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How Good is the 2013 Crop Insurance Safety Net?

At first glance, the projected prices per bushel look good at $5.65 for corn, $12.87 for soybeans and $8.44 for spring wheat.

The 2013 projected prices for crop insurance are known, so producers are huddling with their crop insurance agents to determine what policies, coverage levels and units of coverage to use for the coming crop year.

“At first glance, the projected prices per bushel look good at $5.65 for corn, $12.87 for soybeans and $8.44 for spring wheat,” says Andy Swenson, North Dakota State University Extension Service farm management specialist. “These prices are the third highest ever and should provide stout risk protection.”

Most producers select a revenue policy with a “revenue guarantee,” which is calculated by multiplying the projected price, the actual production history (APH) yield and the selected coverage level. However, revenue is only one side of the profit equation. The true measure of this crop insurance safety net is how the revenue guarantee compares with costs.

“Unfortunately, costs have risen dramatically,” Swenson says. “Budgeted total costs of production have doubled for corn and wheat since 2006.”

Has the revenue guarantee kept pace?

To answer this question, Swenson focused on the east-central region of the state (Eddy, Foster, Griggs, Stutsman and Wells counties) for which he annually constructs projected budgets. For 2006 to 2013, he calculated the revenue guarantee using the projected crop insurance price for the year, a 70 percent coverage level and assumed the APH was similar to the seven-year Olympic average yield used in the budgets. Each year, the revenue guarantee was compared with projected costs.

The costs included a charge for labor and management. The labor and management charge used for 2006 was $30 for wheat and soybeans and $40 for corn. It was increased each year by 2.5 percent.

For east-central North Dakota, the 2013 revenue guarantee for soybeans is estimated at 92 percent of projected per acre total cost, which is down from 98 percent in 2012. The corn revenue guarantee was 89 percent of total cost, which is down from 94 percent in 2012. Spring wheat increased to 80 percent compared with 78 percent in 2012. During the eight years of 2006 through 2013, soybeans typically had the best safety net, while spring wheat had the worst.

When focusing on individual crops during the eight years, the 2013 safety net is projected to be the third best for wheat but only the fifth best for soybeans and corn.

The 2008 year had a significantly better safety net than other years. The revenue guarantee was 142 percent of projected total per acre costs for soybeans, 130 percent for spring wheat and 109 percent for corn. “Agriculture is a risky business, but 2008 was a year when producers essentially could not lose,” Swenson says.

The poorest safety net year was 2006, when the revenue guarantee was projected to cover only 78, 63 and 59 percent of soybean, corn and spring wheat total costs per acre, respectively.

It is important to note that the crop insurance revenue guarantee is not necessarily the minimum revenue that will be received per acre.

“In fact, it only is accurate if there is a complete crop failure,” Swenson says. “If there is any production, the revenue will be a combination of crop value and crop insurance indemnity (if any). Because of differences in the crop revenue insurance harvest price (determined by the futures market) used in the calculation of crop insurance indemnities and the local cash price the farmer actually receives when selling the grain, the actual revenue per acre typically is somewhat less than the crop insurance revenue guarantee.”

NDSU Agriculture Communication – March 4, 2013

Source:Andy Swenson, (701) 231-7379, andrew.swenson@ndsu.edu
Editor:Rich Mattern, (701) 231-6136, richard.mattern@ndsu.edu
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