Minding Ag's Business
Marcia Zarley Taylor DTN Executive Editor

Thursday 09/20/12

Crop Insurance Is No Free Ride

Hard as it is to imagine if you live in the drought-decimated state, some growers are chalking up their career best yields and revenues in 2012. Native Iowans like me are developing a new respect for regions of the country we once discounted because they were on the "fringe" of the Corn Belt. What's more, the good fortune for growers from North Dakota , northern Minnesota and Mississippi proves you're better off harvesting a crop than collecting a crop insurance claim.

Brian Montgomery of Alliance Ag Risk Management, Starkville, Miss., sells insurance throughout the Delta and into Arkansas. "Regionally, we might be experiencing the best crop in the country at the moment," Montgomery says, with corn harvest nearly complete and soybeans about 30% to 40% finished. Irrigated corn yields for his customers are frequently 200 bpa; some customers report about 5% of their yields are running in the 275 bpa to 300 bpa range and overall averages could be 30 bpa over historic yields. Irrigated soybean yields are running 60 bpa.

"We may never see another crop this good as long as I live," the 36-year-old Montgomery says in awe. Except for some small cotton claims (due mostly to the 20%-plus price drop since spring), he's not expecting much demand for his services at harvest. In fact, he sees renewed investor interest in farmland and pressure on southern growers to pony up Midwest-sized cash rents with these kind of returns.

In the Red River Valley, sugar beet growers report pre-harvest yields of 40 tpa, up from a normal 26 tpa crop. Other crops--including corn and dry beans--look spectacular as well, thanks to irrigation. "The dealmaker for us was the center pivots. It was the most intense irrigation season we have ever had," says one grower whose family expects the best returns in at least 40 years.

Kansas State economist Art Barnaby points to these bumper incomes as evidence that crop insurance is no substitute for a normal harvest . By his calculations, a corn grower with normal yields should see incomes at least 40% or more above their spring price expectations. For a Minnesota corn grower with a typical 182 bu. APH and no yield loss, that translates into a whopping $1,450/acre gross revenue.

In contrast, a typical Iowa farmer with an 80% yield loss and an 80% Revenue Protection policy will only make 10% more than his spring price expectation at best. That assumes that the Dec 2012 corn contract averages $8 during the month of October, something that appears highly unlikely now. In Barnaby's example, the Iowan would gross about $1,164/acre in a best case scenario.

But disaster victims may have higher expenses, not just hits to their gross revenue, Barnaby adds. For example, some livestock producers need to replace feed supply at higher prices, premiums for specialty crops may be lost, or they may need to buy cash grain on the open market to replace bushels they hedged using forward contracts. I visited with one Missouri farmer this week who is losing his 50-cent/bu. premium on waxy corn, because aflatoxin levels were too high to sell for human food. He could sell as livestock feed, but crop insurance won't make up the difference.

In response to critics who think revenue-based crop insurance is too generous, Barnaby makes the case that crop insurance is not a welfare program, but an insurance program where farmers pay below-market premiums. For good Revenue Protection policies this year, Minnesotans shelled out $55 to $62/acre for protection. It reduced their risk, but it still cost real money.

"Farmers can go years with no claims," he says, citing Minnesota corn growers who in aggregate have paid more in premiums than they have collected in indemnities for the past 25 years.

"In an area without recent claims, just ask those farmers if writing premium checks for crop insurance feels like a subsidy," Barnaby says. He hopes that argument silences the critics on Capitol Hill.

Follow Marcia Taylor on Twitter@MarciaZTaylor


Posted at 3:16PM CDT 09/20/12 by Marcia Zarley Taylor
Comments (4)
speaking from an area that has had to rely on crop insurance for 2011 and 2012, I can tell you we would much rather harvest a "normal" crop. Our insurance guarantee yields are going to take a substantial hit with 2 years of zero production figured in! That takes several years of good yields to bring back up. We are not offerred the various insurance options that other parts of the country enjoy, either. We can only buy 75% coverage, got no trend yield adjustments, cannot buy the weather products, etc. We are as dry as 2011 going into wheat planting and blowing ground is becoming our latest issue. We are no-til, which is not very effective with zero crop residue to plant next crop in. Believe me, growing and harvesting crops is much better than relying on insurance year after year. Dr. Barnaby is correct about the livestock consequences, also. Janet Tregellas
Posted by JANET TREGELLAS at 11:16AM CDT 09/21/12
Janet, all I can say is "ouch, that hurts!" I wasn't aware that Texas remained capped at 75% as Mississippi lifted that restriction this year after farmers protested. But your experience helps explain why some growers do not see crop insurance as a perfect substitute for a farm program safety net. With repeated damage to your APH, and inability to buy 80% or 85% coverage, you can't insure much for your premium dollars. Are any others having this experience?
Posted by Marcia Taylor at 4:09PM CDT 09/21/12
I'm happy to see DTN/Progressive Farmer reconsider their original hypothesis that receiving crop insurance is better than growing a crop. Now, if we can just get my local paper, the Cedar Rapids Gazette, to do the same, what a revelation. My farming friends and I were furious about the media using hypothetical situations to twist our misfortune into headline news! It was interesting though, that Gazette online comments were all in favor of subsidized crop insurance. Perhaps more people than I thought, realize the high risk of earning an income from the ravages of Mother Nature, the whims of the Board of Trade and government policies.
Posted by Curt Zingula at 7:21AM CDT 09/25/12
I read an article the other day and one of the respondents was saying that he thinks it is time for all the farmers to step up to plate and start paying their fair share of taxes since they are the richest people. He believed most were using unfair practices to not pay the required taxes since it was his belief, apparently, that farmers need to pay on gross income, not net. WHen you stop and think how much money is often lost due to the insurance premiums for not only crops but the farm and machinery, that really ads up and not being able to deduct those costs along with the cost of seed and fertilizer would wipe out every farmer and no one would ever want to farm again.
Posted by Dale Paisley at 11:35PM CDT 09/25/12
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