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Corn+Soybean Digest

Making the Tough Insurance Choice

Soybean growers may have the most difficult decisions of all when it comes to choosing crop insurance by the March 15 deadline, according to Kansas State University agricultural economist Art Barnaby.

"With the myriad of insurance choices, not to mention the weather, market and political scenarios that growers might face this year, careful planning is key," says the K-State Research and Extension farm management specialist.

News that the Multi-Peril Crop Insurance (MPCI) price election [amount paid per bushel if indemnity payments are triggered] was increased 10 cents to $5.26 a bushel this year makes it a somewhat attractive prospect. At $5.26, MPCI is about 60 cents higher than revenue insurance price elections on soybeans.

Those other insurance options include Revenue Assurance [RA], Revenue Assurance with Harvest Price Option [RA-HPO], and Crop Revenue Coverage [CRC].

The revenue insurance price election set March 1 is $4.66. "Because of the higher MPCI price election, many growers may be considering Multi-Peril Crop Insurance on soybeans, but that may not be the best alternative," Barnaby said.

A farmer's decision will depend on the yield and market price that is assumed.

Why? Despite lower markets for both corn and soybeans this year, corn and soybean price elections are higher. This inverted price plays a key role in insurance choices, the economist said.

For example, if a farm has a 40-bushel actual production history and 75 percent coverage, and if market prices were to increase above $4.66 a bushel, Revenue Assurance [RA] without the harvest price option would pay the least.

If prices were to increase to $5.26 – equal to the soybean price election set for MPCI – then MPCI, RA- HPO and CRC would all pay the same indemnity payment; also, payments would trigger at the same yield – 30 bushels and below for this example farm.

"Just like you wouldn't compare a Mazda Miata with a Chevy Suburban, you shouldn't compare dissimilar crop insurance scenarios. Make sure it’s apples to apples, so to speak," he says.

"If the soybean price were to increase to $5.26, the RA contract would require a yield below 27 bushels per acre to trigger indemnity payments, and those payments would be less than would be paid under the other contracts," Barnaby said. "If this turns out to be a disaster year with substantial increases in soybean prices, then RA's performance is even less attractive.

"If prices rose to $7.00, for example, the grower with a 40-bushel average yield (i.e., the example farm) would need a yield below 20.5 bushels to trigger payments, and those payments would be substantially less that the payments under MPCI or the replacement-revenue insurance products."

Barnaby adds, "Soybeans are further complicated by the fact that the price for new crop soybeans is substantially below the loan rate [which is] currently projecting LDP (loan deficiency) payments in excess of 50 cents per bushel.

"As a result, growers have little downside price risk because as prices fall, the LDP payment increases. Their big risk in a falling market is the loss of production, because one must have production to sell in the cash market and to collect the LDP.

"Therefore, the really large catastrophic risk is to have market prices increase to $5.26, combined with a yield loss."

Under that scenario, Revenue Assurance would provide the least protection. If prices rise, RA-HPO, CRC, and replacement MPCI would all provide "substantially better protection" than Revenue Assurance without the harvest price option.

"The real risk on soybeans this year is low yields and higher prices," he adds.

When shopping around for insurance and making comparisons, Barnaby said it's important for a grower to receive quotes on the same price election, coverage level and unit structure.

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