2004 CROP INSURANCE INDEMNITY PAYMENTS

Corn and soybean harvest is just getting under way in most areas, and growers are analyzing the 2004 crop year, as well as looking ahead to the 2005 growing season. A couple of decisions that crop producers face each year is whether or not to purchase Federal Crop Insurance, and to determine which type of crop insurance policy to purchase. A large percentage of growers in certain parts of Minnesota will be filing crop insurance claims and will likely receive indemnity payments on some of their 2004 corn and soybean acres. Yields will likely be reduced on many farms by a combination of wet weather in June and September, a cooler than normal growing season, an August frost, severe storms, and soybean diseases.

Since the 2004 growing season is winding down, it is a good time to review the likely outcomes of the crop insurance indemnity payments resulting from losses to this year’s soybean and corn crop. The attached example (Table) compares the estimated indemnity payments from a standard Multi-Peril Crop Insurance (APH) policy to the potential indemnity payments from a Crop Revenue Coverage (CRC) or Revenue Assurance – Harvest Price Option (RA-HP) insurance policy at similar coverage levels and final harvested yields for 2004. Hopefully, a review of potential outcomes of 2004 crop insurance results can help assist producers with crop insurance decisions for the 2005 crop.

First, let’s review the basics of a standard APH insurance policy and a CRC or RA-HP policy. All of these types of policies were available to Minnesota corn and soybean growers for the 2004 growing season.

APH Insurance Policies

  • APH policies provide protection from yield losses only.
  • A Market Price is established for each crop early in the year prior to sign-up.
    This Market Price does not change or fluctuate at harvest time.
    2004 APH Market Prices are :
    - Corn -------- $ 2.45 per bushel
    - Soybeans --- $ 5.60 per bushel
  • Producers may select coverage ranging from 50% to 85 % of the “actual production history” (APH (“proven yield”) to arrive at a “yield guarantee”.
    Soybean Example --- 45 Bu./ Acre APH X 80% = 36 Bu./ Acre guarantee
  • Replant and prevented planting coverage apply to APH policies.
  • Indemnity payments are calculated by subtracting the harvest yield on a “farm unit” from the yield guarantee and multiplying times the APH market price.
    Soybean Example ---- 36 Bu./ Acre guarantee and 25 Bu./ acre harvest yield.
    36 Bu./A. - 25 Bu./A. = 11 Bu./A. X $5.60/Bu. = $61.60/Acre
  • In most cases the Crop Insurance premium cost per acre is paid after harvest and will be deducted from the “gross” indemnity payment that is calculated.
CRC and RA-HP Insurance Policies
  • Crop Revenue Coverage (CRC) and Revenue Assurance with a Harvest Pricing option (RA-HP) insurance policies function in the same manner.
  • A Revenue Assurance policy without the harvest pricing option (RA-BP) functions differently than a CRC or RA-HP policy, and is not affected by harvest prices.
  • CRC and RA-HP insurance policies are designed to protect against crop revenue loss per acre due to yield loss and/or price fluctuation during the growing season.
  • The APH, “farm unit” determinations, insurance coverage selections (50% to 85%), replant, and prevented planting coverage, etc. with CRC and RA policies are the same as with APH policies.
  • An initial “Price Guarantee” is established for each crop prior to the Crop Insurance enrollment deadline on March 15th each year. The final “Price Guarantee” is determined a harvest time in the Fall. The “Price Guarantees” are based off of Chicago Board of Trade (CBOT) grain futures prices.

  • Following is how CRC and RA-HP “Price Guarantees” are calculated :

    CORN
    Base Price
    is the average settlement price for December CBOT corn futures in February.
    Harvest Price for CRC is the average settlement price for December CBOT corn futures in October during the year of harvest. (Average price in November is used for RA-HP.)
    Limit
    - Harvest Price is limited to the Base Price plus or minus $1.50 per bushel.

    SOYBEANS
    Base Price
    is the average settlement price for November soybean futures in February.
    Harvest Price for CRC and RA-HP policies is the average settlement price for November CBOT corn futures in October during the year of harvest.
    Limit --- Harvest Price is limited to the Base Price plus or minus $3.00 per bushel.

