The drought of 2012 has reinforced the belief in crop insurance for those who carried it this year, and established a priority for many of those who did not subscribe to it. Regardless which group you may be in, the question of what the guarantees will be are reasonable questions. If you sign up next spring, how much will you be guaranteed for Revenue Protection policies?
Crop insurance guarantees may well dictate cropping plans for some farmers; subsequently it is important to pencil in some potential marketing objectives for the 2013 crop, just in case a lender wants to visit with you about that issue. Or in the case of farmers whose crop insurance policies paid off in 2012, you may want to know what to expect in the coming year should they be needed. University of Illinois Farm Management Specialist Gary Schnitkey worked through the process of potential spring guarantees for crop insurance to forecast what can be expected when you visit with a crop insurance agent.
Since the spring guarantee is based on the market performance of the December corn contract during February, Schnitkey says the current guarantee price would be $6.35/bu., if the guarantee would be set now. But there are nearly three months before that would happen, and the price of December corn could vary widely between now and then.
But will that really happen, and has it done that in the past? While it is difficult to say whether it would happen, history shows how the price of December corn has varied from November to February in prior years. In 1975 it declined about 10%, but in 2004 and 2008 it increased more than 20%. Earlier in 2012, the spring guarantee was $5.68, and if the current $6.35/bu. were to substantially remain in place it would be the highest in history. Schnitkey says, “While large price declines are possible, most years have modest price changes or price increases. Historical changes suggest there is a much larger chance that prices will be above $6 than below $6.”
What about soybeans? Currently, the November 2013 soybean contract is trading about $13.40/bu. Would you be satisfied with a $13.40 spring guarantee for soybeans, and would you increase acreage with that guarantee in place? When Schnitkey looked at the performance of the November soybean contract between the fall and the following February, he said the largest decline was an 18% drop that occurred in 1976. But he is quick to say, “While large price declines have happened, historical data suggests the 2013 projected price will most likely be above $12.75.” His data indicate a nearly 20% increase in 2008, at the other end of the scale. Only four years of the past 40 have seen a drop in soybean prices between the fall and the spring of more than 5%.
If you are ready to sign up for those levels of spring guarantees, make an early appointment with your crop insurance agent. But also you should beware of the downside of high guarantees, and that is the cost of the premium. When guarantees go up, so do premiums. Although the USDA subsidizes and average of two-thirds of crop insurance premiums, higher guarantees lead to higher premiums. So that is the downside of that benefit.
Schnitkey says, “The 2013 projected prices for corn and soybeans likely will be near historically high levels, providing farmers will the ability to set relatively high per acre guarantees using crop insurance. These are possibilities for falling prices, particularly for soybeans. However, historical chances suggest projected prices will most likely be at high levels.”