Don’t Call Me An Expert - This is just the way I do things

Planning Crop Insurance/

Managing Production Risks

By Jon Goplen

As a farmer and crop insurance agent for the past 20 some years, my philosophy towards risk management has evolved.  The days of hail insurance only and putting the crops in the bin to market at a later date are long gone. With increasing financial exposure and the necessity to sell in the high end of the market place, a well thought-out crop insurance plan is now a necessity.

The temptation exists as we look at our budgets for ‘06 to try and save a little money where we can, including crop insurance. That decision should be driven by determining your financial risk and not by emotions.  In fact, higher levels of insurance may be needed because of added exposure this year.  Here is my approach.

Before selecting a plan and coverage level, it is important to determine what the breakeven point is for each crop planned.  The goal is to insure each crop at that dollar level. It is also important to have a marketing plan or strategy in place. This will impact coverage level decisions. Bushels that are either forward contracted or hedged should be protected with a revenue product such as CRC or RA. These products provide protection against market risk as well as production risk, and are designed to give you the courage to pull the trigger on sales in advance of harvest.  These protect, in case of a crop failure and rising prices, against delivering bushels that cost more than what they were sold for. Another benefit is that premium is calculated on the spring price even when additional coverage is realized from a higher fall price.

As a farmer, I can live with a breakeven year now and then.  Red ink is what is hard to digest and that is what we try hard to protect against.  I also would rather save premium dollars than over insure.  To determine my coverage, I will consider the production history of each crop, the breakeven for that crop, how aggressive forward sales will be, and the rates for like coverage.  Typical coverage on soybeans, corn, or wheat would be a CRC or RA policy at 70% with a hail policy filling any coverage gap.

It is often more cost effective to insure at 65% with more hail coverage rather than at 70% to 75% and less hail but again, the marketing plan will have an impact on this decision. The added cost of maintaining optional units typically make good business sense for it provides protection against geographically specific losses from hail, wind, frost, or excess rain.

In recent years, the ability to manage production history in individual units by combining and splitting units has been limited.  It is frustrating trying to establish or maintain decent history with crops that only rotate to a section or unit every 3 or 4 years.  Insurance coverage not only is inadequate with a poor APH, it can cost more per acre than a policy that has a substantially higher APH and guarantee.  It doesn’t seem fair that the farmers who have seen the bad side of Mother Nature are penalized.  Some alternatives are being offered in this area with the expansion of products such as GRIP and a pilot project due out in 2007 that will allow for personal T-yields.  

An update in corn T-yields is the most significant change for 2006.  These T-yields will improve an insured’s APH where less than 4 years of actual history is available for a unit or where 60% of T-yield is plugged for a specific year where an actual yield was poor.  Spring revenue prices appear at this time to be significantly better than APH prices. This along with grain market fundamentals that will encourage a significant amount of forward sales help make revenue policies an obvious choice for ‘06. 

The barley malting endorsement will have more value in ‘06 versus ‘05 due to the wider spread between malting contracts and APH price. I would use this endorsement if your barley is contracted.

There is always work to do in making sure the industry continues to provide us new and improved tools. Support the organizations that lobby these causes on your behalf. I would encourage all producers to make sure their agent has a good understanding of how revenue products can compliment their marketing plan.  It is well documented that producers also need to continue to educate themselves on being better marketers.  Successfully managing production and marketing risk may ultimately make the difference for your operation in this tough economic environment.

Jon Goplen is a farmer and owner of Advantage Crop Insurance in Hannaford, N.D.