Some Iowa corn and soybean producers are facing substantial if not complete crop losses due to flooding. In particular, many acres of crops in the Missouri River Valley have been under water for a month or more this year. Fortunately, nearly 90% of Iowa’s corn and soybean acres are protected by multiple peril crop insurance.
Crop Insurance
Most Iowa producers purchase crop insurance policies with a 75% or 80% level of coverage. This means that if crops are a total loss, the producer must stand the first 20-25% of the loss. However, in 2011 nearly 90% of the crop acres insured in Iowa were covered under revenue protection (RP) policies, which offer an increasing guarantee if prices increase between February and October. So far, this has added over a dollar per bushel to corn guarantees and about 25¢/bu. to soybean guarantees. Moreover, since revenue protection policies are settled at the average nearby futures price during the month of October, rather than local cash prices, farmers will receive a bonus equal to the fall grain basis in their area.
Producers with crops that have been totally destroyed by flooding will not have to incur the variable costs of harvesting. This could save around $20/acre for soybeans and perhaps $70/acre for corn, depending on potential yields and drying costs. Nevertheless, even producers who carried insurance at an 80% coverage level could be looking at net revenues of at least $100/acre below those obtained from normal yields this year.
Potential Losses
For example, assume an insured tract has an expected corn yield of 160 bu./acre and an insurance proven yield of 150 bu. A normal crop marketed at $6.50/bu. would bring $1,040/acre. The insurance indemnity payment for an 80% RP guarantee, zero yield and an October futures price of $7 would equal 150 bu. x $7 x 80% = $840. Saving $70 in harvest costs would give an equivalent of $910/acre, or $130 below the value of a normal crop.
For soybeans, assume both the expected yield and the proven yield are 50 bu./acre, and the crop could be marketed at $13/bushel. Gross income for a normal crop would be $650/acre. The insurance payment for a complete crop failure and a $13.75 October futures price would be 50 bu. x $13.75 x 80% = $550. Savings of $20 in harvesting costs brings the equivalent of $570/acre, or $80 below the value of a normal crop.
In many cases, of course, flooded acres will make up only a portion of the insured unit, so production from non-flooded acres will be averaged in with the zero yields from the flooded acres.
The real question is how much will it cost to clean up fields and bring them back into production next year? Iowa farmers have not had prior experience with fields being under water for extended periods of time, so effects are difficult to estimate. Problems will range from physically removing debris to leveling eroded areas to restoring fertility.
What do these questions imply for rental contracts? A great deal of uncertainty, for one thing. Lease agreements in Iowa continue in effect for another year under the same terms if they are not terminated on or before Sept. 1. Either an owner or a tenant can terminate a lease. Operators who rented flood covered land this year may want to think seriously about whether they want to rent those acres next year, especially at the same level of cash rent. Leases can be terminated by delivering a notice in person to the other party, sending it by certified mail or (rarely) publishing it.
Landowners will have to bear the burden of mitigating flood damages – that goes with owning property. But, a better solution may be for renters and owners to work together to repair the damage and bring the land back into production. Farm operators may have access to machinery that can help accomplish the job that owners do not. In return, tenants should be compensated for their efforts, either directly, through a significant discount on the 2012 rent or with a long-term lease.
Next Year
In some cases there may be doubt as to whether land flooded this year can even be planted next year. Fortunately, such acres are still eligible for multiple peril crop insurance coverage in 2012, including prevented-planting payments. Operators have the opportunity to increase the prevented-planting coverage from 60% of their initial guarantee to 65% or 70% when they purchase their policies. They should also consider insuring flood-damaged land as a separate unit to the extent possible. Finally, operators can request that their 2011 yield histories reflect a value equal to 60% of the county “T-yield” rather than a zero or very low yield.
Close communication and cooperation between owners, crop insurance agents and renters can be a “win-win” strategy in the long run, but recovery will likely take several years. Additional information about managing flood-damaged cropland will be available on the ISU Extension and Outreach flooding website as the waters recede and the situation is assessed.