Making Your 2020 Crop Insurance Decisions

James Mintert, Professor & Director

Nathan Thompson, Assistant Professor

Purdue Center for Commercial Agriculture

February 24, 2020

Thinking About Your 2020 Crop Insurance

1. Lesson’s learned in 2019

üPrevented planting considerations are important

üPrevented Planting Buy-Up Option of 5%

2. Harvest Price Option is a valuable tool to manage risk

3. Enterprise units are a good cost reducing alternative for many Corn Belt farms

4. Your crop insurance strategy can help support your market risk management strategy

February 24, 2020

Crop Insurance DefinitionsØBasic Units

vAll of one crop in a county for a specific share of productionvAll owned and cash rent land for one crop in one county is a basic unit

vEach share rent landowner arrangement would be a separate basic unit

ØOptional UnitsvDivisions of basic units based on township section

ØEnterprise UnitsvAddition of all basic units in one county for a single crop

February 24, 2020

Potential Crop Insurance Products• Yield Policies

§ AYP = area yield protection§ Insures against county-wide production loss (based on county yield)

§ Policy protection = dollar amount of protection per acre x net acres

§ 70 to 90% coverage levels

§ YP = yield protection§ Insures against production loss (based on individual farm yield)

§ Yield protection guarantee = APH approved yield x coverage level x projected price

§ 50 to 85% coverage levels

February 24, 2020

Potential Crop Insurance Products• Revenue Policies

§ ARP = area revenue protection

§ Insures against county-wide revenue loss (based on county revenue)

§ Policy protection = county yield x coverage level x greater of projected (Feb. average) price or actual harvest (October average) price

§ 70 to 90% coverage levels

§ RP = revenue protection

§ Insures against revenue loss due to increase or decrease in price, low yield, or combination of these (based on individual farm revenue)

§ Revenue protection guarantee = APH approved yield x coverage level x greater of projected price or harvest price

§ 50 to 85% coverage levels

February 24, 2020

Projected and Harvest PricesØProjected Price

Based on settlement prices for futures contracts during February v2016: Corn = $3.86 and Soybeans = $8.85v2017: Corn = $3.96 and Soybeans = $10.19v2018: Corn = $3.96 and Soybeans = $10.16v2019: Corn = $4.00 and Soybeans = $9.54v2020: Corn = $3.91 and Soybeans = $9.20 (preliminary, estimated through 2/21/20)

ØHarvest PriceBased on settlement prices for futures contracts during October of the crop year v2016: Corn = $3.49 and Soybeans = $9.75v2017: Corn = $3.49 and Soybeans = $9.75v2018: Corn = $3.68 and Soybeans = $8.60v2019: Corn = $3.90 and Soybeans = $9.25

February 24, 2020

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19Year

Ratio of Harvest to Projected Crop Insurance PricesCorn and Soybeans, 1996-2019

Corn Soybeans 0.80 1

Source: USDA-RMA

Harvest soybean price exceeded projected price 8/24 years

Harvest corn price exceeded projected price 6/24 years

February 24, 2020

Estimated Corn Premiums: White County, IndianaCorn Proj. Price = $3.91; Volatility = 0.18, TA APH =180, +5% Prev. Plant Option

Coverage Level YPEnterprise Units

RPEnterprise Units

(Optional Units in Red)

ARP120% Protection

Factor65% 1.17 2.02 N/A

70% 1.55 2.95 3.73

75% 2.37 4.68 ($11.51) 8.15

80% 4.60 9.25 ($18.63) 13.38

85% 8.48 17.82 ($28.04) 23.60

90% N/A N/A 38.86

February 24, 2020

Estimated Soybean Premiums: White County, IndianaSoybean Proj. Price = $9.20; Volatility = 0.14, TA APH =56, +5% Prev. Plant Option

Coverage Level YPEnterprise Units

RPEnterprise Units

(Optional Units in Red)

ARP120% Protection

Factor65% 0.73 1.03 N/A

70% 1.14 1.72 1.51

75% 1.85 2.90 (6.59) 2.20

80% 3.55 5.61 (10.30) 3.50

85% 6.90 11.06 (16.13) 7.63

90% N/A N/A 14.52

February 24, 2020

Should You Increase Your Coverage Level?White County Example

• 80% corn RP provides $563 revenue coverage

• 85% corn RP provides $598 revenue coverage

• Revenue coverage increase = $598-$563 = $35

• Farmer Paid Premium increase for 85% coverage = $8.57

• Is it worth it?

