Farmgateblog.com - Where farm decision-makers start their day

« Back to main

Tuesday, September 17, 2013

Are You Bidding Up Cash Rent Because of Crop Insurance Indemnities



 

Your 2012 crop, withered by the drought, brought in record income for your operation thanks to crop insurance.  The check arrived about the time that you were negotiating cash rents for both land you had been farming and new land that you will be picking up.  And with that wad of money in your pocket, there was not even a second thought about agreeing to pay higher cash rents.  Or was there?  Your 2013 crop is going to make a good yield, but you have several hundred acres of both corn and soybeans that were not planted, and you have a big crop insurance check for prevented planting that will come about the time for cash rent discussions with land owners.  And you will gladly pay the additional money they ask for.  Or will you?

 

Indemnity payments from crop insurance have been rumored to be an influential dynamic in pushing up both cash rents and land values.  Since 2012 provided that opportunity for many producers, researchers began to investigate whether that was the case.  And with the growing popularity of crop insurance, there are more opportunities for it to drive the land economy.

Purdue economist Michael Langemeier says, “The primary question is whether the risk-adjusted net return, (i.e., certainty equivalent of net return) is significantly impacted by purchasing a crop insurance product. If the difference in risk-adjusted net returns between scenarios that include and exclude crop insurance is positive, purchasing the crop insurance product puts upward pressure on both cash rents and land values.” 

 

Langemeier selected some farmland in northwestern Indiana, where rents and land values have been rising, but where corn prices are expected to significantly decline.  And he says if crop insurance indemnities have a positive effect on land values and cash rents, then there will be less of an impact on the decline in crop prices.  He picked out a representative farm in that part of the state, which raised corn and soybeans, but where cash rents have been rising.  Langemeier looked a grain prices, yields, and production costs for the 40 years before 2013.  His study was based on purchase of a 75% yield protection policy.  His results for the return to land and management averaged 10¢ more per acre without crop insurance compared to similar returns when crop insurance was purchased.  When real 2012 dollars were used there was a 51¢ higher return to land and management without crop insurance, compared to the return to land and management if a crop insurance policy had been selected.

 

Langemeier says, “Crop insurance indemnity payments were incurred for corn in 1983, 1988, 1991, and 2012; and for soybeans in 1988 and 2003. In nominal dollars, the average crop insurance indemnity payments for the corn and soybeans were $4.11 and $0.33 per acre.”  Comparatively, Langemeier says the average per acre government payment was $23.

 

While the research was conducted with a yield-based crop insurance policy, questions may be asked if the results would have been different if a revenue-based policy was used.  Langemeier says a 75% revenue policy would have resulted in a $2 per acre indemnity payment for corn in 1986, and no payments in the other years that indemnity checks were received from the yield policy.

 

So the bottom line is whether the crop insurance policy and indemnity payments had any impact on cash rents and land values.  He says, “Obviously, there is not much difference in cash rents or land values between the two net return scenarios. Differences in cash rents ranged from $0.48 in 2004 to $6.48 in 1984 while differences in land values ranged from $1.20 in 1990 and 2000 to $16.52 in 1984.”

 

Summary:

While large indemnity payments can be influential in making purchase decisions on a farm, overtime, indemnities from crop insurance policies are few and far between.  However, when they have been paid, it has been generally a small amount, and too small to have any significant impact on cash rent and land values.

Posted by Stu Ellis on 09/17 at 10:34 PM | Permalink

Post a comment

*Name:

*Email:

Location:

URL:

SPAM? Leave this blank unless you are a spam-bot.

*Comment:

Remember my personal information

Notify me of follow-up comments?

*Required