Minding Ag's Business
Marcia Zarley Taylor DTN Executive Editor

Wednesday 03/05/14

Why Crop Insurance Can't Fly Solo

In cyclical businesses like farming, what goes up must come down--and it's usually market prices that adjust much faster than your cost of production. So the tailspin in commodity prices since 2012 is a poignant example of why crop insurance alone can't be the only safety net for farm income. It also reinforces why you seriously need to research options on the new farm bill's ARC and PLC programs.

Revenue-type crop insurance such as Revenue Protection or Area Risk Protection quickly adapt to shifts in market prices. Harvest prices reset the February spring guarantees if October prices are higher. So the record guarantee for corn was $7.50 in 2012, but set at only $4.62 so far this year.

As the accompanying chart shows, corn's crop insurance revenue guarantee (for those with a harvest-price adjustment) bounced around about 225% in the last decade. It peaked at $7.50/acre in 2012, but bottomed at $2.32 in 2005. The beauty of crop insurance is that quickly reacts to market shifts, but it provides little security against multi-year price collapses.

This week the Risk Management Agency set minimum crop insurance price guarantees for spring-planted crops in the bulk of the Grain Belt at $4.62 for corn, $11.36 for soybeans and $6.51 for spring wheat--down from spring guarantees of $5.65, $12.87 and $8.44 respectively in 2013. Growers who purchase revenue-based products with automatic harvest-price adjustments still could benefit from a surprise rally come October like they did in 2012, but that's not a likely scenario at the moment.

The bottom line is that production costs have barely budged since 2013 so a typical corn grower in Illinois who pays average market rents of about $202-$302/acre in 2014 faces a net loss of $41 to $48/acre this year, the University of Illinois says.

Corn prices may not drop as low as USDA's season-average 2014 corn price of $3.65--or even its $3.30 2015 forecast, other land grant university economists concede. "But suppose the recent drop in crop prices is the beginning of a multi-year trend," Daryll Ray of the Agricultural Policy Analysis Center at the University of Tennessee asked me. "It will be impossible for revenue insurance to provide farmers’ crop/revenue protection as time moves along."

Ray calls revenue insurance an “upside down safety net.” "When prices are very high, that is well above total production costs, revenue insurance can guarantee farmers pure profits," Ray says. "Under those conditions taxpayers subsidize insurance that often guarantees farmers revenue that is above all production costs. This is nearly unprecedented as an agricultural policy and yet this characteristic is being overlooked by those who normally would be the most critical of government sanctioned arrangements that have the effect of supporting farmers' incomes, even at levels that only cover a fraction of total production costs.

"On the other hand, when prices are below production costs, whether measured as total or out-of-pocket or variable, revenue insurance only protects a percentage of that low price that is already below the measure of production costs. Relying on revenue insurance as the primary safety net for agriculture works when a safety net is not needed but fails miserably when it is," he says.

Ray believes some of his land grant colleagues may be "downplaying the very real threat of substantially lower crop prices in the years ahead. Sure, events may prevent prices from dropping further, but history would suggest otherwise." In its long-term forecasts, USDA pegs corn prices below $4 until 2022, bottoming at $3.30 in 2015, so Ray isn't alone in his bearish outlook.

In a March 5 farm bill webinar, Jonathan Coppess, an assistant professor of law and policy at the University of Illinois, gave some consolation that county-based Agricultural Risk Coverage (ARC) might provide more cushion to Midwest corn and soybean growers than at first expected. What's more those projected payments would come on top of any crop insurance indemnities, although (unlike insurance) you can't count on payment before October 2015.

Using McLean County, Ill. trend-line yields and an expected corn price of $3.90, Coppess estimates a 2014 county ARC payment rate per corn base acre of $68.52 (the actual payment rate is $81/acre, but you're paid only on 85% of base). Likewise, a $9.65 season-average soybean marketing price for 2014 would generate a payment of $29.82/acre in McLean County (that's a $35 payment rate times 85% of base acres). In contrast, Price Loss Coverage programs would pay nothing for either commodity unless prices plunged below $3.70 for corn and $8.40 for soybeans.

Growers and their landlords will have a one-time irrevocable choice to pick PLC or ARC for the life of the farm bill, sometime come later summer or early fall. That will require them to choose whether they are bearish or just slightly bearish about prices over the next five years.

"The big issue for this decision is what farmers think prices are going to do and more importantly, what do things look like on their farm (i.e., their input costs and expectations)," Coppess says."Because prices have been strong for the last few years, the 5-year Olympic average calculations in County ARC are going to be more effective with price declines that do not fall below the reference price ($3.70 corn, $8.40 soybeans). Most forecasts seem to have corn and soybeans above the reference prices in coming years, so that makes County ARC more effective. But if you are very bearish on prices, PLC looks a little different--especially in years four and five.

"What’s most interesting about ARC is that 5 year-Olympic average price and how it readjusts to the new market situation if it is longer term than just a year or two," he adds. Like crop insurance, its protection could erode over time. If you estimate prices to stay low for the next five years, the last two years County ARC may not make payments, he says. A key question, Coppess adds, is will input costs have adjusted to the new market?

For more PLC and ARC analysis from the University of Illinois go to http://farmdocdaily.illinois.edu/…

 

For a wheat grower's analysis of Farm Bill options, subscribe to Kansas State University's pre-recorded webinar at http://commerce.cashnet.com/…

 

Follow me on Twitter@MarciaZTaylor

 

 

Posted at 12:49PM CST 03/05/14 by Marcia Zarley Taylor
Comments (5)
Government schemes that guarantee the largest income benefits and subsidies to those with the greatest wealth steal from smaller farmers a fair and equal opportunity to compete in ag which is exactly what the billions for millionaires farm bill does. With the trillions in deficits and trillions in national debt how do we have the money to provide multimillion dollar safety nets as well as millions in insurance subsidies to the wealthiest and largest farmers most who are multimillionaires. What more could be more pathetic than having most farmers addicted to and dependent on government farm insurance schemes? Typical insane government programs that provide the most benefits to those the least needy of any help.
Posted by T Kuster at 9:13AM CST 03/06/14
Great article Marcia! I always find it funny that whenever you write about crop insurance or any other government program, the T kusters and Bill's of the internet and whomever else they have trolling, for EWG or which ever group is offended by something farmers must have done in the past, come out in droves and all have the same type of bland comment to make referencing millionaires stealing from the poor, schemes, guaranteeing profits, etc.
Posted by Aaron Cross at 11:03AM CST 03/06/14
Crop Insurance can be a solo, stand alone program. You know how? By having farmers build in higher profit margins for themselves when they bid cash rents, farm land purchases, and when they spend money. If during the good times, farmers are making good money, they should be "saving" that profit for the times when they get tight. That is where we are at now. Just because cash flows are tipping in the red, doesn't mean we should make sure those farmers survive. This is a business and poor spending/business decisions should not get rewarded.
Posted by Pedro Sanchez at 9:01AM CDT 03/10/14
Government crop insurance as we know it has been a near total disaster. Decades of government targeting the largest farmers with the largest income/profit guarantees and insurance subsidies has stolen from smaller farmers any chance of competing in a highly competitive business. Government farm programs have decimated rural America.
Posted by T Kuster at 1:32PM CDT 03/10/14
What needs to change is the government mindlessly targeting those with the greatest probability of the greatest profitability the largest government benefits. Government financially bulletproofing and turbocharging those with the largest incomes with extreme financial benefits destroys any chances of smaller farmers to compete.
Posted by T Kuster at 5:32PM CDT 03/11/14
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