Use Crop Insurance To Manage Your Risk

Rising production costs, volatile prices have raised the risks for farmers. A risk management plan using crop insurance can help you cope in 2012.

Published on: Feb 10, 2012

Iowa State University Extension and Iowa Farm Bureau addressed crop insurance and crop marketing decisions for farmers during a one-hour webinar on February 8, 2012. "As farmers' costs of production increase, risk management tools—including crop insurance and marketing decisions—are vital to the success of their farming operations," pointed out William Edwards, ISU Extension ag economist.

The webinar addressed the changes in crop insurance for 2012, including the change to adjust proven insurance yields to reflect upward crop yield trends, and the webinar also explained the new lower premium rates. "In these volatile times, risk management is more important than ever," emphasized Ed Kordick, Iowa Farm Bureau's commodity services manager. "Farmers need to understand their options as they look forward to marketing and protecting that next crop."

The webinar has been recorded and archived at www.iowafarmbureau.com. Following are highlights of the information presented.

Deadline to sign up for 2012 crop insurance is March 15

The COMBO or Common Crop Insurance Policy product which was introduced last year is back for 2012. This package allows the farmer to select if a yield protection (YP) or a revenue protection (RP) policy is best for his/her operation. COMBO was created as a combination of yield and revenue protection policies. As the product names imply, Yield Protection protects against a decline in yield only. Revenue Protection protects against a decline in revenue (yield times price).

As with all risk management tools, make sure you understand all the factors. The best source of information is your crop insurance agent. "Talk to your agent now, well before the March 15 signup deadline, and ask questions," says Kordick.

Several important changes in crop insurance for 2012 crop season

There are some key changes that have been made to crop insurance for 2012 that are welcomed by farmers. Starting this year, the Trend Adjusted APH Yield Endorsement is available. The improvements in crop production technology and seed genetics have resulted in increased yields in recent years and the current crop insurance Actual Production History (APH) system has lagged behind those increases in yield. This new endorsement is an effort to allow a farm's crop insurance APH to be increased using a factor of recent county yields.

Trend adjustments can be made based on a county's historical yield trend. The adjusted APH yield is then used in the coverage calculations. This trend adjustment is available in 2012 for soybeans (except specialty type beans) and corn (except silage type corn).

The adjustment is available for either Yield Protection or Revenue Protection insurance products. The farmer must elect the Trend Adjusted APH before the sales closing date (March 15) and the election will be based on a crop and county basis.

For 2012 crop year, the lower premium rates will be available

The USDA's Risk Management Agency (RMA) has announced an updated method that will be used to set crop insurance premiums. This will lead to lower insurance premium rates for many corn and soybean farmers in the 2012 crop year. Specific details of the rate reduction and whether or not it applies to you or how much, needs to be discussed with your crop insurance agent.

Any rate reduction will be on the yield portion of the insurance rate and not on the price portion of any revenue type product. Specific rates will not be known until after all the factors involved are determined, but RMA has estimated the rate adjustments may result in an overall rate decrease of around 7% for corn and 9% for soybeans.

Locking in margins—crop insurance essential for risk management

Purchasing crop insurance isn't the last step in putting together a crop risk management plan, notes Kordick. Although there can be basic protection when a RP (revenue protection) product is purchased, a key use of these products is they can be used in tandem with price risk management to establish acceptable profit margins.

Historically, some of the best market opportunities occur as the market tries to "buy" acres for the crop as the planting/growing season begins. Also, this is the time of the greatest production uncertainty for the market and on each farm.

Revenue protection products help you cope with market uncertainty

The revenue protection crop insurance products offer a cure to help take care of part of that "on farm" uncertainty, explain Edwards and Kordick. These products help to provide guarantees that allow farmers to sell crops ahead of harvest.

A concern that can stall pre-harvest sales is "What if I sell it, and my crop ends up with low yields and the price goes up?" Revenue crop insurance can help with that concern and give the confidence needed to lock in an acceptable margin before the crop is harvested.

If there are crop production problems, and the bushels committed are not there, the revenue protection insurance helps to make up the difference. Yield protection crop insurance alone may not give the desired protection if the intent is to sell a portion of the crop before harvest.

"Farmers should decide what type of coverage does the best job of managing the risk for their farming operation," says Kordick. "Check with your crop insurance agent on all details and for updated prices as the insurance purchasing period approaches. If you have questions, ask them now before the March 15 sign-up deadline. Clearly, there are good developments in these changes for 2012 crop insurance, and crop insurance should be considered as part of a crop risk management plan."

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.