Jon Scheve with weekly market commentary made on March 8, 2024
Crop insurance is a great tool to protect a farmer’s production risk. It guarantees that if something happens during the growing season, the farmer is protected from catastrophic losses.
However, some farmers think their revenue protection crop insurance is providing a floor price for their grain that protects them against falling crop prices. I believe that is an incorrect thought process and I think that crop insurance should be thought of as a revenue protection tool. This is because it considers both price and production in its calculations. Let me explain.
First, some farmers believe their revenue protection price is guaranteed at the spring value, which is $4.66 this year. Unfortunately, it is not. The revenue protection is based on the level of insurance farmers buy. If a farmer elects to buy the highest coverage they can they can only get 85% coverage. If we use that coverage value as the example this means the price value of the floor protection is actually $3.96. ($4.66 spring value x 85% coverage)
But price is not the only part to how a farmer’s payment is calculated. The next issue is that the crop insurance payment structure is also based on the farmer’s 10-year average production history (APH). For most farmers their APH is lower than what they should produce in any given year. This is because corn yields have been improving on average almost 2 bushels per acre each year. For example, in 2014 the average national corn yield using a linear measurement of the national yield back to 1974 was 162, but for 2024 it is 180. The current 10-year APH on the national yield is only 173.4, which is much lower than the 180 average farmers are expected to raise in 2024.
If we use the spring price of $4.66 x the 10-year APH of 173.4, and we have signed up for 85% coverage, our crop insurance’s revenue protection is $686.84 per acre (spring price x 10-year APH x % coverage). The real “floor price guarantee” will vary based on different final yield outcomes:
10-year APH - 173.4 final yield = $3.96 floor price
If a trendline yield is attainted - 180 final yield = $3.81 floor price
If an above trendline yield is hit - 187 final yield = $3.67 floor price
If there is a drought - 160 final yield = $4.29 floor price
Regardless of what yield is attained, the crop insurance “floor price” is much lower than where corn is currently trading.
Using 2023 As Another Example
The 2023 spring insurance price was $5.91 and the national 10-year APH last year was 171.43. If 85% coverage was purchased, the revenue protection was $5.02 or $860.57 per acre. ($5.91 x 85% x 171.43).
The national yield ended up being 177.4, so the actual floor price was $4.85 instead of $5.02. ($860.57 divided by 177.4). That means there was a $1.06 per bushel drop from the guaranteed spring price to the crop insurance “floor price” at the end of November and that includes more than a 16 cent drop just due to above 10-year APH yields.
This is why farmers need to still think about marketing strategies to protect the price they receive for their production. Crop insurance is there to protect against production issues not a price drop.
Insurance Is a Safety Net
Let me put it another way. If you wanted to sell or trade your pickup, you wouldn’t go out and wreck it to collect the insurance. This doesn’t work because the value of your pickup is based on the current value of the vehicle less the deductible.
Crop insurance has two “hidden deductibles” because it typically only pays 85% (or whatever level a farmer purchases) of the spring value and it is based on the 10-year APH, not the current year’s expected trendline yields.
Again, I am in favor of purchasing revenue protection crop insurance. I do it every year and I recommend other farmers do the same to protect themselves against the worst-case scenario in production. However, I believe that decision has nothing to do with marketing the grain that one should produce this fall.
Crop insurance is insurance, it is not marketing. If it was marketing, they would call it marketing.
If you would like to discuss different ways in how you can market your grain to protect your farms profits, please reach out to me.
Jon Scheve
Superior Feed Ingredients, LLC
9358 Oak Ave
Waconia, MN 55387