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Thursday, November 21, 2013

UGLY:  Likely Crop Insurance Guarantees for 2014


 Have you looked at November 2014 soybean prices and December 2014 corn prices?  Do they provide any profitability?  Will they cover your breakeven costs of production?  They are different from day to day because of trading activity, but look at their long term performance.  Where have they been and has there been any volatility that might return? Probably, they are not going to move much unless there is a substantial crop threat that looms next year.  In that case, how will they perform during the month of February when the spring crop insurance guarantees are established?  What you see is what you get, and your crop insurance protection level will not protect a lot of money.


While we are more than three months away from establishing the spring insurance guarantees, Illinois farm management specialist Gary Schnitkey says farmers will have to bear more yield or revenue loss for the 2014 crops than in past years before any of the guarantees begin to make indemnity payments. In 2011 corn had a spring price of $6.01 and a harvest price of $6.32.  In 2012, the spring price of $5.68 and the fall price was $7.80.  In 2013, the spring price was $5.65 and the fall price was $4.39. At this point, the December futures price is about $4.50, which is substantially less than the guarantees of the past several years.


The same can be said for soybeans.  In 2011, the spring price was $13.49 and the fall price was $12.14.  In 2012, the spring price was $12.55 and the fall price of $15.39. And in 2013 the spring price and the fall price were equals at $12.87.  Those are considerably higher than the $11.50 which is the current 2014 price.  Like corn, the likely spring price for beans will be well under the guarantees of the past several years.


The critical point comes where the per acre revenue guarantee meets the cost of production, and in both corn and soybeans Schnitkey shows that farmers will have to suffer financial losses below their cost of production before any crop insurance indemnity payments will occur.


For corn,

consider a farm with a 190 bushel APH, protected with an 80% Revenue Protection policy and a $4.50 guarantee price.  While that scenario does not begin to make any indemnity payment until losses drop below $684, that will be well below even modest input costs and cash rental rates.  It compares to the 2013 acreage guarantee of $859.


For beans,

consider a farm with a 52 bushel APH, protected with an 80% Revenue Protection policy and the $11.50 current futures price.  That is $478 per acre for your 2014 guarantee, and few farmers will see much protection at that level.  With higher non-land and land costs, 2014 crop insurance will require farmers to shoulder a large part of the burden before there is a crop insurance payment.  And Schnitkey says raising the coverage level to 85% will not do much to resolve the problem. 


The farm management specialist said the current example of relative lower levels of protection show the weakness of the crop insurance program to be the sole safety net for agriculture.  He said it works well when there are periods of high prices, and high guarantees, but when there is little or no financial assistance offered by crop insurance, such as 2014, it is important for Congress to establish a farm program with safety nets across years, not just individual years.  Ironically, Schnitkey says 2014 will closer to the norm, than recent years with high revenues and high indemnity payments.



Lower commodity prices are pointing to lower spring and fall crop insurance guarantees for 2014 crops.  Those are currently near $4.50 for corn and $11.50 for soybeans.  While the spring guarantees are not set yet until next February, there is no reason for 2014 prices to be much different than they are now.  Those prices would provide an acreage guarantee of $684 for corn and $478 for soybeans, based on an 80% Revenue Protection policy.

Posted by Stu Ellis on 11/21 at 11:41 PM | Permalink

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