Now that the 2012 corn and soybean harvest season is completed, many farm operators are focusing their efforts on 2012 crop insurance claims. It is anticipated that 2012 crop insurance claims will likely set an all-time record, both for total claim numbers and total indemnity payments made to producers. The large number of crop insurance claims is primarily due to the significant yield reduction resulting from the 2012 drought in many key corn and soybean-producing states in the U.S. Some experts predict that total crop insurance indemnity payments for 2012 will be over $25 billion, nearly 2.4 times higher than the previous record of $10.8 billion for crop insurance payments from the 2011 crop year.
According to crop insurance industry estimates, there are 1.2 million crop insurance policies in place for the 2012 crop year, insuring approximately 281 million acres, at a farmer investment of $4.1 billion. It is also estimated that crop insurance claims on the 2012 crop may be filed close to half of those 1.2 million crop insurance policies. It is further estimated that approximately 80% of the over 95 million corn acres in the U.S. are insured by some type of crop insurance policy in 2012. By comparison, only about 15% of the nation’s corn acres were under a crop insurance policy in 1988, which was the last widespread drought causing this much loss to the U.S. corn crop.
On Nov. 1 the USDA Risk Management Agency (RMA) finalized the 2012 crop insurance harvest prices for corn at $7.50/bu., and for soybeans at $15.39/bu. The harvest prices for Revenue Protection (RP) insurance policies are based on the average CBOT December corn futures price, and the average CBOT November soybean futures price, both during the month of October. The established base prices for 2012 Yield Protection (YP) and RP crop insurance policies were $5.68/bu. for corn and $12.55/bu. for soybeans. This will be the payment rate for all 2012 YP (yield only) policies for corn and soybeans on any indemnity payments.
The $5.68 price level for corn and $12.55 for soybeans are also used to determine the final revenue guarantee for all 2012 RP crop insurance policies, with a Harvest Price Exclusion (RP-HPE). There is no enhanced revenue protection on RP-HPE policies from the increased levels of corn and soybean harvest prices in 2012. For RP-HPE policies, the base price is used to calculate the revenue guarantee and the higher harvest price is used to calculate the value of the harvested yield, which greatly reduces the potential indemnity payments.
The higher harvest price levels of $7.50/buhel for corn and $15.39 per bushel for soybeans will be used to determine final revenue guarantees for standard RP insurance policies. For example, a farm unit with a 190-bu./acre APH corn yield (proven yield), insured by an 80% RP policy, would have a final guaranteed revenue of $1,140 (152 bu./acre x $7.50/bu.). By comparison, that same farm unit insured by an 80% RP-HPE policy with a 190-bu./acre APH would have a final guaranteed revenue of $863.36 (152 bu./acre x $5.68/bu.), a difference of $276.64 less than the RP policy.
For corn and soybean producers in the Midwest, RP policies are the most prevalent, due to the potential for enhanced revenue protection with higher harvest price levels, as well as having a minimum revenue guarantee established by the March 1 base price levels. Some farm operators may have chose the YP or RP-HPE policies for 2012, due to the lower premium levels. However at comparable coverage levels, most YP indemnity payments will likely be 20-25% lower than the indemnity payments from comparable RP policies. In many cases, there may be no indemnity payment or very reduced indemnity payments for comparable RP-HPE insurance policies.
Even though calculations for RP policies are revenue-based, the standard RP insurance policies function similarly to a YP policy when the harvest price is higher than the base price, such as is the case for corn and soybeans in 2012. This is because the increase in harvest price increases both the final revenue guarantee and the value of the harvested bushels. So with RP policies, for yield levels below the yield guarantee, the crop insurance payment rate is $7.50/bu. for corn and $15.39/bu. for soybeans, compared to $5.68 for corn and $12.55 for soybeans with YP policies. For example, a farm unit with a 190 Bu./Acre APH corn yield (proven yield), insured by an 80% RP policy, and a final harvested yield of 130 bu./acre, would receive an estimated RP crop insurance payment of $165/acre (22 bu./acre x $7.50/bu.), before premium reductions. By comparison, that same farm unit insured by an 80% YP policy, also with a final harvested yield of 130 bu./acre, would receive an estimated YP payment of $124.96/acre (22 bu. x $5.68/bu.), before premium reductions.
Crop insurance companies are required to perform an automatic audit for any crop insurance claims of $200,000 or higher in total indemnity payments in a crop year, for a given crop in a particular county. If the total indemnity payments will exceed $500,000, the insurance company must contact the RMA for possible involvement in the audit. These audits can delay crop insurance indemnity payments, especially if producers do not have the required documentation readily available. Documentation may include settlement sheets, yield records, etc., for the past three years, which must be verified to specific farm units.
A reputable crop insurance agent is the best source of information to make estimates for potential 2012 crop insurance indemnity payments, and to find out about documentation requirements for crop insurance losses and for potential audits. It is important for producers who are facing crop losses in 2012 to understand their crop insurance coverage, and the calculations used to determine crop insurance indemnity payments. They should also be aware of the documentation that may be required in the event of a crop insurance audit, which will be required on claims of over $200,000.
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 firstname.lastname@example.org.