In 2014 farmers will find that premiums will drop, but so too will the revenue guarantee provided by crop insurance. At the 75% coverage level, 2014 ratings for premiums are projected to be between 2% and 5% lower than those in 2013.
In addition, revenue guarantees are tied to new crop futures prices that will drop roughly 10% to 20% from those in 2013. A farm level revenue protection or RP coverage this year with the same actual production history or APH, may fall below the cost of production for many farm operations. Most 2014 crop costs will remain high, lagging the decline in commodity prices, putting a squeeze on margins.
"A crop revenue insurance protection policy, along with a grain marketing plan, will allow farmers to protect the majority of their revenue," says Steve Johnson, an Iowa State University Extension farm management specialist. "Increasing the level of coverage on your farm is a good idea this year, given the expected lower crop prices. Adding supplemental insurance products like hail, wind and greensnap policies should also be considered." Johnson offers the following information and observations to help farmers make the right decisions for crop insurance coverage in 2014.
Related: Find Your Local FSA By State
Crop insurance revenue guarantees are lower for 2014; you need more revenue coverage
With lower crop insurance revenue guarantees, farmers may actually need more, not less revenue coverage. You might consider moving to higher coverage levels to offset a portion of that risk. Revenue guarantees this year are calculated using the average futures price in the month of February for the December 2014 corn contract, and the November 2014 soybean contract. These prices are called "crop insurance projected prices."
Farmers who insured at 75% with RP last year might consider going up to 80% or 85% levels of coverage for 2014. For example, say your corn APH is 180 bushel per acre and you are insured at the 75% level. With 2013's $5.65 per bushel projected price level, the per-acre guarantee was $763. This year's guarantee may only be $4.50 per bushel, however, which means revenues of $608 per acre are protected. That's a revenue guarantee decline of $155 per acre compared to last year.
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DECISION TIME: What decisions do you need to make regarding adding supplemental coverage to your crop revenue insurance policy for 2014? Once you've chosen a multi-peril revenue protection product, level of coverage, TA option and enterprise vs. optional units, you should consider adding hail, wind and greensnap coverage.
Enterprise vs. optional units is another important decision you need to make for 2014
Farmers have other important crop insurance decisions, too. Like whether to insure acres using enterprise unit or optional unit coverage. Also, whether to elect the trend-adjusted yield option (TA option).
For most farmers—though not all—enterprise units make the most economic sense. That's because at the 75% level of coverage, enterprise unit premiums are subsidized at 77%; for optional units the subsidy is only 55%.
USDA's Risk Management Agency or RMA increased subsidies for enterprise units beginning in 2009 since similar crops are combined across the county for determining indemnity loss. Optional units provide coverage for similar crops in the section of land. Thus, farmers take more risk when using enterprise units but receive a larger percent subsidy.
With the TA option, farmers can protect a higher level of yield than their 10-year APH average, for a very small increase in premium. In fact, a farmer might get an extra 8 to 10 bushel per acre for corn above his/her 10-year APH for the least amount of additional premium cost.
Crop insurance helps farmers manage business risk, an important tool to have in 2014
Crop insurance will again be an important tool to help farmers manage crop revenue risk in 2014. Buying crop insurance and making coverage decisions that fit their farming operation will be one of the most important risk management decisions farmers will make this winter.
The 2012 drought and the 2013 drop in corn prices should serve as an eye-opener for the need to manage revenue risk. The importance of crop insurance to insure against both yield losses and price declines the past two years has kept most all farm operations financially viable. In 2014, with lower corn and soybean projected prices forecast, crop insurance's ability to protect against loss of revenue will be critical.
Farmers need to choose the right multi-peril, revenue protection policy. That includes decisions regarding level of coverage, choosing the TA yield option, and deciding whether to use the enterprise or optional unit coverage. In addition, various supplemental policies can be added to multi-peril RP policies. The supplemental policy choices include crop hail, wind and green snap coverage, weather products and projected price discovery products.
What supplemental coverage should you add to your revenue protection policy?
The first step to using a crop insurance RP policy as part of your risk management strategy is to choose the right level of coverage. If you were at 70% coverage last year you might want to move to 75% in 2014. Or if you were at 75%, you'll want to go up to 80% or 85% this year. "I think we'll see a lot of people moving to higher coverage levels because of the drop in the projected price for 2014 corn and soybeans," says Johnson.
The second step in your crop insurance decision is to nearly always take the TA option, he adds. That's the cheapest way to increase your revenue guarantee without paying additional premium.
Next, if your insured acres are in more than one section of land, you need to look at using enterprise units vs. optional units, says Johnson. You get the largest discount on your premium by using enterprise units instead of optional units. There's more risk in optional units which insures crops at the section line. With enterprise units you are combining all of your cornfields together in the county. This is where the supplemental coverage fits in.
Good reasons to add supplemental coverage for hail, wind and greensnap
If you want to use enterprise units and the TA option which get you back the section line, you can add supplemental insurance products such as hail, wind and greensnap, explains Johnson. Electing enterprise units forces you combine all your corn fields together as one in the county, and all your soybean fields together as one.
So you are saving more on the premium by using enterprise units and the TA option. But you are exposed to risk when hail hits one of your farms but doesn't hit the other fields you farm in the county. That's why you likely want to have supplemental coverage for hail. "Farmers need to look at having some supplemental products, in addition to revenue protection," says Johnson.
SUMMING UP: In 2014, most farmers will want to use a multi-peril insurance product that has revenue protection and trend-adjusted or TA option, he says. In addition, determine the level of coverage you want and whether you want to use enterprise units, which provide a larger premium discount.
Next, ask yourself what would happen if hail hits certain farms in the county, and not the other locations. Adding hail, wind and greensnap coverage on all the farms you operate in a county gets you back to the section lines for coverage—and helps your crop insurance coverage handle those individual perils that might occur.
Begin talking to your crop insurance agent now; work with them to get right coverage for your farming operation
The underlying theme for crop insurance considerations in 2014 is lower premiums, but also lower revenue guarantees. Expect more risk in 2014 with lower crop revenue guarantees than in 2013 because of this year's lower projected corn and soybean prices.
Related: Find Your Local FSA By State
Contact your crop insurance agent and set up a time to meet and review your coverage. Determine if there's anything you want to change. Deadline to sign up for crop insurance or to make any changes in your 2014 coverage is March 15.
"Work with your crop insurance agent now and during the month of February," suggests Johnson. "Make sure you've provided all your 2013 yield information to your agent and inform the agent of anticipated changes for 2014. Discuss how a Revenue Protection policy works and discuss any of the supplemental policies you may be thinking about adding to your coverage."