Six key questions when considering margin protection insurance
With commodity prices signaling a potential price reset and input prices remaining elevated, there's no better time to think about how best to protect 2024 profit margins. One strategy to consider is
Margin Protection (MP) is a relatively new (and underutilized) risk management tool. But as producers become familiar with its benefits, MP is proving to be a critical addition to their risk management strategy. From 2021 to 2022, the number of MP policies increased 77% nationwide.
It is the only subsidized crop insurance policy that offers growers up to 95% coverage. In the recent environment of volatile fuel and fertilizer costs, MP has been a pivotal for many producers, one of whom described it as enabling their farm to focus on development and growth, rather than just survival, in the upcoming year.
As with any crop insurance policy, MP isn't for every operation. It also is complex, requiring a crop insurance agent who understands how it works and who it best fits. To help determine if MP is right for you, here are six preliminary questions to consider.
1. Are you planting corn, soybeans, rice or wheat in a county eligible for MP coverage?
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2. Are your actual production yields consistent with county averages?
MP reduces risk better than any other subsidized product on the market, particularly for those whose yields are consistent with the county in which they farm. MP is tied to county averages – what it costs to grow a crop in local agronomic conditions – instead of an individual grower's actual costs.
3. Can your cost of production be covered by a traditional
Safety nets from crop insurance will be key to navigating rising input costs and reduced prices, but traditional Multi-Peril policies may not have coverage levels high enough to offset costs. Since MP can be purchased at higher coverage levels – up to 95% – it can be an advantageous tool, especially with the volatility and disruptions we've seen in the market lately.
4. Do you have enough working capital to sustain a revenue loss?
A strong risk management strategy is critical for operations that are highly leveraged. MP is a tool that mitigates the impact of current market conditions and protects your bottom line. In the event of a loss, MP can help restore working capital.
5. When do you typically buy your inputs?
If you pre-pay for inputs in the early fall, MP might not be a good fit. If waiting until after harvest to lock in some of those inputs, then MP is a way to help protect against fertilizer and fuel price spikes, like we experienced two years ago.
6. What is your risk tolerance?
The answer starts with knowing your cost of production and your expected per-acre profits. MP is unique in that it allows you to establish next year's floor price before this year's harvest. If you expect prices to decline or production costs to increase, then MP may be a good option. Ultimately, MP is an important crop insurance tool growers can leverage to financially prepare for significant shifts in the ag economy and protect their bottom line.
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