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RSS By: Chris Barron

Chris BarronHave a margins question? Through this blog, you will gain insight into improving your bottom line, as a margins expert answers questions and provides farm business advice.

 

Protect your Crop Investment

Mar 11, 2011

 

High prices and extreme volatility is the common theme in crop production today. Crop insurance is the single expense item which can protect a high percentage of your costs of production. With 3% to 6% investment many growers can protect almost 100% of their production risk. Every situation is unique but just looking at a premium cost for a decision on which level of coverage to purchase is only one part of the decision equation. The value of this year’s crop in many cases for corn could range between $800 and $1000 per acre. This crop has the value of a new Cadillac rather than a used Buick. Would you insure the value of your car differently if it were a new Cadillac versus a used Buick? Risk management decisions need to take into consideration the value of what you are protecting. Think about what you're protecting and spend some time understanding the crop insurance that you’re purchasing.
Calculate your cost of production and compare the gap between your cost per acre and your minimum revenue guarantee. If the gap is small or within your ability to tolerate risk your coverage is adequate. On the other hand, if the gap is too wide there are several options to consider.
Let's say the gap is too wide for your comfort but to go from 75% to 80% coverage your premium increases by $10 per acre. You may think that the extra $10 investment in the premium isn't worth the expense. Rather than just looking at the cost side be sure to understand the value that the additional $10 of investment may return. For example if the $10 gives you an additional $50 of coverage you need to look at the bottom line of what an additional $40 per acre of net coverage will return in the event of a loss. If an additional $40 per acre of coverage narrows the gap or possibly eliminates the gap the additional $10 of investment would be easily worth it.
 Here is a list of items that both the agent and the producer should discuss and mutually understand.
1.       The producers cost of production
2.       Producers APH “actual production history”
3.       The dollar gap between cost of production and proposed insurance coverage
4.       The producer’s debt load and capacity to tolerate risk
5.       The producers comfort level of production risk (Can I sleep at night with this coverage?)
6.       Enterprise units versus Basic or Optional units   (Is the cost savings worth it?)
7.       Insured bushels  - safe to price ahead of harvest - at each coverage level
8.       Understand what your specific coverage would be for a specific loss scenario calculation.
 For example, what would your coverage be if your corn crop yield came in at 130 bushel per ac.
 
 
Here is an example of a Crop Insurance Calculator that I use to measure risk management decision-making.
 
 
 

             Insurance      Calculator
 800 Acres of Corn…..
 
% Cost
Insurance Cost / Acre
35.00
5.0%
Insurance Coverage
35.00
Per / Acre Price
Insurance Coverage
$28,000.00
Total Price
Insurance Coverage
$893.99
Per / Acre
% Level Of Coverage
85%
 
APH
175
 
Spring Price $$
$6.01
 
Min. Rev. Guarantee
$893.99
 
             Bushels Of Risk Coverage
Total Bushel
Bushels
Bushels
Guarantee
Per/ Acre
% Of Total
119,000.00
148.75
82.6%
119,000.00
Bushels Safe to Forward Price
$715,190.00
Total Final Guarantee $$
$0.00
Per/Ac. Insurance Indemnity
$0.00
Total Insurance Indemnity

 
Cost of production Information for above considerations :( 800 Acres Corn priced at $5.09 and 180/BPA)

Economic Results
 180 bu/ac. CORN
Farm Totals
 
Expenses
 
$571,040.00
Cost / Total
Per Acre
 
$713.80
Cost / Acre
Per Bushel
 
$3.97
Cost of Production /Bu
 
 
Total Income
 
$732,960.00
Income / Total
Per Acre
 
$916.20
Income / Acre
per Bushel
 
$5.09
Income / Bu.
                                       Income after Insurance Indemnity
 
Gross Profit
$161,920.00
$161,920.00
Profit / Total
Per Acre
 
$202.40
Profit / Acre
Per Bushel
 
$1.12
Profit / Bu.

 
 
Here is a scenario example with the exact numbers as used above changing the yield from 180 to 130.
Example:  800 Acres of corn priced at $5.09 - 130 BPA - in a Loss Situation.

Economic Results
130 bu./ac. CORN 
Farm Totals
 
Expenses
 
$550,640.00
Cost / Total
Per Acre
 
$688.30
Cost / Acre
Per Bushel
 
$5.29
Cost of Production /Bu
 
 
Total Income
 
$533,520.00
Income / Total
Per Acre
 
$666.90
Income / Acre
per Bushel
 
$5.13
Income / Bu.
                                       Income after Insurance Indemnity
 
Gross Profit
$73,030.00
($17,120.00)
Profit / Total
Per Acre
 
($21.40)
Profit / Acre
Per Bushel
 
($0.16)
Profit / Bu.
             Bushels Of Risk Coverage
 
Total Bushel
Bushels
Bushels
 
Guarantee
Per/ Acre
% Of Total
 
119,000.00
148.75
114.4%
 
119,000.00
Bushels Safe to Forward Price
 
$715,190.00
Total Final Guarantee $$
 
$112.69
Per/Ac. Insurance Indemnity
 
$90,150.00
Total Insurance Indemnity
 

 
Using a spreadsheet to calculate these scenarios is the most effective way to analyze different situations. If you have questions on tools to calculate these different scenarios accurately send me your questions.
Volatility in agriculture creates numerous challenges. By studying and managing your risk you can take advantage of opportunities. Risk management is an individual decision. What is a good crop insurance plan for one could be inadequate for another. Determining the level of coverage that best suits your specific situation takes a great deal of effort and time. Commitment to understanding your crop insurance plan will help you be a more successful margin manager.

 

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