Trimming crop insurance coverage isn’t worth the risk for many producers
This year, farmers can get more federal crop insurance coverage for the same or less money. However, with guarantee levels tied to futures prices, revenue protection (RP) will likely fall below most cost-of-production estimates.
Does that mean crop insurance is one area that can be trimmed as farmers look for ways to cut costs?
"Don’t make that mistake," says Steve Johnson, Iowa State University farm management specialist. There is already more risk for 2014, he says, adding that input costs will lag commodity prices in their movement down, which squeezes margins.
"Farmers insured at 75% with RP last year should consider going up to 80% or 85% levels of coverage," he says, explaining that if your APH for corn is 180 bu. per acre and you’re insured at the 75% level, with 2013’s $5.65 per bushel price level, the per-acre guarantee was $763. This year’s guarantee might be $4.50, which will protect revenues at $608 per acre. That’s $155 less than last year.
Increased coverage helps offset increased risk. Gary Schnitkey, a University of Illinois ag economist agrees. Using a micro example, to get the same coverage in Sangamon County, Ill., the 70% RP option in 2013 must be increased to 80% this year, he explains.
"At 75% and higher coverage levels, 2014 premiums are projected to be between 2% and 5% lower in 2014 compared to 2013," Schnitkey says.
While the above example applies to many, not everyone should crank up coverage, says Erick Schminke, John Deere Insurance Company crop insurance development manager.
"Producers have to cut somewhere," Schminke says. There is not a one-size-fits-all answer, he adds.
But Kansas State University ag economist Art Barnaby says producers will be able to get more coverage for less.
"We’ll see some very good premium rates for 2014," Barnaby says, explaining that lower prices and less volatility drive down premiums.
Decision Day. Final premiums won’t be known until March 3, and final selections must be made by March 15.
Other crop insurance- related decisions to consider include whether you’ll qualify acres as enterprise units or optional units and whether to use trend-adjusted yields.
For most farmers, but not all, enterprise units make the most economic sense. "On our farm, enterprise unit premiums are subsidized at 80%, but optional units are only 65%," Barnaby says.
However, if a producer farms in three counties and risk is much higher on some land than others, optional units might be the better decision, Barnaby acknowledges.
On another note, Johnson says the trend-adjusted yield option is a no-brainer. Farmers can protect a higher level of yield than their 10-year APH and for a small increase in premiums. "You get an extra 8 bu. to 10 bu. per acre on top of your APH and you do not have to do anything," he says.