March Madness

February 25, 2014 06:00 PM
March Madness

It's the 11th hour and time to finalize federal crop insurance elections

The witching hour for federal crop insurance decisions is fast approaching. Producers have until Monday, March 17, to make selections on coverage for 2014 crops. It’s not a decision that could really be made until now because of the absence of critical numbers for final premium rates. So it’s March madness for crop insurance with a lot at stake.

The best news for 2014 crop insurance is that most Midwest producers will see premiums drop for corn and soybeans due to less price volatility and as much as $200-per-acre less coverage because of lower prices.

In 2009, the projected corn price was $4.04 per bushel, but volatility was 37%. Corn volatility for the December contract was running 18% in early February, compared to 20% a year ago. Meanwhile, soybean volatility on the November contract was 14%—the lowest since 1996, says Art Barnaby, a Kansas State University ag economist.

"That means rate price cuts on revenue protection (RP)," he says. "The real bargain this year is with soybeans. If soybean volatility were a more normal 20%, many Iowa soybean premiums would be more than 40% higher. If volatility were the 30% that we had prior to 2012, many Iowa premiums would be more than 140% higher for the same lower coverage provided in 2014."

TA Option

Many farmers should increase coverage levels, and in most cases, they’ll be able to increase from 75% to 80% or even 85% for the same money as last year, Barnaby says.

Because corn prices fell more rapidly than soybeans by early February, it appeared that corn guarantees would drop more than soybeans compared with 2013, notes Michael Langemeier, a Purdue University ag economist. If that leaves you with a tough choice, he says to consider purchasing higher levels of corn coverage while holding soybean levels.

It’s critical to think beyond subsidy levels alone. The highest subsidy levels are for 65% and 70% coverage. At these coverage levels, the subsidy is 80% for enterprise units (EU), but the subsidy for corn coverage declines to 68% for 80% coverage and 53% for 85% coverage, says Steven Johnson, an Iowa State University farm management specialist.

For those electing optional units (OU) instead of EU, premiums are subsidized at the following levels:

  • 59% at 65% and 70% coverage,
  • 55% at 75% coverage,
  • 48% at 80% coverage,
  • 38% at 85% coverage.

USDA’s Risk Management Agency (RMA) structures the subsidies this way to try to steer farmers toward EU because it believes there is less fraud, Barnaby says.

However, Johnson cautions farmers not to make their coverage decision based entirely on the subsidy level.

With the drop in crop prices, farmers need more insurance to get coverage at 2013 levels. Farmers would be wise to avoid moving to a lower coverage level to save money, Johnson says, noting that they should also consider hail and wind/green snap when using EU, as well as selling some insurance bushels in the spring, when price spikes are most likely.

Additional spot coverage will vary by region. Barnaby says in Illinois it might cost $1 per $100 of coverage, $2.50 to $3 per $100 of coverage in Iowa, but $10.55 in western Kansas.

For the vast majority of producers, the best deal is to use EU and Trend-Adjusted Actual Production History yields, more commonly known as the TA Option. "Farmers should take it 99.5% of the time," says Johnson.

He explains that EU with an actual average production history (APH) of 167.3 bu. per acre at 85% coverage with guarantees of $640 per acre and a projected price of $4.50 results in a premium $11.94 per acre.

However, using the TA Option, the APH increases to 189.3 bu. because of trend yield adjustments. So the producer in this example can reduce coverage to 80% but still enrich the per-acre guarantee by $40 to $680 and for less money—$8.48 per acre. The only farmers who should not take the TA Option are those with less than four years of APH data or poor yield history, Johnson says.

Revenue Protection (RP) has an additional premium discount because of lower volatility, especially on soybeans. In the Corn Belt, low volatility has a bigger impact on premiums than the projected price.

Looking to future farm policy debates, farmers should not lose sight of the fact that federal crop insurance "has a big bull’s-eye on it" by those opposed to farm subsidies, says Roger Bernard, a policy analyst with Informa Economics. Payments and subsidies will be under fire from farm program opponents, he says.

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