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December 26, 2016
Our agency (Sustainable Crop Insurance Services, wholly owned by National Sorghum Producers) writes with Diversified Crop Insurance Services, which is a subsidiary to Consolidated Grain and Barge. Diversified is one of the fastest-growing crop insurance providers, and its annual agent meeting just after Thanksgiving is a well-attended event. This year’s meeting was no different, with about 600 crop insurance agents from around the country in attendance. The meeting is always a great venue for discussion and professional development, but this year a new crop insurance option dominated most of the conversations.
Production Cost Insurance is a private crop insurance product that covers multiple perils but uses a producer’s actual gross margin to calculate the guarantee. Gross margin is defined as the average of the last five years’ gross revenues less hedging, seed, fertilizer and chemical costs. The maximum guarantee is 80% of the gross margin plus any hedging, seed, fertilizer and chemical costs incurred during the year.
For example, Farmer Chris has a five-year average revenue of $300 per acre and five-year average seed, fertilizer and chemical costs of $140. Thus, his guarantee is 80% of the difference plus expected seed, fertilizer and chemical costs, or $268. This guarantee then slides up as he begins spending extra on hedging, seed, fertilizer and chemicals. Say he spends $50 on seed and $70 on fertilizer but has severe insect pressure late in the season and spends $80 on chemical, so his guarantee slides up to $328. Farmer Chris harvests his grain and sells just below his five-year average revenue at $290 and collects a PCI indemnity of $38.
PCI gives producers the ability to produce the best crop possible instead of the cheapest crop possible. Much has been made over the past two years about belt-tightening, and the target of this is often fertilizer and chemicals not absolutely necessary to the survival of the crop. While this may make economic sense, it rarely makes agronomic sense. PCI covers producers who otherwise would have been hesitant to spray their sorghum for the sugarcane aphid again, hit their corn with a post-tassel application of nitrogen or spend those extra couple dollars on a better harvest aid for their cotton.
And, because PCI covers hedging costs as well, producers will be able to hedge aggressively knowing any production shortfalls will be covered. If Farmer Chris had purchased $5 worth of options, his revenue would have been calculated at $285, and his indemnity would have been $43. This positive effect would be even more exaggerated with outright futures positions. What would your banker say if you asked him to finance your margin calls at the top of a price run with severe weather in the forecast? What would he say if you could also give him a guarantee you would recover any unprotected margin calls you incur in the event of a crop failure?
Federal multiple peril crop insurance is one of the most successful government programs ever created, so it is easy to see producers might not be willing to take a chance on an untested product, particularly in light of MPCI’s coverage quality. With this in mind, Diversified offers an exclusive add-on to MPCI called PCI Select. PCI Select will add a coverage band on top of an existing MPCI policy to enable producers to produce the best crop possible while retaining the MPCI coverage that has allowed them countless nights of peaceful rest.
Cogburn writes from Abernathy, Texas. His Twitter handle is @nspchris.
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