Lower Harvest Prices Trigger Crop Revenue Insurance Payments

Considering how high 2008 crop prices were, it's hard to believe farmers will be able to collect on revenue-type crop insurance.

While most Iowa farmers cringed at the size of their 2008 crop insurance premiums paid in October, others felt rewarded. A large number of farms likely triggered indemnity payments, not just from large yield losses but from lower yields in combination with the steep decline in futures prices that occurred at harvest.

Steve Johnson, Iowa State University Extension farm management specialist, says recent commodity price declines have increased the probability that crop insurance products which insure revenue may trigger indemnity payments for loss. These products include Crop Revenue Coverage, Revenue Assurance and Group Risk Income Protection.

The CRC and RA products insure revenue using farm-level yields to establish guarantees and payments, he explains. The GRIP product uses average county yields. The final county yield numbers won't be released by USDA until mid-February or mid-March 2009. Thus, indemnity payments won't be made until these yields are established.

Collecting on crop revenue insurance

Be sure you understand the difference between spring base and harvest prices. The CRC, RA and GRIP products use spring base prices to determine their revenue guarantees, explains Johnson. These base prices are figured using daily settlement futures prices. Corn uses the December contract and soybeans the November contract. The 2008 spring base prices are $5.40 per bushel for corn and $13.36 per bushel for soybeans.

USDA's Risk Management Agency uses these same CBOT futures contracts are used to determine harvest prices that enter into the revenue calculations. When actual harvest revenue falls below the guaranteed level, crop insurance coverage triggers an indemnity payment. The lower harvest prices witnessed in October resulted in lower crop revenue and the likely payments to insured farmers.

The soybean harvest price determined for CRC, RA and GRIP products is the daily average settlement price for the November soybean futures contract during October. For corn, the December corn futures contract is used to determine the harvest price. Both CRC and GRIP use daily average settlement prices for the month of October. The RA product uses the month of November to determine the harvest price. Given current price volatility, the CRC harvest price for corn could be substantially different from the RA harvest price.

What are the CRC and GRIP price limits?

There are price limits for the amount by which the harvest price can increase or decrease from the spring base price, says Johnson. Both CRC and GRIP policies have price limits of $1.50 per bushel for corn and $3.00 per bushel on soybeans. The RA policies have no price limits. Thus in 2008, the fall price for CRC and GRIP can't fall below $3.90 per bushel for corn and $10.36 per bushel on soybeans. The likelihood is harvest prices will be below these limits, especially for beans. Because of the price limits, RA coverage could provide much larger indemnity payments than would CRC.

Farms using GRIP coverage may collect large indemnity payments next spring. Most farms that buy the GRIP product do so at the 90% coverage level in order to more easily trigger losses. "Thus, lower harvest prices in combination with average county yields don't have to decline very far before loss payments are triggered," he says.

Keep good production records

Producers with CRC or RA policies should contact their crop insurance agent as soon as possible with questions regarding potential revenue loss for 2008, says Johnson. Recommendations from the crop insurance industry include:

* Keep production separate for each unit.
* Mark scale tickets by unit, farm name or reference number.
* Follow crop insurance guidelines for commingling units in the same bin and maintain good records.
* Report production right after harvest to your crop insurance agent to determine actual production history (APH) and to check for a potential revenue loss.
* Keep track of feed records for corn before final production is verified.

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