The Benefits Of Crop Insurance
Many people I know had the same opinion of last year for agriculture: I’m glad 2012 is over! Let’s face it, people who make their living from agriculture have really been hit hard this past year and it’s kind of affected their thinking going forward into this year.
So let’s review. Last spring, growers thought they would have steady $6 commodity prices and raise 200-bushel corn. They were thinking everything in agriculture is good.
But you don’t have to move these numbers very far for growers to start losing money. The early projection was for growers to plant 97 million acres of corn in 2012, so what was the likelihood that commodity prices would stay up? And because of a nice spring, many growers were planting corn in the middle of March last year, with good soil conditions. So at the start of the 2012 season, the marketplace was setting up for a really large corn crop. So there was a lot of concern commodity prices could drop to the $5 per bushel level.
The Crop Insurance Safety Net
So what could these growers do to manage their risk? For many, purchasing crop insurance was the answer.
But what kinds of crop insurance policies could growers purchase? For most, there are five different types.
First is Yield Protection. With this kind of policy, growers are protected against a production loss for crops for which revenue protection is available but not selected. It also provides prevented planting and replant protection. This policy allows growers to protect their bushels, and nothing more. In 2012, Yield Protection policies set the spring price for corn at $5.68. And for every bushel the grower lost, he or she was going to get paid $5.68 regardless.
Then there’s a Revenue Protection policy. This is probably the most common policy, especially for your larger acre growers. It is a tool that allows producers to manage both their yield and price risk. The policy is structured to allows growers to “lock in” a certain level of revenue, which is usually yield times price.
Then there’s the Revenue Projection with Harvest Price Exclusion. This is essentially the same as a Revenue Protection policy, except that the amount of insurance is based upon the projected price only. This policy can protect a grower, but there is no bushel guarantee with this plan. So growers could end up not getting covered if the spring prices for corn are significantly different than the fall prices were when the policy was purchased.
Finally, there are the Group Risk Protection and Group Risk Income Protection policies. These are multiple peril insurance programs designed to help growers protect their crops from disastrous losses. However, these policies only protect growers when yields are low all over the county they are in, not when isolated problems hit an individual’s crops. In addition, neither provide coverage for prevented and delayed planting or reduced grain quality, such as aflatoxin damage.
In 2012, most Group Risk Protection policies were based off of the county’s yield projection. This was figured out in many cases by using the yield surveys conducted of the county’s growers.
As for the Group Risk Income Protection plan, this was based on the county’s revenue projections. This policy is popular with growers that might not have the records to prove what their production would have been for the year or for growers that consistently outperform the county average. Growers can also buy up to 90% of their coverage using this kind of policy. Historically, when a grower has bought this policy, they are most concerned about price. Also, for every $1 lost using this kind of policy, growers would get paid $1.66.
Buying Into Profit
So by buying these types of policies, most growers were able to purchase profit in 2012. How many of you have heard that crop insurance doesn’t work, it doesn’t pay? You might hear a lot of growers talk that way. But you’ve probably also heard many growers say: “I have crop insurance, so I’m fine.” But it all depends upon which kind of coverage a grower has whether or not crop insurance can help them out in a bad crop year.
We were at record revenue levels going into 2012. So what are we looking for in 2013? On the commodity market, we are getting close to that $6 per bushel for corn level again, so growers can set a $6 spring price with their insurance policies for 2013.
So what are growers concerned about going into the year? The drought continues. Much of the country is still dealing with the after-effects of the drought from 2012. In some parts of the country, the drought area is continuing to grow.
Also, some experts are projecting that more than 99 million acres of corn will be planted in 2013. That’s a huge number. If this happens, this could move corn commodity prices down to $4.05 per bushel. And that would really do some financial damage to some growers.
So with the drought, we have production risk. And with that much corn being produced, we also have a price risk. So for 2013, I don’t foresee the need for crop insurance going away or becoming less important than it was during 2012.