Producers encouraged to make crop insurance decision

“This year is a particularly interesting year, as producers are starting the year off with higher than usual crop prices,” shares University of Nebraska-Lincoln (UNL) Grain Marketing Extension Specialist Cory Walter  during a Making Farm Program and Crop Insurance Decisions for 2021 webinar held March 1.

UNL Extension Policy Specialist Brad Lubben joined Walter during the webinar, adding the year-long crop insurance decision to be made is deciding which insurance policy best fits an operation. 

Looking at crop prices

Crop prices are important for producers to acknowledge and understand because farm profit is largely dependent on crop prices, according to Walter and Lubben.

“As producers start the new year, it is unknown how crop prices will evolve throughout the growing season,” shares Walter. “It is important to note as producers research prices, they should research prices around their area.”

Surrounding counties could potentially have lower or higher prices than a producer’s county so looking at local prices can be beneficial. 

Walter shares, when looking at prices, producers can use a projected price and implied volatility. This practice allows producers to characterize what crop prices may become.

“When attempting to ascertain crop prices, producers should use actual production history (APH) in an attempt to find the most accurate prices,” Walter continues. “There can be large amounts of variability in terms of crop prices. For example, higher fall yields may increase the price of crops.”

ARC versus PLC

According to the U.S. Department of Agriculture (USDA) website, when it comes to crop insurance, there are two main programs – Agriculture Risk Coverage (ARC) or Price Loss Coverage (PLC). These programs were authorized by the 2014 and the 2018 Farm Bills.

ARC can be broken down even further into agriculture risk coverage-county (ARC-CO) or agriculture risk coverage-individual (ARC-IN). 

ARC-CO provides support tied to historical base acres of covered commodities, and not current production. ARC-CO payments are issued when the actual county crop revenue is less than the ARC-CO guarantee for the covered commodity. 

The USDA adds, PLC payments are issued when the effective price of a covered commodity is less than the respective reference price for said commodity.

“Oftentimes, producers fail to acknowledge ARC can limit the ability to additionally purchase supplemental coverage options (SCO) or enhanced coverage options (ECO),” notes Lubben. “Foreign program decisions can substitute, and in some instances compliment, crop insurance.”

“There are new price projections in 2021,” he adds. “They start much higher but this doesn’t mean the ARC and PLC programs will fundamentally pay producers.”

Lubben shares in 2014, producers came off record high prices which led to the olympic average being high. This action resulted in relative support through the ARC-CO program.

“The question is what kind of crop insurance should one purchase and should they purchase an underlying protection level such as SCO or ECO,” states Lubben.

Additionally, he adds, “The farm program decisions are dependent on a decent crop insurance decision, and good marketing decisions are as equally important.”

Lubben notes it is also important for producers to understand how to manage broader complex safety nets for farm income.

Crop insurance decisions

There are many decisions producers need to make when deciding on crop insurance. Walter explains multiple peril crop insurance has different coverage levels, which are dependent upon liability. 

“Coverage levels start at 50 percent and increase in five percent increments,” he says. “Coverage levels end at 85 percent.”

Additionally, Walter notes, “Insurance policy types can influence how payments are made, revenue protection  and protection against higher and lower fall prices as well as lower yields. Different policy types may also influence yield protection against lower yields.”

“Unit type will determine how acreage is divided into separate insurance policies – optional, basic, enterprise and whole farms,” Walter shares.

“SCOs are designed to effectively seperate farm payments from crop payments,” explains Walter. “SCOs will insure producers coverage level up to 85 percent.”

He adds if producers have a 75 percent coverage level, a SCO will insure they get paid the 10 percent between 75 and 85 percent.

“The ECO is new since the beginning of 2021,” Walter shares. “An ECO is similar to SCO but it is available for revenue protection and yield protection.”

An ECO operates at county levels for revenue protection and yield protection, thus allowing producers to select a 90 to 95 percent coverage level with premium subsidy ECO of 44 percent for revenue protection and a 51 percent for yield protection.

However, Walter notes it is important for producers to know the rise of December futures through the month of February can cause insurance deductibles to grow.

When layering SCO and ECO to individual coverage, indemnities are generated from two sources – county and individual coverage.

Additionally, Walter shares there are similarities to both SCO and ECO prices. If producers receive an indemnity from individual coverage due to price, they are likely recieving SCO and ECO as well. 

Walter adds individual yields and county yields will be the source of payment discrepancy. Further price drops from spring to fall, with higher yields will take revenue out of indemnities. 

Given the high projected prices starting point, prices could potentially drop dramatically between spring months and fall.

Madi Slaymaker is the editor of the Wyoming Livestock Roundup. Send comments on this article to roundup@wylr.net.