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Selling your crop insurance bushels

In 2011 more than 80% of Iowa’s corn and soybean acres were covered by Revenue Protection, or RP, crop insurance. With the uncertainty of weather and potentially volatile crop prices, it is expected Iowa farmers made similar plans for managing revenue risk in 2012.

In addition, most farmers using the RP product have a high level of comfort in committing “insurance bushels” to delivery. Combining crop insurance revenue products with preharvest crop sales has been a common strategy across Iowa. Despite 2010 and 2011 having contra-seasonal futures price rallies late in the growing season, the odds still favor higher corn and soybean futures prices in the spring and early summer months, as opposed to harvesttime.

However, some farmers still struggle with answers to two primary questions: What if I don’t produce the bushels? What if the markets move higher after I make preharvest sales, and I don’t have enough bushels to deliver against my forward-cash contracts?

Using RP coverage counters both concerns. Here’s an explanation of how to use the RP product and sell your crop insurance bushels using seasonal price trends.

How to use RP coverage

Since RP is a farm-level product, the insured is guaranteed the Actual Production History, or APH, times the level of coverage elected annually on or before the March 15 deadline. With RP coverage, these bushels are guaranteed at the higher of the Projected Price (February average for December corn and November soybean futures) or the Harvest Price (October average for each of the futures contracts).

If you can’t deliver bushels contracted, you’re going to receive an indemnity payment reflecting any missing bushels at the higher of the two futures prices. In Iowa, very few merchandisers will require that you go out and buy substitute bushels. They will simply charge a service fee of 10 to 20 cents per bushel. Any missing insurance bushels are reflected in this indemnity payment received shortly after harvest when both the yield losses and the harvest price are known.

Here’s an example: The insured has a farm with an APH of 175 bushels per acre. That’s a simple average of the last 10 years corn was grown on that farm. In 2012, many insured farmers took advantage of the Trend-Adjusted APH Yield Endorsement. Let’s say the trend-adjusted county yield factor for this farm is 2.38 bushels per acre. The TA yield for this farm is 194 bushels per acre. This endorsement would increase the APH coverage on this farm by 19 bushels per acre.

Most insured farmers likely elected the higher TA yield to benefit from the higher revenue guarantee. Another benefit is the additional 15 bushels per acre (194 minus 175 equals 19 bushels per acre times 80% coverage) that can be preharvest-marketed for delivery.

The projected prices of $5.68 per bushel for corn and $12.55 per bushel for soybeans were not known until Feb. 29. Thus, the revenue guaranteed for crop insurance purposes on corn for the example above is $795 per acre, or $882 per acre, depending on whether the farmer elects to take the TA yield (at the 80% level). The premium difference was simply the extra cost of covering those additional 15 bushels per acre. Again, these are extra bushels that can be committed to delivery.

Selling insurance bushels

Since the use of RP coverage guarantees both bushels and price, many farmers like to preharvest-sell a portion of these insurance bushels well in advance of harvest.

There is a risk if a farmer commits to delivery of all their insurance bushels (APH times level of coverage) should they be unable to plant the crop. The prevented planting coverage is only 60% of the revenue guarantee. Another caution is the harvest price reflects the futures price, not the cash price. Should the basis (cash minus futures) be positive at harvest, there’s a risk of not having an indemnity check large enough to cover all insurance bushels if 100% are committed to delivery.

Look at the 22-year history in line graphs for weekly futures price movement from January through December. Note that the seasonals favor higher new-crop corn and soybean prices in the spring months of March through June. The June highs in 2008 and 2011 exaggerate the extreme highs in June that occurred each of those years. Selling insurance bushels incrementally from mid-February through mid-June (perhaps mid-July for soybeans) is advised, rather than timing all sales for a specific week or price.

Conclusion: Using Revenue Protection coverage and the new TA yield option are popular choices for 2012. It’s expected that many farmers will combine these products with a preharvest marketing plan with a comfort level to sell “insurance bushels.”

This is especially true when futures prices are at or above the projected price for either corn or soybeans. The odds favor this occurring during the spring months.

Johnson is an ISU Extension farm management specialist in central Iowa.

For more on grain marketing and crop insurance, visit www.extension.
iastate.edu/polk/farmmanagement.htm
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Credit: Edward Usset, Center for Farm Financial Management, University of Minnesota

This article published in the April, 2012 edition of WALLACES FARMER.

All rights reserved. Copyright Farm Progress Cos. 2012.