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Best of NAMA 2024












CROP INSURANCE, MARKETING & INCOME PROSPECTS ON MIDWEST GRAIN FARMS


by Gary Schnitkey, Nick Paulson, and Jim Baltz, Department of Agricultural and Consumer Economics, University of Illinois

and

Carl Zulauf, Department of Agricultural, Environmental and Development Economics, Ohio State University

Much-needed rains recently came through the Midwest, increasing yield prospects and decreasing the chance of a significant drought like that in 2012. Income prospects, however, did not improve, as corn prices fell by over $1.00 per bushel in a week. Overall, new crop pricing of corn at this point will not reduce revenue risk as corn prices are near trigger levels for high coverage RP policies. Downside revenue risks for soybeans are more significant. Pre-harvest sales of soybeans can reduce downside price risks.

Marketing and Crop Insurance

Most corn and soybean acres in the Midwest are insured using Revenue Protection (RP), revenue insurance that allows its guarantee to increase if the harvest price exceeds the projected price. The RP guarantee for crop insurance is the (see Figure1)

Higher of the projected price or harvest price

x Approved yield (usually the Trend-Adjusted Actual Production History (APH) yield)

x coverage level.

RP will trigger payments when harvest revenue -- harvest price times actual yield -- is below the RP guarantee.

For 2023, the projected price for corn is $5.91 per bushel, set based on December 2023 CME futures prices in February. Given an approved yield of 220 bushels per acre and an 85% coverage level, the minimum guarantee is $1,105 per acre (5.91 x 220 x .85).

On July 5, 2023, the December 2023 CME futures contract settled at $4.94 per bushel, down by 16% from the $5.91 projected price. A harvest price of $4.94 would trigger crop insurance payments for an 85% RP policy, given that the actual yield is near or below the approved yield. To illustrate, take the above example with a $1,105 RP guarantee. Actual revenue would be $1,087 per acre at a $4.94 harvest price and a 220 actual yield, the same as the TA-APH yield. RP would pay $18 per acre ($1,105 - $1,087).

At an 85% coverage level, RP will trigger payments at $5.03 per acre when the actual yield is at or below the approved yield. Trigger prices decrease to $4.73 for the 80% coverage level, $4.43 for the 75%, and $4.14 for the 70% coverage level (see Figure 2). Any further price declines will result in higher crop insurance payments for those farmers who have purchased at an 85% coverage level. Even at an 80% coverage level, new crop sales have little risk management benefit, as the December contract is only $.21 above the $4.73 trigger level.

To read the entire report click here.


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