Crop Insurance Decisions

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Many farm operators are now finalizing their crop insurance decisions for the 2011 crop year. March 15 is the deadline to purchase crop insurance for the 2011. Following are some considerations:

 

YIELD PPROTECTION (YP):  

  • YP policies provide protection from yield losses only.
  • (NEW) The market price for corn and soybeans will be established in the same manner as the base price for RP insurance policies (see below under RP insurance policies).
  • Producers may select coverage ranging from 50% to 85 % of the actual production history (APH, proven yield) to arrive at a yield guarantee. For example: Soybeans – 50-bu./acre APH x 80%  =  40-bu./acre guarantee.
  • Replant and prevented planting coverage apply to YP policies.
  • Indemnity payments are calculated by subtracting the harvest yield on a farm unit from the yield guarantee and multiplying times the YP market price minus the crop insurance premium. For example: Soybeans – 40-bu./acre guarantee minus 30-bu./acre harvest yield (40 bu. - 30 bu.) =  10 bu./acre x $13.66/bu. - $16/acre  = $120.60/ acre 

REVENUE PROTECTION (RP & RPE):

  • The new revenue protection (RP) and revenue protection with harvest price rxclusion (RPE) insurance policies function essentially in the same manner, except that the RPE policies are not affected by harvest prices.
  • The yield guarantee (APH), farm unit determinations, insurance coverage selections (50-85%), replant and prevented planting coverage, etc., for RP and RPE insurance policies are the same as for YP policies.
  • Following is how YP, RP and RE price guarantees are calculated: (All prices are based on Chicago Board of Trade (CBOT) Futures prices, and not cash prices.)

CORN

  • Base Price for YP, RP and RPEpolicies is the average settlement price for December CBOT corn futures in February.
  • Harvest Price for RPpolicies is the average settlement price for December CBOT corn futures in October during the year of harvest.
  • Limit –Theharvest price maximum for RP is limited to the base price x 200%. For example: $6/bu. base price x 2  =  $12/bu. maximum. There are no restrictions regarding downside price movement.

SOYBEANS

  • Base Price for YP, RP and RPE policies is the average settlement price for November soybean futures in February.
  • Harvest Price for RPpolicies is the average settlement price for November CBOT corn futures in October during the year of harvest.    
  • Limit –Theharvest price maximum for RP is limited to the base price x 200%. For example: $13.50/bu. base price x 2 = $27/bu. maximum). There are no restrictions regarding downside price movement.

 

  • 2011 YP, RP and RPE base prices will be finalized on March 1, 2011. As of Feb. 18, 2011, the base prices are estimated at: $6.04/bu. for corn and 13.66/bu. for soybeans.
  • The higher of the base price or the harvest price is used to calculate revenue guarantee per acre for RP policies, and the harvest price is used to determine the value of the harvested crop for RP and RPE policies.
  • RP (80% policy) corn crop loss example: 180-bu./acre APH; 144-bu./acre guarantee; 140-bu./acre harvest yield; $6/bu. CBOT base price; $5.50/bu. CBOT harvest price; $30/acre premium:
    • Revenue Guarantee = 144 bu./acre x $6/bu. = $864/acre
    • Harvested Crop Value = 140 bu./acre x $5.50/bu. =   $770/acre
    • Indemnity Payment = $864/acre - $770/acre - $30/acre = $64/acre

 

ENTERPRISE UNITS:  

A few years ago, the USDA Risk Management Agency (RMA) increased the federal subsidy for purchasing insurance coverage under enterprise units, which combines all acres of a crop in a given county into one crop insurance unit. Many producers have previously used optional units, which allows producers to insure crops separately in each township section. Enterprise units will be available for YP, RP and RPE insurance policies in 2011. Following are some things to consider regarding enterprise units:

  • There are substantial premium savings by using enterprise units rather than optional units – as much as 50% or more on insurance coverage levels of 80% or lower.
  • Producers need to be aware of the limitations of insurance coverage on individual farms with enterprise units. In 2010, some producers had crop losses on individual farms due to wind, hail, flooding, etc., but were on enterprise units, and as a result did not reach the threshold for any insurance indemnity payments. This can be quite costly.
  • Enterprise units appear to work quite well with RP policies to protect against price drops during the growing season, as well as when a producer has most of their land in the same general area, and when supplemental hail insurance coverage is also part of the overall risk-management plan.
  • Enterprise units do not work as well when a producer has a variety of land that is spread across a wide area, or when producers have individual farms that are highly susceptible to natural disasters, such as flooding, drought, frost, etc.
  • Producers should contact their crop insurance agent to better understand insurance coverage with enterprise units.

BOTTOM LINE

A reputable crop insurance agent is the best source of information to find out more details of the various coverage plans, to get premium quotes, and to help finalize 2011 crop insurance decisions. Here are some websites with very good crop insurance information:

 

Editor’s note: Kent Thiesse is a former University of Minnesota Extension educator and now is Vice President of MinnStar Bank, Lake Crystal, MN. You can contact him at 507-726-2137 or via e-mail at kent.thiesse@minnstarbank.com.

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