Insure for Costs or Profit?

January 27, 2012 08:39 PM
Insure for Costs or Profit?

The answer is different for each producer

Wild weather and lower crop insurance rates for 2012 suggest that some farmers should boost their coverage if they haven’t done so already.

"If the premium is within your budget, you might want to insure for profit rather than just costs," suggests Moe Russell, Farm Journal columnist. "We paid $12 per acre and insured for $600 in 2011," he notes.

In 2011, the futures price USDA used was more than $6 per bushel, and the rates to insure for profitability, rather than costs, was a good deal for many. "This might be another year when you can insure profit," Russell says.

That said, Russell is on the fence over whether to insure for profit or crop production costs because the numbers are different for each farmer, and budgets can vary.

"I insure for the true cost of production, including machinery and land," says Don Swanson, a crop farmer in Ottumwa, Iowa. For corn, he figures that’s about $700 per acre, with a $200 per acre land cost and $100 for machinery. In his area, to go beyond 80% coverage for crops is cost-prohibitive, Swanson says.

Push the pencil. Below are examples of crop insurance decisions for corn and soybean crops this year, based on Russell’s formulas. Plug in your own numbers to check your insured rates for corn and soybeans.

For corn, assume total costs are $800, which includes a $100 per acre profit. Including all costs would mean $700 per acre coverage. Because the crop insurance premium calculation uses the February average of December corn futures, which we’ll assume to be $5.85, you’d need to insure
120 bu. ($700 ÷ $5.85 = 120 bu.). If your actual production history (APH) is 160 bu., you should look at a 75% policy (120 ÷ 160 = 75%).

For soybeans, assume a $550 per acre gross income to cover payments, operating expenses,
living, depreciation and a $100 per acre profit. Subtract the $100 profit and you are left with $450
if your operation is highly leveraged. If you have significant machinery costs, you should insure the full $450. Divide the $450 by an expected $12 February average of November futures. If your APH is 50 bu. per acre, this would require 37.5 bu. or 75% coverage (37.5 ÷ 50 = 75%).

Rates Coming Down

Most states will see a drop in corn and soybean crop insurance rates for 2012, with double-digit drops in much of the Corn Belt. On average, rates should decrease by 7% for corn farmers and 9% for soybean farmers, according to USDA’s Risk Management Agency.

Several states, including Mississippi, Texas, Colorado, the Dakotas and most states in the Northeast, will see a 1% to 7% increase in corn rates. Soybean producers in Mississippi and New Jersey will have a slight jump in soybean rates. The rate increases are primarily due to large-scale damage from 2011’s catastrophic weather.

The good news is expected to continue for the 2013 crop year. This is only the first year of the lower rate phase-in. Next year, new crop insurance rates will also be announced for wheat, cotton, rice, sorghum, potatoes and apples.

The major reason that rates overall for corn and soybeans are dropping is that the loss
experience has significantly improved in recent years. Since 1994, the average loss ratio has been 0.84; prior to that time, the average was 1.43, with hardly a year averaging below 1.0.

"We’re seeing some partial premium changes this year," says Garry Niemeyer, a corn farmer from Auburn, Ill., and president of the National Corn Growers Association. "It will be significant in 2013."

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