Farmers face tremendous revenue risk in 2013, given the uncertainty of the 2012 drought continuing into the upcoming growing season. Most remain unsure of crop yield prospects and expect futures prices will remain volatile until the concern for tight global ending stocks for corn and soybeans subsides.
"Too often, farmers focus on the premium they pay for crop insurance," observes Steve Johnson, Iowa State University Extension farm management specialist in central Iowa. "Rather, they should focus on how much revenue they can guarantee by using Revenue Protection crop insurance and their ability to do preharvest marketing of a portion of their uninsured bushels." Johnson provides the following explanation as to how you can protect your revenue by using revenue protection coverage and implement a crop marketing plan.
Revenue Protection, or RP, remains the most popular Multi-Peril Crop Insurance product throughout the Corn Belt states. Besides choosing RP on or before the spring closing date for spring planted crops, which is March 15, a farmer has some other related decisions to make including:
* Use the actual production history (APH) or the Trend-adjusted APH yield option
* Choose the Optional or Enterprise Unit Coverage
* Determine the level of coverage (65%, 70%, 75%, 80% or 85%)
For most farmers, the likely choice will be RP and use the TA Yield Option, which creates a larger yield thus higher revenue guarantee for the least amount of money. This option was offered in 2012 for the first time as a way of reflecting the longer-term trend toward higher yields. Each county has updated TA factors for 2013. The TA-option is an annual decision and doesn't affect the farm's proven Actual Production History, or APH, of the most recent 10 years the crop was grown on that farm.
The decision to use enterprise unit coverage carries a larger percent federal crop insurance subsidy but also more risks by grouping all fields of that particular crop together in the county for determining a potential loss payout.
~~~PAGE_BREAK_HERE~~~Another factor is that federal subsidies are a smaller percentage at higher levels of coverage. Thus, larger percent federal subsidies are provided at lower levels of coverage.
Calculating revenue guarantees with crop revenue protection coverage
Let's combine the level of subsidy paid by the federal government for level of coverage and the decision regarding optional vs. enterprise units. We'll assume an Actual Production History, or APH, of 180 bushels per acre for corn and 50 bushels per acre APH for soybeans. The assumption in these comparisons is a $5.68 per bushel projected price for corn and $12.95 per bushel for soybeans, respectively. Keep in mind the exact "projected price" will not be known until March 1 because the crop insurance industry uses the simple average of the 19 trading days in the month of February for both the December 2013 corn futures and the November 2013 soybean futures contracts.
With these considerations, the bar charts below compare corn revenue guarantees to soybean revenue guarantees at 65%, 70%, 75%, 80% and 85% level of coverage. Note the higher the level of coverage, the larger the revenue guarantee. Also, the percentage of premium subsidy varies by optional vs. enterprise unit and by level of coverage. The higher the level of coverage above the 70% level, the smaller the percent federal subsidy for your choice of unit coverage
Corn revenue comparison with preharvest marketing of 100 bushels per acre
Let's use that 80% level of coverage and $818 per acre guarantee for corn and $518 per acre revenue guarantee for soybeans. This assumes a projected price of $5.68 per bushel and the farmer preharvest sells for delivery 100 bushels of corn and averages $6 per bushel cash price. This equals the $600 per acre Pre-Harvest Sales and appears as the lower bar in each of the four comparisons.
* Low yields, indemnity payments. These first two bars in the chart assume a final yield on the farm of only 100 bushels per acre. The difference in indemnity payments depends on the harvest price. With a $4.50 per bushel harvest price on the first bar in the chart, the indemnity payment equals $368 per acre. Revenue guarantee equals $818 per acre minus $450 per acre revenue to count = $368 per acre.
The second bar in the chart assumes a $7.50 per bushel harvest price, the indemnity payment equals $330 per acre. Revenue guarantee equals $1,080 minus $750 per acre revenue to count = $330 per acre.
Note the lower harvest price creates the larger indemnity payment, regardless of the preharvest sales. This point of higher indemnity payments with lower harvest prices might be overlooked after recent years with higher harvest prices.
~~~PAGE_BREAK_HERE~~~Should final yields turn out to be 200 bushels per acre, there are no indemnity payments as reflected in the third and fourth bars in the chart. To calculate the value of those additional 100 bushel per acre of unpriced bushels, take the harvest price and subtract a minus $.50 per bushel basis.
Soybean revenue comparison with preharvest marketing of 30 bushels per acre
Let's look at that same farm that chooses Revenue Protection, or RP, at the 80% level of coverage. Assume a projected price of $12.95 per bushel and the farmer preharvest sells for delivery 30 bushels of beans and averages $12.50 per bushel cash price. This equals the $375 per acre Pre-Harvest Sales and appears as the lower bar in each of the four comparisons.
* Low yields, indemnity payments. These first two bars in the chart assume a final yield on the farm of only 30 bushels per acre. The difference in indemnity payments depends on the harvest price. With an $11-per-bushel harvest price, the indemnity payment equals $188 per acre. Revenue guarantee equals $518 per acre minus $330 per acre revenue to count = $188 per acre.
The second bar in the chart assumes a $14-per-bushel harvest price, the indemnity payment equals $140 per acre. Revenue guarantee equals $560 minus $420 per acre revenue to count = $140 per acre.
Note the lower harvest price creates the larger indemnity payment, regardless of the preharvest sales.
High soybean yields equal additional unpriced bushels
Should final yields turn out to be 60 bushels per acre, there are no indemnity payments. To calculate the value of those additional 30 bushels per acre of unpriced bushels, take the harvest price and subtract a minus $.50 per bushel basis.
Conclusion: In summary, choosing Revenue Protection, or RP, coverage provides the ability to use a preharvest marketing plan that includes the delivery of bushels up to your guarantee of APH times the level of coverage.
The comfort level should come from the fact that RP guarantees the higher of the Projected Price (February average for new crop futures) or the Harvest Price (October average for new crop futures).
In both corn and soybean scenarios, the preharvest sale of 70% to 75% of your guaranteed insurance bushels still provides revenue protection should the farmer have low yields and low or high harvest prices. The same is true if the farmer has high yields, additional unpriced bushels to sell and low harvest prices or high harvest prices.For farm management information and analysis go to ISU's Ag Decision Maker site www.extension.iastate.edu/agdm and Extension farm management specialist Steve Johnson's site www.extension.iastate.edu/polk/farm-management.