News & Resources

Lean Times Hike Risk

10 Mar 2016

By Marcia Zarley Taylor
DTN Executive Editor

NEW ORLEANS (DTN) -- Minnesotan Jerry Demmer has experienced farming's feasts and famines over the past decade. But after 42 years of farming and with his golden years ahead of him, the Clarks Grove operator doesn't want to jeopardize his lifetime earnings.

His conservative approach is more urgent now since he also owns stock in eight ethanol plants, and while still profitable, their dividends have withered due to competition from cheap crude oil.

"I use crop insurance as a safety net to protect my assets in case of a fallout disaster," Demmer said. "Younger producers use it to go to the bank to borrow for operating loans and tell them, 'I'm protected.'"

When the crop insurance deadline strikes March 15, Demmer will again sign up for an 85% Revenue Protection policy on both crops. It's a habit he has followed religiously over the past 20 years, even though the only time he triggered an indemnity was 2013. That was the spring when the southern part of the state was so swamped with rain, some growers had experienced only four days suitable for fieldwork by May 31. Demmer filed prevented planting on 75% of his acres.

Years of paying insurance premiums "were absolutely worth it" just to relieve the stress of that spring, Demmer said. "It made things easier. A farmer feels his job isn't done until planting is finished. At least insurance was there."

DOWNSIZED SAFETY NET

This year's spring planting guarantees -- $3.86 for corn, $8.85 for soybeans and $5.13 for spring wheat -- expose growers to even more risk than in recent history. Corn's spring insurance guarantee is the lowest for the past six years and soybeans for the past four. The same 85% corn policy with 200 bushels in Actual Production History (APH) guaranteed $1,028 per acre in 2011, versus $656 per acre today.

That's in line with deterioration in grain prices, but mismatched relative to growers' cost of production.

Because rents and input costs have resisted much price change, it will cost a typical 2016 Illinois corn farmer aiming for 200 bushels per acre yields about $822 per acre to produce a crop, University of Illinois economist Gary Schnitkey estimates, exposing that grower to more than $166 per acre of potential losses even with a full insurance payout. In the same case, someone who purchased only 70% Revenue Protection coverage would feel $282 per acre of exposure.

"It's not like a couple of years ago when crop insurance guarantees covered your production costs," Schnitkey said. "Buying the highest level of coverage -- 85% -- still puts you in loss territory in 2016."

Compounding that risk is that 2016 prices could slide much lower than previously expected if U.S. growers produce monster crops. USDA currently forecasts 2016 seasonal average corn prices at $3.45 per bushel, but it takes just a 10% above trend line national yield to push corn prices to $3.08 per bushel, National Corn Growers Association Vice President Paul Bertels cautioned in his Commodity Classic report last week.

To defend against such revenue disasters, Schnitkey recommends that Midwesterners:

-- Opt for 75% (or preferably higher) Revenue Protection policies.

-- Keep harvest-price adjustment if they typically pre-sell much crop ahead of harvest. In drought years like 2012, this feature helps growers buy out their forward contracts at the fall price.

-- Exclude the harvest-price adjustment if: (1) You don't presell much before harvest; and (2) The cost-saving alternative is to drop a coverage level. You'll save almost the same amount of money excluding the harvest price election on an 80% corn policy as you would dropping down a coverage level to a 75% policy with harvest price, Schnitkey said.

-- Economize by boosting APHs where possible. Ask crop insurance agents about using Trend-Adjusted yields, Enterprise Units (if all farm yields are consistent) and the new Actual Production History-Yield Exclusion option. All give you more bang for the buck.

(APH-YE allows growers to exclude their personal yields in all years when their county -- or an adjacent county -- suffers a 50% yield loss. Forgiving wipeout yields like 2012 helped boost corn APHs an average of 7% on 2015 premiums, according to the Risk Management Agency.)

MINDING THE BUDGET

Iowa farmer Ray Gaesser is mindful that insurance offers both upside and downside price protection. But in an effort to economize, he will be dropping his corn coverage level to 75% from 80% in 2015. On soybeans, he'll maintain his 75% coverage. His agent tells him most area farmers are choosing coverage at those levels.

"It's risk versus reward," said Gaesser, who farms about 6,000 acres with his wife Elaine and son Chris. "Each extra dollar of premium buys me a potential $5 return at the higher level. That's just not very good odds for insurance."

Unlike Demmer, Gaesser has never received the full premium back in any year, including the drought of 2012, which paid only two-thirds of his upfront cost. So he's willing to self-insure with a higher deductible to save premium dollars. His preference for optional coverage -- which insures individual farms rather than enterprise units -- adds to his premium expense. But he thinks the protection against actual loss on individual farms is worth it.

"I just use crop insurance in case of a real disaster. It's some income you can count on. There's no way it can come close to covering all your costs this year," Gaesser said.

APH-YE is one factor that's allowing Gaesser to keep his revenue-per-acre coverage relatively high at an affordable 75% coverage level. In 2012, he experienced a 124 bpa yield, versus his 10-year average of 187 bushels. By excluding that single disaster, he raised his APH by 10 bpa.

Gaesser knows it's early, but drought doesn't appear to be a major risk for him this season. Right now, his home county has fully charged subsoil moisture and adequate surface moisture. In an era of reduced expectations for farm income, he's just hoping to ride out 2016 losing the least amount possible.

"Legislators and economists who want to cut crop insurance need to understand most farmers are taking the first 20% to 25% hit upfront, before crop insurance even kicks in," Gaesser said. "That's the highest risk. Would homeowners accept that?"

See related crop insurance coverage on the Minding Ag's Business blog.

Marcia Taylor can be reached at marcia.taylor@dtn.com

Follow Marcia Taylor on Twitter @MarciaZTaylor

(SK/BAS/CZ)