• $8.57/$35= approximately 24%

• So, if you expect the revenue guarantee increase to trigger a

payment at least 24% of the time, you would expect to recover the

additional premium

February 24, 2020

What About SCO (Supplemental Coverage Option) Insurance?

• Farms choosing PLC as their 2018 Farm Program choice have an option to

purchase county level insurance known as SCO

• Provides buyer an opportunity to “buy-up” coverage as an add on to their

regular crop insurance

• The ”buy-up” is to 86% of benchmark revenue, but the benchmark is county

revenue, not individual farm revenue

• Provides buyer with a mix of farm level and county level insurance

• Two considerations: Cost and Risk Protection provided

February 24, 2020

Purchase of SCO Provides Buyer With a Combo Type Product Consider our White County, Indiana example

• 80% RP premium was $9.25/acre

• 85% RP premium was $17.82/acre

• If enrolled in PLC, could purchase 80% coverage ($9.25) + SCO ($4.29)=$13.54

• The “Combo” mix of RP and SCO is $4.28/acre cheaper than 85% RP

• But, the ”Combo” mix of RP and SCO does not provide the same coverage as 85% RP

• Likelihood of county revenue falling below 86% of the county guarantee is generally less than on any of the RP individual products

• Historically county level insurance at 86% level has not been very attractive

• Use of SCO is potentially more attractive for farms that carry a lower coverage levels (75% RP or less) to boost coverage

• Compare cost of buying SCO vs. bumping your RP coverage up one level

February 24, 2020

Integrate Your Crop Insurance & Crop Marketing Strategies

How can I sell it before I know if I have it?1. Crop insurance coverage…can count on those bushels

2. Don’t pass up opportunities for profitable sales (know your cost of production)

3. Pre-harvest sales allow you to take advantage of seasonal crop price strength in the spring

February 24, 2020

New Crop Corn Futures Seasonality and Futures Carryby Month and Week, 1988-2018

$0.15

$0.21103 104

959596979899100101102103104

$0.14$0.15$0.16$0.17$0.18$0.19$0.20$0.21$0.22

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

New Crop Corn Dec. Futures Price

Index (Jan. 1 = 100)

New

Cro

p Co

rn Ju

l. M

inus

Dec

. Fu

ture

s Pric

e Sp

read

($/b

u.)

New Crop Corn Jul. Minus Dec. Futures Price Spread ($/bu.)New Crop Corn Dec. Futures Price Index (Jan. 1 = 100)

New crop futures prices tend to peak when ”carry” is weak

“Carry” tends to peak when new crop futures prices are weak

February 24, 2020

New Crop Soybean Futures Seasonality and Futures Market Carryby Month and Week,1988-2018

$0.08

$0.22105

99 9899100101102103104105106

$0.07$0.09$0.11$0.13$0.15$0.17$0.19$0.21$0.23

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

Jan Feb Mar Apr May Jun Jul Aug Sep Oct

New Crop Soybean Nov. Futures

Price Index (Jan. 1 = 100)

New

Cro

p So

ybea

n Ju

l. M

inus

Nov

. Fu

ture

s Pric

e Sp

read

($/b

u.)

New Crop Soybean Jul. Minus Nov. Futures Price Spread ($/bu.)New Crop Soybean Nov. Futures Price Index (Jan. 1 = 100)

New crop futures prices tend to peak when ”carry” is weak

”Carry” tends to peak when new crop futures are weak

February 24, 2020

University of Illinoisfarmdoc Crop Insurance Tools

• https://farmdoc.illinois.edu/crop-insurance

• Premium Calculator• Payment Evaluator• FAST tool spreadsheet

February 24, 2020

Considerations for Your 2020 Crop Insurance

1. Enterprise units are a good alternative for many Corn Belt farms

2. Use products that include the harvest price option (e.g., RP and ARP)

3. Take advantage of 5% Prevented Planting Buy-Up

4. If You Choose PLC as Your Farm Bill Option, You Are Eligible to Purchase SCO Insurance...Compare SCO vs. Boosting Your RP Coverage

5. Integrate your crop insurance and crop marketing strategies

Check out our new Crop Basis Tool at

Purdue.edu/commercialag

Thank You