Solid crop insurance strategy seen as 'no-brainer'
Illinois farmers are realizing that crop insurance is, as University of Illinois risk management specialist Bruce Sherrick puts it, a “no-brainer.”
Published: Jul 27, 2012
But crop insurance strategy isn’t. Farmers who put forethought into risk protection this season may face far fewer headaches heading into 2013.
“The past couple of years, it (crop insurance) hasn’t been the most profitable thing to invest in,” said Greene County farmer Chad Schutz, who insures 100 percent of his acres. “But it’s part of doing business. This is a year where (having crop insurance) is really going to pay off.”
Given federal premium subsidies, crop Revenue Product (RP) coverage that covers real production costs makes “a lot of sense in most cases,” Sherrick said. But choosing the right type of revenue coverage is key, as well.
For example, corn growers this spring could have opted for standard RP, which triggers losses based on the higher of a $5.68-per-bushel spring price or a harvest price, or RP with a harvest price exclusion.
In addition, Illinois farmers were offered the Trend-Adjusted Actual Production History (APH) Yield Option for the first time this spring. That allowed eligible policyholders to elect to have their APH yield adjusted based on their county’s historical yield trend.
“Clearly, regular RP was the best choice this season, and the highest (coverage) election you could have was the best choice,” Sherrick told FarmWeek. “On top of that, trend adjustment is an absolute no-brainer. There is virtually no case where doing that was not the right decision.”
Of course, policyholders can’t anticipate all possible scenarios. This spring, Kane County farmer Bob Gehrke purchased a regular RP policy on an enterprise unit basis, which covers all corn/bean acres within a county. The 2008 farm bill increased premium subsidies for enterprise coverage.
Higher-cost “optional” coverage of individual Farm Service Agency units, which separates higher- and lower-yielding acres, likely would have provided greater drought protection, Gehrke admits. “But there’s definitely an advantage to having any crop insurance this year,” he said.
House-Senate farm bill proposals would replace direct payments and other crop programs with a new revenue safety net -- in the case of the House plan, a dual option aimed at meeting respective Midwest and southern farmer concerns. Sherrick stressed the need for a program that works with rather than “undermines” crop insurance.
“What we’ll discover is that if we start out next March with $7 (corn) prices, crop insurance is going to look really expensive on a cash flow basis, because it’s going to be covering really highly valued revenue,” he suggested.
“If we get to next spring and we have $4 prices, crop insurance is going to look kind of cheap on a cash flow basis, because we’re covering revenue that’s not that highly valued.
“But in both of those cases, that’s fairly priced insurance, and we have a subsidy on top. You have to start with underlying crop insurance,” said Sherrick.
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