Despite Low Prices, Most Won’t See Insurance Payments for 2014

September 17, 2014 09:11 AM
Despite Low Prices, Most Won’t See Insurance Payments for 2014

Even at $3 cash corn, most producers who signed up for Revenue Protection (RP) won’t be receiving Federal Crop Insurance indemnity payments for 2014. That’s even though the spring price on which RP guarantees are based—determined by February futures prices—was $4.62/bu., right at $1.40 higher than new crop futures.

The trigger point for RP corn payments with trend yields in northwest Indiana is $3.46 at the 75% coverage level, $3.70/bu. with 80% coverage and $3.93/bu. with 85% coverage, says Michael Langemeier, ag economist at Purdue University. But with producers whose combine hoppers ring up 5% above trend-line yields, corn trigger prices at 75% coverage are $3.30; $3.52 at 80% coverage, while a trigger price of $3.74 at 5% above trend.

Some are likely to even show 10% above trend-line yields this year in Indiana and other states. For such producers, the trigger point for RP payments will be $3.15, $3.36 and $3.57 at 75%, 80% and 85% coverage. Throughout the Corn Belt, most producers have elected 80% and 85% coverage levels.

Misconceptions about Price versus Revenue

Langemeier says that a fair amount of confusion exists about payment triggers because some inaccurately believe that crop insurance RP guarantees a price. It does not, but instead guarantees revenue, with revenue limits between $615 and $697/acre for northwest Indiana. "There are misconceptions," Langemeier says.

In concept, RP has not really changed since it was rolled out in 1997, but questions surface by those not fully understanding the program during times when yields are high but crop prices are low, says Steve Johnson, farm management specialist with Iowa State University Extension. The revenue guarantee is the APH times the higher of the projected or spring price (February average for December corn futures) or harvest price (October average for December corn futures).

By way of an example, assume the APH is 160 bushels/acre and the producer elects 85% coverage. At this year’s $4.62 spring price, guaranteed revenue is $626/acre, "no price guarantees, no yield guarantee but a revenue guarantee," Johnson says. If the insured producer’s yield averages 184 bushels/acre in 2014—well above the APH—that amount times the harvest price of $3.40 equals the $626/acre. "Thus, the producer experiences no shortfall of RP revenue and no indemnity claim for 2014," Johnson says. He adds that for producers choosing yield protection (YP), a loss is only triggered when actual yield is below the APH multiplied by level of coverage.

Final numbers for 2014 won’t be available until November 1 and insured producers harvest their crops and submit final yields to their crop insurance agents. Agents canvassed during last week’s Minnesota Crop Insurance Conference said that while claims are unlikely for most producers in states like Illinois and Indiana where yield records may fall, many producers in Minnesota where yields are projected to be only average this year, could well qualify for RP payments.

Breakevens Drop with Higher Yields

While many producers will not likely see an RP payment, high yields will reduce breakevens substantially. In northwest Indiana with a trend yield of 177, typical breakeven is $4.84; yields 5% above trend reduces total costs to $4.61/bu., Langemeier notes. For those with 10% above trend yields, the breakeven falls to $4.40 or 44 cents per bushel below trend yields. "That’s a revenue increase of $70/acre," he says. "That’s huge, reducing losses by 40%."

On soybeans, the RP spring price is $11.36 with revenue limits of $451 to $511/acre for northwest Indiana. At 75% coverage, the price trigger for trend yield is $8.52; $811 at 5% above trend and $7.75/bu. at 10% above trend. At 80% coverage, the trigger at 80% coverage is $9.09 at trend yield, $8.66 at 5% above trend and $8.26 at 10% above trend. At 85% coverage, the trigger is $9.66 at trend yield, $9.20 at 5% above trend and $8.78/bu. at 10% above trend.

Harvest Price Triggers for Corn in 2014


Chart courtesy of Purdue University.


Harvest Price Triggers for Soybeans in 2014


Chart courtesy of Purdue University.

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