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During the next few weeks, many farm operators will be finalizing their crop insurance decisions for the 2021 crop year. March 15 is the deadline to purchase crop insurance for the 2021 crop year.

The rise in corn and soybean prices in the past several weeks will likely enhance the available crop insurance coverage for 2021 compared to recent years. However, premium costs are also likely to be higher than a year ago for similar crop insurance products.

Producers have several crop insurance policy options to choose from, including yield protection policies and revenue protection policies, supplemental crop option, enhanced coverage option and other private insurance policy options. There are also decisions with using “enterprise units” vs. “optional units,” as well as decisions on the use of “trend adjusted” actual production history yields.

Yield protection insurance policy options provide for “yield only” insurance protection, based on historic actual production history yields on a given farm unit. Yield protection prices are based on average Chicago Board of Trade prices for December corn futures and November soybean futures during the month of February — similar to revenue insurance products. Producers can purchase yield protection insurance coverage levels from 50 to 85 percent, and losses are paid if actual corn or soybean yields on a farm unit fall below the yield guarantees. 

In recent years, most farm operators chose revenue protection or revenue protection with harvest price exclusion insurance policy options which provide a guaranteed minimum dollars of gross revenue per acre (yield times price). This minimum guarantee is based on actual production history and the average CBOT prices for December corn futures and November soybean futures during the month of February. The revenue protection and revenue protection with harvest price exclusion insurance policies function essentially in the same manner, except that the guarantees on revenue protection with harvest price exclusion policies are fixed at the base price level and are not affected by harvest prices which exceed the base price. The revenue guarantee for revenue protection policies is increased for final insurance calculations if average CBOT prices during the month of October are higher than the February CBOT prices, which is why the revenue protection policies tend to be more popular for corn and soybean producers.

Farmers who purchase revenue protection and revenue protection with harvest price exclusion insurance coverage levels from 50 to 85 percent, and losses are paid if the final crop revenue falls below the revenue guarantee. The final crop revenue is the actual yield on a farm unit times the CBOT December corn futures price and November soybean futures price during the month of October. As of Feb. 12, the 2021 estimated crop insurance spring base prices in the upper Midwest were estimated at $4.52 per bushel for corn and $11.66 per bushel for soybeans. The current 2021 base price estimates compare to 2020 base prices of $3.88 per bushel for corn and $9.17 per bushel for soybeans. The2021crop insurancespring base prices will be finalized on March 1.

A historical analysis for the past 14 years (2007-2020) shows the final crop insurance harvest price for corn has been lower than the spring base price in 10 of the 14 years — including from 2013-2019. That trend was reversed in 2020 when the harvest price for corn was $3.99 per bushel, which was 11 cents above the $3.88 per bushel spring price. The only other years which saw an increase in the harvest price were 2010, 2011 and 2012. The range has been from an increase in the harvest price of $1.82 per bushel in 2012 to a decline of $1.27 per bushel in 2008 and a decline of $1.26 per bushel in 2013.

For soybeans, the harvest price has increased in six years (2007, 2009, 2010, 2012, 2016 and 2020), decreased in seven years (2008, 2011, and 2014-2019) and stayed the same in 2013. The range has been from an increase of $2.84 per bushel in 2012 to a decline of $3.00 per bushel in 2008. In 2020, the final harvest price for soybeans was $10.55 per bushel, an increase of $1.38 per bushel from the spring price of $9.17 per bushel.

Many producers in the upper Midwest have been able to significantly enhance their insurance protection in recent years by utilizing the trend-adjusted yield endorsement, with only slightly higher premium costs. The actual production history yield exclusion option allows specific years with low production to be dropped from crop insurance actual production history yield guarantee calculations. Several counties in the upper Midwest and plains states are eligible for yield exclusion for corn and soybeans in some of the past several years. For information on which counties, crops, and years are eligible for yield exclusion, go the U.S. Department of Agriculture’s Risk Management Agency web site http://www.rma.usda.gov/.

Enterprise units and optional units

Enterprise units combine all acres of a crop in a given county into one crop insurance unit, while optional units allow producers to insure crops separately in each individual township section. Enterprise units usually have considerably lower premium costs (approximately $7 to $10 per acre) compared to optional units for comparable revenue protection and revenue protection with harvest price exclusion policies. Producers should be aware that enterprise units are based on larger coverage areas, and do not necessarily cover losses from isolated storms or crop damage which affect individual farm units such as damage from hail, wind or heavy rains. So additional insurance, such as hail or wind insurance, may be required to insure against these types of losses. It is also important for producers to run “what if” scenarios when analyzing the comparison between enterprise units and optional units.

Many times, producers automatically opt for enterprise units every year, due to the lower premium cost per acre for similar coverage. It is important to analyze the yield risk on each individual farm unit when determining if paying the extra premium for insurance coverage with optional units makes sense. If a producer has uniform soil types and drainage in a close geographical area, and is primarily concerned with a price decline, a revenue protection policy with enterprise units is probably a good option. However, if a producer has farm units which are more spread out geographically, with more variation in soil types and drainage, and has greater concerns with yield variability, they may want to consider a revenue protection policy with optional units. 

