Crop Insurance Guarantees Fall Hard; Cash Key In 2015

How much will you get from your crop insurance in the next year? As grain prices have fallen, so too have crop insurance guarantee level expectations. Those expectations are clarifying now as the 2014 corn and soybean harvest nears its end.

Minimum revenue guarantees will be established next February using the December 2015 futures contract price for corn and the November 2015 price for soybeans. Sure, February's still a way off, but one economist says there's not much reason to believe prices will move enough to prevent projections at this point in the year from being well within reason.

"Crop insurance guarantees likely will be lower than those for recent years. As a result, farmers will face more downside revenue risks. In this article, 2015 crop insurance guarantees are projected using levels of current Chicago Mercantile Exchange (CME) futures contracts. Revenue guarantees for crop insurance products will be below total costs of production," says University of Illinois Extension ag economist Gary Schnitkey in a university report. "Current prices on the Chicago Mercantile Exchange futures contracts will provide a gauge of 2015 projected prices."

Right now, the December 2015 corn contract is trading around $4.10/bushel, while the November contract for soybeans is trading around $10.10/bushel. Both are 11% below the 2014 revenue guarantee prices of $4.62 and $11.36 for corn and soybeans, respectively.

"This 11% price decrease then translates into an 11% decrease in minimum revenue guarantees on Revenue Protection, given no changes in guarantee yields and coverage levels. A $4.10 projected [corn] price would be the lowest price since 2010, when the projected price was $3.99," Schnitkey says. "A $10.10 projected price [for soybeans] would be 11% lower than the 2014 projected price of $11.36. A $10.10 projected price would be the lowest projected price since 2009, when the projected price was $9.23. Like corn, revenue guarantees offered by crop insurance have decreased since 2011, 2012, and 2013."

Revenue guarantees for corn have fallen since 2011, when a $914/acre guarantee was paid based on a $6.01/bushel projected price x a 190-bushel/acre TA-APH yield x .80, the typical coverage level. Since then, revenue guarantees have fallen to $863/acre in 2012, $859 in 2013, and $702 this year. The projected $623/acre revenue guarantee is the lowest since 2010, when it was $606/acre for corn at an 80% coverage level, Schnitkey says.

The general trend is the same for soybeans, with a little more year-to-year fluctuation; the projected $404/acre revenue guarantee for 2015 is the lowest since $369 in 2010. Since that year, guarantees that topped out at $544/acre in 2011 will land at $404/acre this year based on a $10.10/bushel price x 50-bushel yield x .80 (the 80% coverage level).

"In 2011 through 2013, revenue guarantees were above $500. The 2015 revenue guarantee at an 80% coverage level will be near $400 per acre. Similar to corn, soybean revenue guarantees will not exceed costs," Schnitkey says.

What if you've got a higher crop insurance protection level? Based on his price projections, Schintkey says even at higher levels, crop insurance protection won't amount to enough to exceed overall crop costs next year based on projected nonland costs of $550/acre and $375 for corn and soybeans, respectively.

"A cash rent of $300 gives total costs of $850 per acre, significantly higher than the $623 revenue guarantee at an 80% coverage level. The guarantee at an 85% coverage level is $662 per acre, still below total cost by $200 per acre," Schnitkey says of the corn projections. "[For soybeans,] a $300 cash rent results in $675 total costs, significantly above the $404 revenue guarantee. An 85% coverage level has a $429-per-acre revenue guarantee, still over $100 lower than total costs."

Ultimately, these numbers mean farmers should utilize crop insurance as just a part of a risk-management strategy for the 2015 crop year. More importantly, any cash savings should be pursued as a way to hedge against both lower prices and lower crop insurance revenue guarantees.

"Lower projected prices will cause crop insurance to provide protection at lower revenue levels. As a result, farmers will face more risks from lower revenue in 2015 than they did in 2014," Schnitkey says. "These lower guarantees continue point to the need of farmers to conserve cash and employ other risk-management strategies."