By Jamie Wasemiller
By now, producers have determined their crop insurance program and coverage level for the year. Done and done. Now what? Before you get too busy in the field, there are still a few important tasks to tackle.
If you elected the Yield Exclusion Option, follow through. This option gives you a chance to improve your actual production history (APH) and revenue guarantee. Your bad yields can be excluded if your county or a contiguous county yields are below 50% of the average of the previous 10 years.
If the Yield Exclusion Option is selected for a specific crop in a county, all actual yields eligible for the yield exclusion will be automatically removed unless you identify which yields should not be removed by the production reporting date. Most underwriters have programs to compare how APH varies with and without the Yield Exclusion Option. To determine if it’s worth excluding a specific year’s yield, crunch the numbers to see how the revenue guarantee stacks up to the additional premium.
It’s important to look at each APH database because there will be examples when the county yield was bad, but you might have databases with good yields. In such cases, removing those years could lower APH.
Your second to-do item, if you haven’t done so, is to elect Agriculture Risk Coverage (ARC) or Price Loss Coverage (PLC) by March 31. Since the USDA–National Agricultural Statistics Service (NASS) released their 2014 county yields, there has been speculation on what kind of payments producers might receive. The major issue when speculating on NASS yields is the yields are based on their procedures. Meanwhile, ARC payments are based off Farm Service Agency procedures, which are different and likely won’t be published until midsummer. For now, we are left with yield assumptions based off historical manipulation of the data.
When deciphering between ARC and PLC, view each as a true risk management tool. That begins with determining the cash price value that will hurt your operation. For example, if $3 or less corn is your true risk, then PLC is your winner. It is the prudent choice because you will not be subject to receiving only 10% of the benchmark revenue. If prices are that low, it’s probably because yields are good.
For many, choosing PLC could mean foregoing a payment in 2014 and 2015. Again, the best decision could likely be the one that provides the most risk management for your operation. As a general rule of thumb, if your payment is projected to be $30 or less per base acre, consider PLC.
Something else to ponder from a risk management standpoint is who will farm the land for the life of the farm bill. In many cases, land will transfer from parents to children in the next five years. It’s not uncommon for each party to have different risk thresholds. Parental risk might be $3 corn, whereas their children’s risk, due to less capital, is closer to $3.70. In this case, it might be prudent to put the land in ARC because the benefits are based in a shallow loss program.
Crop prices will be updated on March 30, and the next USDA Quarterly Stocks Report and Prospective Planting figures will be released on March 31. If possible, wait and make your ARC or PLC decision until you’ve reviewed all updated information.
Finally, consider private crop insurance products to further manage risk. I know most people are not thinking about 2016, but there will be additional price discovery products available soon that could be used to try to lock in an attractive price for the 2016 insurance spring price. Keep that in mind, especially if yields looks promising or demand wanes.