  • 2004 Base Price and Harvest Price Results :


    Corn -------- Base Price = $2.83/ Bu. ; Harvest Price (est.) = $2.18/ Bu. (as of Sept. 17)
    Soybeans --- Base Price = $6.72/ Bu.; Harvest Price (est.) = $5.66/ Bu. (as of Sept. 17)

  • The higher of the Base Price or the Harvest Price is used to calculate revenue guarantee per acre used to determine crop indemnity payments with CRC and RA-HP policies. ($2.83/ Bu. for corn and $6.72 for soybeans)
    The Harvest Price is used to determine the Value of the Harvested Crop.
  • CRC or RA-HP (80% Policy) Soybean Crop Loss Example ………
    (36 Bu./A. Guarantee and 25 Bu./A. Harvest Yield)
    Revenue Guarantee
    = 36 Bu./A. X $6.72/ Bu. = $241.92/ Acre
    Harvested Crop Value
    = 25 Bu./A. X $5.66/ Bu. = $141.50/ Acre
    Indemnity Payment
    = $241.92/ Acre - $141.50/ Acre = $100.42/ Acre
  • Again, in most cases, the CRC or RA-HP per acre premium cost will be deducted from the gross indemnity payment per acre.

CROP INSURANCE RESULTS FOR 2004

The adjacent Table (Refer to Table) shows a crop insurance example for Blue Earth County, Minnesota for soybeans and corn raised in 2004. The Table compares a 80% APH insurance policy to a 80% CRC policy for soybeans, with a 45 Bu./Acre APH, and a 30 Bu./Acre harvested yield. For corn, the Table compares a 80% APH policy to a 80% CRC policy, with a 150 Bu./Acre APH and a 100 Bu./Acre harvested yield. The premium costs listed in the Table are actual costs in Blue Earth County for 2004 at those APH levels on a “Basic Unit”. You will notice in the Table that the estimated “Net” Indemnity Payment per acre, after premium costs are subtracted, is higher with the CRC policy than with a standard APH policy for both corn and soybeans.

It is also important to note that because the harvest price for corn and soybeans is projected to be significantly lower than the base price, the estimated amount of indemnity payment under a CRC or RA-HP policy will be enhanced from estimates on March 15, 2004. The reason for this is because the “guaranteed revenue” per acre is calculated using the higher of the base price or harvest price, and the value of the harvested yield is calculated using the harvest price. It is also important to note that the “yield threshold” where CRC or RA-HP indemnity payments are initiated increase as the harvest price is lowered below the base price. For example, indemnity payments on a 80% coverage CRC policy, with a 150 bushel per acre APH at a CRC base price and harvest price of $2.83 per bushel, would be initiated anytime the harvested corn yield on a given farm unit drops below 120 bushels per acre. However, if the harvest price for corn drops to $2.20 per bushel, the CRC indemnity payments are initiated when the harvested corn yield on a given farm unit drops below 154 bushels per acre. This will result in many more producers with CRC or RA-HP policies being eligible for potential indemnity payments on their 2004 corn and soybean crops.

BOTTOM LINE

It is a good idea to review your 2004 crop insurance policies to determine where the “yield threshold” is on this year’s corn and soybean crops on various farm units. Because the CRC and RA-HP harvest price will be considerably lower than the base price, it is much more likely that you may qualify for some insurance indemnity payments on some of your farm units. Remember, that CRC harvest prices will not be finalized until after October 31, 2004. For more information on 2004 crop losses and potential indemnity payments under various crop insurance policies, producers should also contact their local Crop Insurance agent.

Every year is different, and thus the results from the various crop insurance policies also vary from year-to-year. However, the type of advantage that is shown in the Table for CRC or RA-HP type insurance policies, as compared to comparable standard APH policies, has been fairly consistent in recent years. Before purchasing crop insurance for the 2005 growing season, it is a good idea for producers to sit down with their Crop Insurance Agent in order to review the various policy options for corn and soybeans, including the premium costs and potential indemnity payments under various yield scenarios.

Editors 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.