Decision Time Nears For Crop Insurance

During the next few weeks, many farm operators will be finalizing their crop insurance decisions for the 2016 crop year, with March 15 the deadline to purchase the insurance for the current year.

Profit margins for crop production this year are the tightest they have been for several years, which makes this year's crop insurance decisions even more critical. Producers have several policy options to choose from, including yield protection policies, revenue protection policies, and several other group insurance policy options. There also are decisions to be made about using "enterprise units" versus "optional units" and whether to take advantage of the "trend adjusted" actual production history yields for 2016.

Yield protection policy options provide for "yield only" insurance protection based on actual production history yields on a given farm unit. Yield protection prices are based on average Chicago Board of Trade prices for December corn futures and November soybean futures during the month of February, similar to revenue insurance products. Producers can purchase yield protection insurance coverage levels from 50 percent to 85 percent, and losses are paid if actual corn or soybean yields on a farm unit fall below the yield guarantees.

Kent Thiesse

Revenue protection policy options provide for a guaranteed minimum dollars of gross revenue per acre (yield multiplied by price) based on yield history and the average Board of Trade prices for December corn futures and November soybean futures during the month of February.

The revenue guarantee is increased for final insurance calculations if average Board of Trade prices during October are higher than the February Board of Trade. Producers buy revenue protection coverage levels from 50 percent to 85 percent, and losses are paid if the final crop revenue falls below the revenue guarantee. The final crop revenue is the actual yield on a farm unit multiplied by the Board of Trade December corn futures price and November soybean futures price during the month of October.

Revenue protection with harvest price exclusion policy options function the same as revenue protection policies except that they have a minimum revenue guarantee (yield and price) that is fixed based on the February Board of Trade corn and soybean prices and cannot be increased later).

In recent years, a high percentage of crop insurance policies for corn and soybeans in the Upper Midwest have been revenue protection policies because of the combination of yield and price protection. As of Feb. 8, the 2016 estimated crop prices in the Upper Midwest for insurance protection were $3.92 per bushel for corn, $8.90 for soybeans and $5.18 for spring wheat. The 2016 yield protection prices and revenue protection base prices will be finalized March 1.

Here are some important considerations regarding this year's crop insurance decisions:

• Premium reductions: Crop Insurance premiums for most coverage levels of corn and soybeans in the Midwest should be the same, or slightly lower, than comparable 2015 premium levels because of lower insurance guarantees for 2016 and premium adjustments based on updated insurance data for several years.

• Coverage levels: Make sure you are comparing apples to apples when weighing premium costs for various options or types of policies, and recognize the limitations of the various insurance products.

• Risk management perspective: Given the tight profit margins expected in 2016, some producers might want to reduce coverage to save a few dollars per acre. But they first must consider, "How much financial risk can I handle if there are greatly reduced yields because of drought and weather problems in 2016 or lower than expected crop prices?" Revenue protection policies are an excellent risk management tool for such situations, and this might not be the year to cut coverage.

• Trend-adjusted endorsement: Many producers in the Upper Midwest have been able to enhance insurance protection significantly in recent years by using the trend-adjustment option for figuring actual production history, with only slightly higher premium costs. Using the endorsement is a good insurance strategy for most eligible corn, soybeans, and wheat producers.

• Enterprise units: The use of enterprise units generally is favorable, but producers should know the limitations.

Enterprise units, which combine all acres of a crop in a given county into one crop insurance unit, generally are favorable to optional units, which allow producers to insure crops separately in each township section. Enterprise units usually have significantly lower premium costs for comparable revenue protection policies. However, enterprise units are based on larger coverage areas and do not necessarily cover losses from isolated storms or crop damage that affect individual farm units, so additional insurance, such as hail insurance, mighty be required to insure against such losses.

• Coverage levels: Take a good look at the 85 percent coverage level, especially when using enterprise units with revenue protection policies.

Most Midwest corn and soybean producers have been using a minimum of 80 percent revenue protection coverage with enterprise units in recent years. This year might be the time to upgrade to 85 percent. In many cases, the 85 percent level offers considerably more protection with a modest increase in premium costs. Many producers will be able to guarantee $600 to $650 per acre for corn and $350 to $400 per acre for soybeans at the 85 percent coverage level for 2016 when also using trend-adjusted yields for actual production history.

• More sources of information: A reputable crop insurance agent is the best source of information to find out more details of the various coverage plans, learn more about the trend-adjusted yield endorsement, get premium quotes and help finalize 2016 crop insurance decisions.

In addition, here are some websites with good crop insurance information: the University of Illinois FarmDoc, the Iowa State University Ag Decision Maker and the USDA Risk Management Agency.