Crop Insurance Monitor: Stretch Your Risk Comfort Zone

 
Crop Insurance Monitor: Stretch Your Risk Comfort Zone
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By Jamie Wasemiller

When it comes to crop insurance, the majority of the country has been a bit spoiled in recent years. In addition to covering their cost of production, many farmers have been able to lock in a profit all before putting a seed in the ground. 

This won’t be the case for 2015 as revenue guarantee levels are much closer to breakeven levels—and, in some cases, below breakeven due to a drop in the spring price for insurance. Rather than waving the crop insurance white flag and lowering coverage levels in an effort to cut premium costs, this could be the year to stretch your comfort zone.

Continue to maintain higher levels of insurance coverage. One school of thought is to manage downside price risk using futures and options. If you compare the cost of insurance versus options, in many cases, it is less expensive per bushel to buy insurance. Crop insurance also provides bushel protection while options do not. There is still a chance if production is hindered on a large scale, or if demand for grain exceeds expectations, prices could be higher in the fall and the insurance revenue guarantees could be readjusted higher. This provides some upside price protection as well. 

The value of futures and options depends more on production on the national and global scale. It couldn’t care less about the individual farmer and whether he produces a crop or not. Case in point was 2014. The October averages for corn and soybeans came in low due to production, but there were still many who had insurance claims based on production alone. As a risk management analyst, I encourage futures and options because crop insurance does have shortfalls. Rather than being a one-man band, insurance and marketing should join forces and create a powerful symphony.

Hail insurance has added new options within bundle packages that provide additional weather related coverages at affordable prices. While the spring and early summer weather outlook is favorable, there is concern of heat and inclement weather starting in July and remaining through the end of the growing season. Weather insurance options vary by geography, but along with prevent plant and improved replant coverages, these tools should be considered.

In addition to traditional methods, a flood of Risk Management Association-approved private insurance products offer the opportunity to lock in higher revenue guarantees, which could help fill the large risk gap that remains in 2015 with regular insurance. This can be done in various ways, such as increasing the futures prices used as their spring price or letting the producer protect up to 120% of their actual production history (APH). Others provide the ability to use the enterprise unit discount through regular insurance while also giving optional unit coverage on specific farms and letting the producer have individual and county coverage at the same time.   

Even when private products seem similar at face value, there can be significant variations. Due diligence is key, especially in regard to research and availability. 

In a year with tighter margins, crop insurance and private products are usually money well-spent because the tools have the potential to be one of the biggest risk management decisions of the year.  

Risk is certainly top of mind in years when production could be the primary factor between a profitable and non-profitable operation. Sometimes, the quick reaction is to lower crop insurance coverage levels. Don’t do it. Instead stretch your comfort zone, use the tools available and make this a successful year.  

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