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Serving: IA

Managing risk in 2021

Farm Progress Cornfield damaged by hail
VALUABLE ADD-ON: Some growers see commercial crop-hail coverage as an important add-on to Multiple Peril Crop Insurance — even though MPCI covers losses from hail and wind. That’s because crop-hail insurance lets you elect to get aid from the first dollar of loss, while MPCI allows you to lose at least 15% (assuming an 85% coverage level) before it will pay an indemnity.
Timely Tips: Is wind and hail damage covered by MPCI, or should I still buy a separate policy for wind and hail?

Each month in Wallaces Farmer magazine, the Timely Tips panel answers questions sent by readers. Members of the Timely Tips panel are Alejandro Plastina and Wendong Zhang, Extension economists, Iowa State University; Leslie Miller, Marion County Savings Bank, Knoxville; and Rob Stout, Master Farmer, Washington, Iowa.

Like a lot of farmers, I dropped our wind and hail crop insurance coverage in 2020 due to the higher premiums compared to 2019. We ended up with a derecho windstorm and wished we would have had the extra coverage. Is wind and hail damage covered by Multiple Peril Crop Insurance, or should we still buy a separate policy for wind and hail coverage?

Stout: Wind and hail coverage is covered to the extent of the level of coverage, i.e., 75% or whatever you choose, compared to your proven yields. I think the normal range to choose from is 50% to 85%, and of course, premiums are reflected based on your selection. So if you want a higher level of coverage, you can get hail and corn green snap coverage through your hail insurance policy.

Hail and green snap policies can be purchased with a much lower level of deductibility or even a zero deductible. Many policies allow you to just insure for the top portion of the loss that isn’t covered by Multiple Peril Crop Insurance. Run the numbers on different levels of regular MPCI yield insurance or Revenue Assurance with or without the added hail and green snap, and evaluate your risk tolerance before making a decision on which products to purchase.

Plastina: Yes, wind and hail damage are covered by MPCI, just like any other natural disaster that reduces yields. However, while crop damage and indemnities are calculated using actual harvested yields for MPCI, a crop adjuster’s estimate of percent damage is used to calculate indemnities for wind and hail endorsements.

Because of this technicality, it is possible to get paid under both policies for the same damage. Nevertheless, MPCI and wind and hail endorsements can have very different effects on producers’ costs, cash flow and tax management options.

Since wind and hail endorsements are purely private products, premiums are not set nor subsidized by the federal government and can vary across companies. Each producer should evaluate whether buying wind and/or hail endorsements is a more cost-effective way to manage production risks than simply increasing the coverage level under MPCI (for which the federal government subsidizes premiums at a rate of 35 to 40 cents on the dollar).

Finally, wind and hail endorsements generally pay indemnities soon after the weather incident, while MPCI indemnities are not paid until after harvest, which could impact the producer’s cash flow. If the producer files income taxes on a cash basis and usually sells a substantial share of his or her crop in the year following harvest, indemnities from MPCI can be postponed until after the end of the crop year for tax management purposes. This is not an option for wind and hail endorsements.

Miller: Many of my customers believe commercial crop-hail coverage is an important add-on to MPCI — even though multi-peril insurance does cover losses from hail and wind. That is because with crop-hail insurance, you can elect to get aid from your first dollar of loss, whereas Multi-Peril Insurance allows you to lose at least 15% (assuming an 85% coverage level) before it will pay an indemnity. If you choose a lower multi-peril coverage level — say 75% — then you will need to lose at least 25% of the crop before it pays out.

With commercial crop hail insurance, you can choose to lower your premium cost by selecting a deductible for this coverage as well. For example, you might feel like you can afford the risk of losing 5% of your crop to hail before you receive any indemnity payments from your insurance company. Pricing in that deductible may lower the cost enough that you can justify spending the money to get better coverage than what multi-peril currently provides.

I would encourage everyone to spend whatever time is needed this February and March to explore all the options and add-ons available for insuring your crops. There are changes every year and for farmers to get the most bang for their bucks, they need to look at all the options.

Repair or replace aging farm machinery?

We’ve been running our machinery far longer than we would like. But with poor prices and thin margins the past several years, we didn’t want to trade for new machinery. Last year we repaired a 10-year-old planter. We have two tractors with 5,000 hours on them. We have two 8-year-old combines. With recently improved corn and soybean prices, should we buy new or continue repairing our older machines? Is leasing a better option than buying?

Zhang: Given the major cost obligations for the machinery, it is important to figure out the accurate estimates of ownership and operation costs for buying and leasing. William Edwards, Iowa State University emeritus professor, has written several articles and created Excel decision tools at ISU Ag Decision Maker website that you could utilize, especially information file A3-39 on machinery cost estimation and A3-35 on machinery leasing decision making process.

Repair could work but you need to assess whether and how this affects your production costs. Machinery leasing could potentially be easier on your cash flow, especially considering the lower interest rates nowadays, but you might have to consider whether you need debt or other finances to extend the lease. If you have the capital, overall you will spend less when you buy it outright, especially for machinery that will be used for five to 10 years or more. Of course, you need to see how the tractor financing works and how that impacts your working capital.

Another consideration is the depreciation deductions and impacts on your taxes. ISU Center for Agricultural Law and Taxation has nice introductory articles on deducting farm expenses and depreciation deductions in particular. You could start by figuring out the repair costs and compare that with the ownership and operation costs when you trade in the older tractor or combine and buy a newer model.

Stout: It depends on your individual financial and tax circumstances. We have been in the repair mode for the past several years with exceptions when it appears that repair costs could be cost-prohibitive. We have a tractor we use nearly every day that has over 8,500 hours with no major repairs, and another tractor with less than half the hours that we had to do a major fuel pump rebuild recently, so you never know for sure.

There is a lot of late-model machinery on auction sites or in dealer lots that would be another option besides buying new or leasing. It looks like with improved crop prices you could at least look at trading up. As far as buying vs. leasing that depends on your deprecation schedule and tax situation, which would be a good question for your tax professional.

The lease payment can be written off in the year it is expensed, while with section 179 and normal depreciation you have a little more flexibility. Of course, it also depends on your availability of cash or loan availability.

Miller: The decision to repair or replace is a good conversation to have with your lender. On one hand, payments on new equipment might be too much for your operation to handle, or may tighten your cash flow so that you can’t survive even a small setback. On the other hand, there could be advancements in technology that could save you enough money to cover the cost of those improvements.

Another resource is your local Extension specialist. Extension has done extensive research in examining what equipment changes might return cost-savings or provide better harvesting. Because Extension specialists are not trying to sell you anything, they can be more objective in helping you examine alternatives.

If you can’t afford new equipment, you can find one of the businesses that specialize in taking old planters and upgrading them with current technology for less that the cost of buying a new planter. Many of these changes will pay for themselves in three to five years.

For example, in my area, single-row shutoffs and variable planting rates can save money on seed. That’s because we have many oddly shaped fields and lots of changes in soil type within the same field. In areas with flat, square fields of uniform soils, those savings may not materialize as quickly.

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