Wallace's Farmer, IA
02-21-07
Crop Insurance More Expensive This Year
If you're going to buy crop insurance this year for corn and soybeans be prepared
to pay higher premiums. Crop insurance is a lot more expensive.
Steve Johnson, Iowa State University Extension farm management
specialist in central Iowa, is putting on farmer meetings this month, talking crop
insurance and explaining what you need to know to help make crop insurance
decisions. Farmers are concerned about what their cost is going to be on crop
insurance and what price the futures market winds up at, to help set that cost.
"I see two types of farmers," says Johnson. "One is a farmer who manages with
his or her checkbook. They're focused on reducing costs. When they hear crop
insurance they think "I gotta cut costs" and they get the cheapest crop insurance
product they can find. The most coverage for the least amount of money.
"I don't think that's the way you should go on crop insurance. The new generation
grain farmer is focused on revenue. This type of farmer is managing costs but
they're just as focused on marketing, too. And crop insurance - the crop revenue
type of products--can help them with their marketing plan."
What type of policy is best for you?
If anything has gotten complicated lately, it is crop insurance. There are so many
different kinds of programs. Some farmers just now have started figuring out
what Revenue Assurance is. How does Johnson explain to farmers their options?
"That's why we're holding these meetings for farmers," says Johnson. "I think you
can simplify it. About 94% of all Iowa farmers who use crop insurance are now
using revenue products - that is, CRC, RA or GRIP.
"So you just simplify it and say 'I'm managing risk, I've got debt, I've got family
living expense to pay. I'll have to pay crop insurance premiums in late October, I
probably should sell some grain preharvest, and I should be using the revenue
tools to help do that,'" notes Johnson. "We have brand new training material. I've
actually got a baseball diamond I use as an illustration. I call it bushels and
baseball. If you want to attend a meeting we'll just focus on making simple
decisions and don't make this too complex."
Don't make the decision too complex
Johnson says some farmers are making grain marketing more complex than it
has to be. "High price has got a lot of people just frozen in their tracks and it
shouldn't. There's nothing wrong with selling at high prices," he says.
There is going to be a higher price for crop insurance this year. "Yes, we would
expect that the premiums will go up for 2007 and again I can't quote specific
premiums, but premiums will go up roughly 30% to 70% based on the crop price
increasing," says Johnson. "So the same insurance product, the same level of
coverage you select in 2006 is going to be more expensive.
"But remember the government subsidizes crop insurance roughly 38% to 59%.
So you're going to get a lot more bang for your buck. And when you're growing a
crop that maybe for soybeans costs $300 to $350 an acre, and for corn $400 to
$450 an acre, and we start talking about $5 and $10 increases, the percentage
really isn't that much when you are guaranteeing profits in row crop agriculture.
How far ahead should you price grain?
Looking at the futures market, a contract is already available on the board for the
year 2010 - on being able to price crops that far forward. Does Johnson think that
gives a farmer more flexibility or should the farmer not be looking that far forward
in terms of locking in a price for grain?
"You can look that far forward and watch what the market is thinking way ahead,"
he says. "But I'm not going to go out there and price much of my crop beyond
2007, to be quite honest with you. Look at the type of demand-based market that
is coming at us today, especially in corn and to a little lesser extent in soybeans,
I'm not going to go out on a limb that far."
Why? "Because I know we're going to see higher expenses," says Johnson. "I
challenge farmers to get beyond thinking about the 2006 crop. I think the 2006
crop that they have in the bin is a stumbling block for some farmers. They are
spending all winter trying to figure out what to do with the 2006 crop. Get a
marketing plan together with a price and a time objective and move on."
Focus on 2007 crop marketing
At his meetings this winter, Johnson is talking about the 2007 crop. "This is the
crop I want to be really focused on marketing here, especially over the next two
to four months," he says.
Some people are holding back on forward pricing their 2007 crop because they
want to hit higher prices that they think are coming this spring or summer. They
have to hit that high sometime this spring and we haven't gotten that yet.
Farmer ego, wanting to try to hit the highest possible price, is the biggest
drawback right now to marketing, says Johnson. Instead, farmers need to be
very focused on knowing their cost of production and revenues. "At my meetings
this past week, from talking to farmers, some of them are probably going to net
somewhere between 20% and 40% return on investment with preharvest sales.
That is committing bushels right out of the field and then using crop insurance
revenue products to guarantee it," he adds.
"I think we're going to see row crop farmers see one of the best years they've
ever had - just with normal production - in 2007. Remember, crop insurance is
your first step in guaranteeing profitability. If you'll understand these revenue
tools, you're going to be a lot more comfortable in preharvest sales. I'm talking to
farmers who have 20% to 40% of their 2007 corn already priced, sold and
committed to delivery at profitable levels," says Johnson.