Seed isn't yet in the ground but farmers quickly must decide whether they'll insure the crop it will produce. The deadline for purchasing crop insurance is March 15.
Crop insurance is a better bargain this year, thanks to legislation passed by Congress last year, says James Pritchett, Purdue University assistant professor of agricultural economics.
The Agricultural Risk Protection Act of 2000 increases coverage level subsidies, making insurance more affordable, he says. It's still up to producers to determine which insurance options are best for them.
"Every farm's financial position is different, and operators must choose a strategy that best fits their needs," Pritchett says. "Some farm-level strategies reduce risk while giving up returns, and others increase returns but mitigate little risk. This is particularly truewhen crop insurance is combined with preharvest marketing strategies."
Types of insurance and coverage levels vary, Pritchett says.
Two common insurance plans are Crop Revenue Coverage (CRC) and Multiple Peril Crop Insurance (MPCI). CRC plans protect farmers from crop revenue losses, while MPCI insures against poor crop yields.
As a general rule, CRC premiums are higher than MPCI premiums but provide greater revenue protection per acre.
According to the U.S. Department of Agriculture's Risk Management Agency, a central Indiana farmer with an actual production history yield of 146 bushels of corn per acre could expect a CRC premium of $5.23 per acre for basic 70 percent coverage. Under a MPCI policy, the farmer would pay $3.10 per acre for the same coverage. The CRC plan would protect $255.50 in revenue per acre; the MPCI plan, $209.51.
For top-end 85 percent coverage, the example farmer's premium would be $19.11/acre under CRC and $11.51/acre under MPCI. Those policies would protect revenues of $307.77 and $254.41 per acre, respectively.
"While the insurance guarantees these revenue levels for a central Indiana farmer, the individual farmer's policy choice will vary depending on the likelihood of meeting variable costs and cash rents, and expected returns," Pritchett says.
Using a farm revenue simulation software program called AgRisk, Pritchett calculated average revenue per acre for a central Indiana farmer under a variety of circumstances, including the purchase of CRC
and MPCI plans, as well as the use of preharvest pricing.
Pritchett compared revenues against a benchmark of selling at
harvest with no insurance coverage. He also compared both the average
revenue generated and the central Indiana farmer's ability to meet
variable costs of $144 per acre and cash rents of $130 an acre.
Pritchett's research found that average revenue per acre was within a few dollars regardless the insurance option selected, but the probability of meeting costs improved slightly with CRC insurance.
"Perhaps CRC performs better because it provides both price and yield insurance, where MPCI is limited to yield protection," he says.
"However, CRC does cost more and in some years the additional
protection is not needed."
Pritchett's research also indicated:
- first bullet: Crop insurance protects producers from years with low yields or revenues. Paying the premium also reduces a farmer's odds of realizing the highest revenues.
- second bullet: Forward pricing of grain provides downside revenue protection.
When used with crop insurance, CRC provides slightly better protection and revenues than MPCI -- even with a higher CRC premium.
- third bullet: Producers can make good risk management decisions and still suffer bad revenue outcomes from adverse weather or market conditions.
Pritchett's complete study, "2001 Crop Insurance and Forward
Pricing Decisions," can be downloaded online at www.agecon.purdue.edu/ext/pubs/insur.pdf .