Thursday, February 17, 2011
Crop Insurance: Strategies For 2011
Ask yourself a couple questions. How much money will you have invested in producing the 2011 crop? What will be the value of an average crop? Now, if you are investing $400 to put in the crop and $350 for cash rent, how will that $750 be covered, if LaNina hangs around this summer and your yield will not produce enough revenue to cover production costs? Yes, it is time to think about protecting your investment with crop insurance.
You can sign up at any time before March 15, which is the deadline. If you want to know the exact price guarantees for the harvest price options, the USDA will announce those about March 4th, since they depend on the price action of fall delivery contracts during the month of February. If you generally know what you are going to sign up for, contact your crop insurance agent now, and the sooner the better. Policies have changed since last year, and many of your old faithful have new names and new provisions.
If you are uncertain what you want to do, let’s listen to the webinar of University of Illinois farm management specialist Gary Schnitkey. He makes several up front suggestions:
1) Purchase the 80% or 85% coverage of revenue protection, or the 90% GRIP coverage with the harvest option. Your costs of production will be high, and Schnitkey says breakeven prices will be in the $4 range. With high premium costs for crop insurance, based on $6+ for corn and $14+ for beans, high coverage levels can be locked in to protect the potential market prices. Schnitkey says there does not appear to be negative returns in the offing, and it is unusual to be able to lock in profit at all price and profit levels. Another reason for high coverage levels is the availability of SURE, the disaster program. He says 2011 is setting up similar to 2008 when there were high SURE payments, and to get a SURE payment, high coverage of crop insurance is required.
2) Consider the use of enterprise units because premiums are lower for them, due to higher subsidies than optional and basic units. And Schnitkey says even higher levels of enterprise units can be obtained, and still spend less on premiums than optional or basic units. They combine all of one crop in a county, and if fields do not vary too much, enterprise units are best.
3) Consider the harvest price election because of the possibility that harvest prices may be better than spring prices.
4) Price 25% of your expected production by May. Revenue protection without the harvest price option is OK if you do not sell more than 25% of your crop prior to harvest. He is not saying prices will fall, but it is just a good risk management practice. Schnitkey’s reason for using the harvest price option is that in years when the harvest price is higher than the base price, the percentage of increase is more than in years when the harvest price is lower than the base price. The years when prices climbed from spring into fall were all years with weather-related yield declines. GRIP without the harvest price option is OK, but you have to realize you are giving up very large payments in a drought year.
5) Sign up for ACRE by June 1, if you have not already done so, since he thinks 2011 payments may be higher than usual. ACRE is not a substitute for crop insurance, and crop insurance helps the farm trigger level. ACRE also provides protection against declines across years. Considering the season average prices that will go into the calculation of an ACRE payment in 2011 point to a higher chance for ACRE payments.
Schnitkey offers a package of assistance for crop insurance decisions for 2011, including a premium calculator, a payment simulator, and a decision tool .
Summary:
The decision for making crop insurance decisions is just under a month away, and for anyone who has not taken crop insurance before, or if it has been a number of years, then learning the new packages will take some extra learning time. Even producers who had crop insurance last year will find changes that have been made. Many decision aids are offered, with the recommendation that farmers sign up for ACRE for 2011 if they have not already done so, along with selecting some of the higher levels of coverage being part of your 2011 risk management strategy.
Posted by Stu Ellis on 02/17 at 12:00 AM | Permalink