SCO and ECO insurance coverage for 2021

The Supplemental Coverage Option (SCO) coverage is only available to producers who choose the Price Loss Coverage farm program option for the 2021 crop year.Approximately 75 percent of the corn base acres and 14 percent of the soybean base acres in the United States were enrolled in the Price Loss Coverage program in 2019 and 2020 and were eligible for Supplemental Coverage Option insurance coverage.

The deadline for 2021 farm program sign-up is March 15, which is the same as the enrollment deadline for 2021 crop insurance; meaning that farm operators will need to consider Supplemental Coverage Option coverage at the same time they are finalizing their 2021 farm program choice. The federal government subsidizes 65 percent of the premium for Supplemental Coverage Option coverage, so farm-level premiums are quite reasonable.

Supplemental Coverage Option coverage allows producers to purchase additional county-level crop insurance coverage up to a maximum of 86 percent coverage. For example, a producer who purchases an 80 percent Revenue Protection policy could purchase an additional 6 percent Supplemental Coverage Option coverage.

Supplemental Coverage Option coverage is a county revenue-based insurance product which is somewhat similar to some of the area risk protection crop insurance products available. The calculations for Supplemental Coverage Option coverage function very similarly to revenue protection insurance policies since they utilize the same crop insurance base price and harvest price. The biggest difference is that Supplemental Coverage Option coverage uses county level average yields, rather than the farm-level actual production history yields which are typically used for most revenue protection and yield protection policies. As a result, the Supplemental Coverage Option and revenue protection insurance policies may achieve different results.

The Enhanced Coverage Option (ECO) is a new crop insurance option available for 2021. ECO provides area-based insurance coverage from 86 percent up to 95 percent coverage. ECO also utilizes county-level yields, similar to SCO coverage. Producers can choose between 90 or 95 percent ECO coverage. Unlike SCO coverage, the purchase of ECO coverage is available with selection of either the PLC or ARC-CO farm program choice for 2021. Producers can utilize both ECO and SCO together, in addition to their underlying revenue protection or yield protection insurance policy. For example, a producer could have an 80 percent revenue protection policy, carry SCO coverage from 80 to 86 percent, and carry ECO coverage from 86 to 95 percent.

It is possible for a producer to collect on an individual revenue protection policy, but not collect on a SCO or ECO policy, or vice versa. For example, a producer with an 80 percent revenue protection policy may have a loss that qualifies for an insurance indemnity payment, while the county as a whole may not meet the threshold to qualify for either a SCO or ECO payment.  It could also be possible to collect a SCO or ECO payment for a county-level revenue loss while not qualifying for a revenue protection insurance indemnity payment at the farm level. Interested producers should check with their crop insurance agent for details on SCO and ECO insurance coverage and premiums for 2021.

 

Key items to consider with 2021 crop insurance decisions

  • There are a wide variety of crop insurance policies and coverage levels available.Make sure you are comparing “apples to apples” when comparing crop insurance premium costs for various options or types of crop insurance policies, as well as recognizing the limitations and the differences of the various insurance products. 2021 crop insurance premiums for most coverage levels of corn and soybeans in the Midwest will be significantly higher than comparable 2020 premium levels, due to the higher crop insurance guarantees available for 2021 and the higher volatility levels.
  • View crop insurance decisions from a risk management perspective. Given the potentially higher profit margins for crop production in 2021, there may be a tendency to reduce crop insurance coverage. However, a producer must first decide, “How much potential profit margin do I want to risk if there are greatly reduced crop yields due to potential weather problems in 2021, and/or lower than expected crop prices?” Revenue protection crop insurance policies serve as an excellent risk management tool to protect profit risk for these situations. 
  • Take a good look at the 80 percent or 85 percent coverage levels — especially when using enterprise units with revenue protection insurance policies.In many cases, the 85 percent coverage level offers considerably more protection with a modest increase in premium costs. Many producers will be able to guarantee near $650 to over $800 per acre for corn, and near $450 to over $600 per acre for soybeans at the 85 percent coverage level for 2021.
  • Evaluate SCO, ECO and other “buy-up” insurance options.In addition to the government subsidizedSCO and ECO county-based insurance products which allow insurance coverage up to 95 percent coverage, there are also “buy-up” private policies using farm-level yields up to 95 percent coverage.Private companies also offer separate wind and hail insurance endorsements. Of course, any of the “buy-up” or “add-on” insurance options add to the premium cost. Producers need to ask, “What mix of crop insurance products gives me the best risk protection for the premium amount that I am willing to spend for protecting my 2021 crop investment?”

A reputable crop insurance agent is the best resource to find out more details of the various crop insurance coverage plans and premium quotes, as well as to receive assistance with putting a sound risk management program in place for the 2021 crop year. Ag lenders, marketing analysts, and farm management advisors can also be helpful with finalizing crop insurance decisions.

Following are some very good web sites with crop insurance information:USDA Risk Management Agency (RMA): http://www.rma.usda.gov/; University of Illinois FarmDoc :   http://www.farmdoc.illinois.edu/cropins/index.asp\

Kent Thiesse is a government farm programs analyst and a vice president at MinnStar Bank in Lake Crystal, Minn. He may be reached at (507) 726-2137 or kent.thiesse@minnstarbank.com.

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