If you’re tired of your farm’s finances getting hammered, you might revisit your approach to crop insurance. Instead of seeing it solely as a safety net, think about it as a tool to manage risk.
Will it cost you more money? Maybe, but it’s no time to skimp, says Michael Langemeier, associate director of Purdue University’s Center for Commercial Agriculture.
“I don’t think crop insurance is one of those areas where you should cut corners,” Langemeier says.
Capital Concerns. Even though production costs are outstripping the expected 2016 revenue guarantee price, Langemeier remains a strong advocate for crop insurance.
“It’s still important to have crop insurance because it helps protect you against these adverse weather years,” he says. In particular, crop insurance provides protection by mitigating any large drop in working capital created by damaging weather.
That’s especially true now because working capital declines could be considerable and happen quickly, according to research by Gary Schnitkey, University of Illinois agricultural economist. In Illinois, where grain producers enjoyed net farm incomes of $100,000 plus in 2014, net farm income this year is forecast at $15,000.
If those numbers give you pause, your banker probably feels the same way. “If you want an operating loan, you’ll need crop insurance,” Langemeier points out.
The good news for farmers wincing at the check they’ll have to write is that the cost to purchase crop insurance coverage should remain relatively flat.
Cover Upside Risk. Additionally, there are ways to turn policies into tools for managing upside risk.
“There are over 30 private insurance products available,” says Jamie Wasemiller of the Wasemiller Insurance Agency, which specializes in crop insurance issues for The Gulke Group in Chicago. “Out of these, there are probably two to three of them that make sense for a person growing corn, soybeans or wheat. They just need to be researched because they are different for every crop and in every state.”
Private products work a little differently than standard government-subsidized crop insurance policies. For example, some rely on alternative price discovery to set the price at which farmers will receive
an indemnity payment.
For example, Wasemiller says, suppose a grower turned to such a policy in 2013. With the spring price guarantee at $5.65 for corn, the grower opted for an alternative price of $6.27. In the fall, the harvest price was $4.39, which would have provided him an indemnity of 41¢ per bushel with a standard multi-peril policy.
The alternative policy, though, paid more than twice that, delivering an indemnity of 94¢ per bushel. Even after the 20¢-per-bushel premium cost, the grower’s indemnity check would have proven significantly larger than with a traditional policy. “The price doesn’t have to fall as far before the insurance kicks in,” Wasemiller says.
Powerful Combination. Such policies also offer farmers the chance to create an integrated strategy, a better way to protect the revenue of uncovered bushels. Yet private products aren’t for everyone.
“If you farm in North Dakota, where you have a bad basis on cash sales, these may be too pricey for you. If you’re well off and you don’t need an operating loan, then it may not be worth using those 20¢ per bushel,” Wasemiller says.