Crop Insurance Math Looks Fairly Positive

Extreme weather this year will have insurance paying off on yield and revenue.

This weather is stressful. It's hard to look at your field and feel good about your future. We've found that walking farmers through the field of financial reality moves them to a better place. The reality is if they bought good crop insurance at high levels this year, they'll likely do as well as they would have done had the year ended up the way it looked at planting time.

When we planted early, the prediction was record yields. The spring price on crop insurance was $5.68 for corn. If the weather had stayed good and we had experienced a bin buster $5.68 would have been an excellent price for 200 bushel corn in a record year. Now corn fields are turning to silage. Emotions are running high. So we start running the numbers.

A farmer and his son raise 3,000 acres of corn. They have a fair amount of their crop sold and are worried about having to deliver grain that they won't raise. What we're dealing with right now is unprecedented. We're seeing corn yields below 50 bushels. So much for being saved by drought tolerant hybrids.

Those farmers who sold bushels forward are getting that queasy feeling as they think about having to buy those bushels back at elevator prices that are higher now. They're thinking about having to write that check without having a clear understanding of how crop insurance will help. Fear is setting in as farmers don't understand where they're going to end up financially.

Here's an example of how it could work. Obviously, some of these numbers still have to be projections. If a farmer has to buy back bushels, they'll use the difference between where they forward contracted the bushels and the fall price if they bought crop insurance with the Harvest Price Option. (If your insurance agent recommended against the Harvest Price Option, we need to talk.) We don't know that price yet, but let's estimate it at $8.00 and say we forward contracted at $5.80. The difference is $2.20/bushel. That's what we owe the elevator.

Crop insurance is going to pay out whatever your guaranteed bushels were. Let's say your guaranteed bushels were 150 and you have a yield of 50 bushels. You're going to get paid out 100 bushels/acre times the harvest price of $8.00. You'll get an indemnity of $800/acre. That indemnity is going to let you take care of the grain you have to buy back and your inputs for the year, and it might even show you the level of profit that you may have had if everyone had produced a large crop this year.

Crop insurance isn't meant to produce a jackpot, it's meant to reduce risk. But this year in some areas, the historically bad weather is creating atypical payments.

If you're stressed out, get with your agent and do the math. 

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