Buckle up for the ride
Seat belts save lives, which is why about 85% of Americans buckle up. Crop insurance sustains livelihoods during weather calamities and market slumps. Farmers respond by securing roughly 85% of acres with a crop insurance safety net.
In 2014, as it’s been for the past several years, revenue protection (RP) will be the most popular crop insurance option, says Tom Sloma, vice president of crop insurance for Farm Credit Mid-America.
Present-day market dynamics, though, are triggering a fundamental shift to incorporate private products beyond what the Federal Crop Insurance Program has to offer, adds Jamie Wasemiller, a senior market analyst for Gulke Group.
"Every year, new private products are created as an add-on to the MPCI [multi-peril crop insurance] policy," Wasemiller says. "In 2014 and beyond, it would be hard to find an insurance underwriter who does not offer at least one privatized product."
Policy names vary by company, but in general, options include prepricing, multi-price, bushel protection, shallow loss, commercial revenue protection and individual and county insurance products.
Paying a few extra cents per bushel to capture a high instead of being at the mercy of the February average for December 2014 corn would have been worth it for this year’s crop. Farm Journal Economist Bob Utterback explains how a prepricing tool could have affected a farmer’s bottom line: In mid-October 2013, December 2014 corn futures were $4.80. At 187 bu. per acre and 85% RP, that’s $763 per acre. For about 2¢ per bushel, a producer could have secured the October average for December 2014 corn and pocketed 30¢ per bushel more than the average in February.
"An extra 30¢ tacked onto your spring price could have meant the difference between being in the red and in the black," Utterback says.
If we have a summer weather event, there might be an opportunity to lock in a premium for the 2015 market using a prepricing tool for your crop insurance floor. "You have to be thinking eight months ahead and not just focus on old crop, though," Utterback notes.
Federal tools. Although there aren’t extensive changes to the 2014 MPCI plans, Wasemiller points out what’s notable.
- There have been some name changes to the Area Plans of Insurance: Group Risk Plan (GRP) has been changed to Area Yield Protection Plan (AYP), Group Risk Income Protection (GRIP) will now be called Area Revenue Protection Plan with the Harvest Price Exclusion (ARPHPE), and GRIP with Harvest Revenue Option (GRIPHRO) will now be known as Area Revenue Protection (ARP). Current GRP and GRIP policyholders do not have to reapply, as their policy will roll over to a similar ARP insurance plan.
- For 2014, USDA has reduced the 1.5 multiplier to 1.2 on ARP payouts, which will trim payouts only in the worst-case scenarios when an entire county’s yield is zero. For the most part, the change will not affect individual policyholders.
- Area Yield Protection (AYP) and Yield Protection policies will now use the February base price.
- There are changes to cover crop management and crop insurance. USDA has moved from a calendar-date-based requirement to terminate cover crops to a method that depends on the plant date of the cash crop. The new timelines are determined by which one of the four zones a farmer resides.
- In the Upper Midwest, the Risk Management Agency has clarified rules for prevented planting insurance to prevent fraud. To collect, producers have to have planted a crop on the land in question at least once in the previous four years, proving the land can be productive in a "normal weather" year.
Ease the pain. Some farmers might be questioning whether crop insurance is a wise investment this year. "Typically, crop insurance can lock in margins," Sloma says. "That probably will not happen in most cases this year. Farmers will be right at break even or below, which means talking about the right coverage level, maybe bumping it up to get a higher guarantee, and what that would cost is imperative."
The good news is with lower commodity prices, premiums are going to be down a little, Sloma adds. "For the same dollars you spent last year, you might be able to get a little more coverage—maybe not percentage-wise, but it might not equal the dollars per acre it did last year."
Sometimes making decisions is tough, but making no decision is worse. "This is a year to get through with the least amount of pain," Utterback says. "If you walk away from crop insurance, then you’re going to shoulder all of the pain."
It’s time to slide in the driver’s seat and buckle up.
You can e-mail Katie Humphreys at email@example.com.