Some Iowa corn and soybean producers are facing substantial if not complete crop losses due to flooding this year. In particular, many acres of crops in the Missouri River Valley along Iowa's western edge have been under water for several months. Although short-term flooding of crops is not unusual in Iowa, water standing on farm fields for this length of time is nearly unprecedented.
How does flood damage affect crop revenue, crop insurance payments and lease contracts for rented cropland? Last week Wallaces Farmer asked Iowa State University Extension farm management economist William Edwards to give us an updated answer to that question, regarding things farmers with flood damaged crops in 2011 need to be considering.
Here's what he has to say regarding flooding, 2011 crop revenue, crop insurance and land rental contracts.
Flood damage, crop insurance payments and lease contracts
* Crop insurance: Fortunately, almost 90% of Iowa's corn and soybean acres are protected by multiple peril crop insurance, and flood damage is an insured cause of loss. Most Iowa producers purchase crop insurance policies with a 75% or 80% level of coverage. This means that the producer must stand the first 20% to 25% of any losses.
The rate at which producers are paid depends on the type of policy purchased. Yield protection or YP policies have fixed indemnity rates of $6.01 per bushel of corn and $13.49 per bushel of soybeans for 2011.
However, this year nearly 90% of the crop acres insured in Iowa are covered under Revenue Protection or RP policies, which offer an increasing guarantee if futures prices rise between February and October. So far, this has added over $1.00 per bushel to corn guarantees and about $.20 per bushel to soybean guarantees. Revenue Protection policies are settled at the average nearby futures price during the month of October, rather than at local cash prices that tend to have wider basis at harvest. Farmers with crop insurance losses will have their shortfall in bushels multiplied times the higher October average futures price.
Producers with crops that have been totally destroyed by flooding will not have to incur the variable costs of harvesting. This could save around $20 per acre for soybeans and as much as $70 per acre for corn, depending on potential yields and drying costs. Nevertheless, even producers who carried insurance at an 80% coverage level could be looking at net revenues of at least $100 per acre less than those obtained from normal yields this year.
Calculate potential crop loss on farms flooded in 2011
* Potential losses: For example, assume an insured tract has an expected corn yield of 160 bushels per acre and an insurance proven yield of 150 bushels per acre. A normal crop marketed at $6.50 per bushel would bring $1,040 per acre. The insurance indemnity payment for an 80% Revenue Protection guarantee, zero yield, and an October futures price average of $7.00 would equal 150 bu. x $7.00 x 80% = $840. Saving $70 in harvest costs would give an equivalent of $910 per acre, or $130 below the value of a normal crop.
For soybeans, assume both the expected yield and the proven yield are 50 bushels per acre, and the crop could be marketed at $13 per bushel. Gross income for a normal crop would be $650 per acre. The insurance payment for a complete crop failure and a $13.75 October futures price average would be 50 bu. x $13.75 x 80% = $550. Savings of $20 in harvesting costs brings the equivalent of $570 per acre, or $80 below the value of a normal crop.
In many cases, of course, flooded acres will make up only a portion of the insured unit, so production from non-flooded acres will be averaged in with the zero yields from the flooded acres. When farm operators report their 2011 production, they can request that their 2011 yield histories reflect a value equal to 60% of the county "T-yield" rather than a zero or very low yield.
Will land flooded in 2011 be able to be planted in 2012?
In some cases there may be doubt as to whether land flooded this year can even be planted next year. USDA Risk Management Agency's rules state that land must be physically available for planting to be insurable. Land that cannot be planted due to weather events that occurred before the sales closing date (March 15 in Iowa) will not be eligible for prevented planting payments.
Even if acres can be planted, they may be reclassified as "high risk" land, which means higher insurance premiums. Alternatively, high risk acres can be excluded from a farm's crop insurance policy. Catastrophic level coverage can still be obtained on high risk acres, however. Producers should work closely with their crop insurance agents to explore all their options.
How USDA disaster payments fit into flooding situations
* Disaster payments: Producers who have suffered crop losses due to flooding may also be eligible for payments under the Supplemental Revenue Assistance or SURE program administered by USDA's Farm Service Agency. Fremont, Harrison, Mills, Monona, Pottawattamie and Woodbury Counties in southwest Iowa have been designated disaster counties by the U.S. Secretary of Agriculture. These plus eight more contiguous counties are eligible for SURE payments, which cover up to 60% of losses not covered by crop insurance, up to 90% of expected revenue.
Coverage is based on national marketing year prices, which will not be known until September 2012, so payments will not be available before then. All of a producer's planted acres are combined, over all crops, when calculating a loss. For more information on the SURE program and how it works, see information file A1-44 on the ISU Extension Ag Decision Maker website, www.extension.iastate.edu/agdm/.
What does this imply for rented land, and lease contracts?
* Rental contracts: The real question is how much will it cost to clean up flooded fields and bring them back into production next year? Iowa farmers have not had prior experience with fields being under water for extended periods of time, so the long-term effects are difficult to estimate. Problems will range from physically removing debris to leveling eroded areas to restoring fertility.
What do these flood-related questions imply for rental contracts? A great deal of uncertainty, for one thing. Lease agreements in Iowa that were not terminated on or before September 1 continue in effect for another year under the same terms. However, if flooded land will have lower yield potential or will require extra expense to be returned to its prior state, its rental value is significantly reduced.
Landowners will have to bear the burden of mitigating flood damages—that goes with owning property. But, a better solution may be for renters and owners to work together to repair the damage and bring the land back into production. Farm operators may have access to machinery that can help accomplish the job that owners do not. In return, tenants should be compensated for their efforts, either directly, through a significant discount on the 2012 rent, or with a long-term lease. Close communication and cooperation between owners and renters can be a "win-win" strategy in the long run, but recovery will likely take several years.For farm management information and analysis, go to ISU's Ag Decision Maker site www.extension.iastate.edu/agdm and ISU Extension farm management specialist Steve Johnson's site www.extension.iastate.edu/polk/farmmanagement.htm.