Growers are pleased to see commodity prices being at historic levels when they plan to sell their harvest. The higher prices can change the crop insurance strategy. It opens more options to create a risk management strategy to meet specific needs of an operation. It is important to create a new strategy based on this year and not carry over last year’s coverage without examination.
Multi-peril crop insurance rates are determined by the base prices. The base prices for most crops in the Midwest are set at the end of February. These base prices are the average of the daily prices through February. We saw an upward trend of prices for both corn and soybeans through the month. The base prices are set at:
What it Means for Crop Insurance Policy.
High Prices Create High Guarantees
The amount of loss payment a grower could receive is determined by the base prices. The higher the base prices the more guaranteed revenue a grower is eligible for.
High Base Prices Mean High Premium Costs
These high guarantees come at a cost. The federal crop insurance program charges the grower more in premium when base prices are high. These premium costs trend even higher when the volatility is high. Volatility is another component to determining crop insurance premium costs. Precision Risk Management is seeing premium increases around 25% for corn and 17% for soybeans from 2021 at the same levels. It is important to balance the increased guarantee with the increased cost of premium.
Some Important Factors to Consider When Choosing Coverage
Prices Could Drop
The high base prices create large guarantees, but it creates a potential for a price drop. The harvest price will determine if a loss for revenue protection (RP) plans. No one knows if the harvest price will be lower or higher than the base prices. We do know these base prices are at record highs and historic trends show harvest prices many times are lower than the base price. It is important to note historical trends do predict future situations. Over the course of these 11 years, a majority of harvest prices have been lower. In contrast, in recent years of 2020 and 2021, harvest prices have increased.
Reduce Coverage Levels with Higher Guarantee
Some growers may already know their break-even points and only want to cover their costs. This year provides an option to reduce coverage levels and still have a higher guarantee. For corn, an 80% level in 2021 produced a lower guarantee than a 75% level in 2022.
The Right Partner
This write-up is an oversimplification to illustrate some basic crop insurance principles as they relate to the base prices. A full risk management strategy is much more complex with many moving parts. The type of coverages, additional farm programs, levels, unit structure, location, crop, share, and much more all interact together to create a risk management strategy.
That is why is vital to have the right partner to guide you in creating a plan. Precision Risk Management provides our customers with a full crop insurance risk management strategy tailored specifically for their operation. Every operation has different needs and requires a different strategy.
If you would like to contact a PRM Risk Management Advisor to see how they can help your operation, you may contact them here