work for producers with an average yield increase throughout a 10-year period of only 0.2, while it works well for producers with a 2 factor yield increase, explains Cory Walters, ag economist at the University of Kentucky. "Such cases of only 0.2, however, are very, very rare," he says.
The Tougher Decision. After the first decision to use the revenue protection (RP) product, producers will then likely choose the TA APH option, Johnson says. The tougher decision is whether to use optional units, in which for loss purposes each field in a section is calculated on its own, or enterprise units, using the average of all fields of that crop in a county. Johnson says that for most producers, enterprise units are a better deal because they are subsidized at a higher rate but expose the insured to greater production risks. At an 80% coverage level, enterprise units are subsidized at 68%, but for optional units it’s lower at 48%.
Consider the example in the table above. With an APH of 175.5 bu. per acre and an 80% coverage level, the guarantee is $842 per acre with a premium of $23.60 per acre using the optional unit selection, again with a sample farm and a $6 per bushel projected price. Using enterprise units, numbers remain the same except for the premium, which drops to $10.67 per acre, less than half that of the optional units.
The vast majority of producers, but definitely not all, are much better off making the enterprise unit selection, Johnson says. Those better off using optional units might be those insured with vastly different soil types or drainage patterns that result in different yields.
The only way to know which unit coverage to elect is to run the numbers and understand the increased risk with the premium savings, Johnson says. "The final premiums vary due to the interaction of optional versus enterprise unit subsidies, along with the TA option (versus the APH) at levels of coverage that have different percent subsidies," he says.
Put another, way, farmers have four choices to make: coverage level, whether to elect the TP option, insurance type and unit type, Kentucky ag economist Walters adds. Producers finally must decide whether to use the TA yield option and the optional versus enterprise unit coverage. Those choosing revenue protection, which is to say nearly all, also have to determine whether to choose to keep the harvest price option, and for nearly all if not all, that’s the right decision, Johnson says.
For Most Crops, No Spike in Rates for 2013
Despite the worst drought in decades, crop insurance rates for 2013 (except for spring wheat) will either see little net change overall or drop, says Jamie Wasemiller, market analyst and crop insurance agent with the Gulke Group. Corn, grain sorghum and cotton rates will change little, soybeans will see an overall decrease, spring wheat an overall increase of 4%, while rates on rice will see an 8% decrease, Wasemiller says. "Insurance is an important piece of your marketing plan," he says.