Tuesday, January 14, 2014
Crop Insurance Choice For 2014: Low Premium Costs Or Higher Coverage LevelsTweet
In three more weeks, the calculations will begin to determine the spring guarantees for crop insurance. Unfortunately, this year it will not even be close to the $5.65 for corn that it was last year, which many farmers thought was too low. When it was $6.01 in 2011, those were “the good old days.” This year, the crop insurance guarantees may be closer to $4.60, which is the value of December futures contract prices. Regardless of the guarantee, your first decision will be to determine a coverage level for your crop. Will you stay at 85%, or will you cut back on coverage to reduce your outlay for premiums in a year when margins are going to be tight?
Because commodity prices are low, premiums will also be lower than they have been the past several years. However, when you are trying to break even on your input costs and your marketing plan, it is tempting to forego the 85% coverage that costs $16.17 per acre with a 190 APH, and opt for the 75% coverage at $3.83. But University of Illinois farm management specialist Gary Schnitkey says that is the opposite of what you probably want to do.
Farmers who are currently calculating a rather thin margin this year—or farmers who have a high debt to asset ratio—or farmers who have high amounts of cash rent will probably be smarter to obtain the highest amount of crop insurance they can, regardless of the premium cost. Schnitkey is not selling crop insurance or making any commission from what you purchase. He is looking at the amount of protection you need to cover your production expenses.
So what production expenses will you have for an acre of corn? Calculate your cost of planting an acre of corn. His numbers have non-land costs (seed, fertilizer, pesticides, fuel, etc.) at $515 per acre. Add your cash rent to that or your per acre payment if you are buying farmland. When that total moves past $678 per acre, your 85% crop insurance coverage will not pay any more. Lower coverages may barely cover your cost of inputs. Times are different than they were the last several years when crop insurance was guaranteeing more than $1,000 per acre.
Back to the question of what will you do when it comes time to select your coverage level for crop insurance? Lower coverage levels will expose an operator to revenue risk, says Schnitkey, who says, “An 85% coverage level has a $678 minimum cash guarantee compared to a $646 minimum guarantee at an 80% coverage level. Moving from an 85% to 80% coverage level exposes farmers to an additional $32 per acre of losses.” Yes, you save money when it comes to premiums, but can your operation weather a financial storm, in addition to an atmospheric storm?
Schnitkey’s recommendation is that, “It is likely that maintaining high coverage levels is a prudent financial move, particularly for farmers with high levels of cash rent or high debt-to-asset positions. Crop insurance premiums are federally subsidized, causing crop insurance to be an efficient way of providing downside revenue protection.”
Crop insurance premiums for 2014 will be considerably less than the past several years because commodity prices are lower and there is less value to protect. But with lower premiums and less value to protect, crop insurance guarantees, whether the spring guarantee or the harvest guarantee will be considerably less than what most farmers have become used to getting. Subsequently, many producers will debate whether to continue the trend of getting the higher coverage, or opt for lower-priced coverage in a budget cutting move due to expected low profit margins. Because guarantees are lower, farmers may want to get the higher guarantees to cover as much of their production cost as possible. Lower levels of coverage with lower premiums may fall well short of covering input costs, much less any land costs.
Posted by Stu Ellis on 01/14 at 10:34 PM | Permalink