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Prairie Grains is the official publication of
the Minnesota
Association of
Wheat Growers,
North Dakota Grain Growers Association,
South Dakota Wheat, Inc., and the Minnesota Barley Growers Association.

Publicity surrounding the Crop Revenue Coverage (CRC) insurance for durum has, to many ears, been sounding to good to be true. In reality, the "revenue guarantee" drawing so much attention is one of the program’s calculations and NOT an actual guarantee, says Andy Swenson, NDSU extension ag economist.
Total income from crop sales plus any CRC payments from yield and/or price shortfalls will seldom reach the revenue guarantee," he says.
The CRC’s main selling point is that it protects against both yield and price losses. But this additional risk management does cost more in insurance premium.
A substantial acreage shift from spring wheat to durum in the Red River Valley due to durum CRC is unlikely, Swenson believes, because spring wheat is selling at a premium to durum for the first time in several years and because of the difficulty of growing quality durum.
And with average or better yields, spring wheat has an economic advantage over durum, as Swenson demonstrates using a hypothetical situation in which a farm has a spring wheat APH of 45 bushels, cash prices are $2.80 for durum and $3.30 for spring wheat at harvest, and using maximum CRC coverage and premium discounts available for each crop.

To illustrate the CRC for durum, Swenson offers this example:

• Yield is represented by the actual production history (APH) and producers determine their coverage election level, which ranges from 50 percent to 85 percent in 5-percent increments. So, a 30-bushel APH and a 65-percent coverage equates to a 19.5-bushel-per-acre yield for calculating the revenue guarantee.

• Price is the greater of the base price or the harvest price (with an upper limit of the base price plus $2). The base price is either 95 percent or 100 percent (producer chooses) of February’s average daily closing price on the Minneapolis Grain Exchange (MGE) for the September spring wheat futures contract—plus $1.15. The harvest price is either 95 or 100 percent of the average daily closing price for MGE top-milling cash durum in August. (For this example, Swenson assumes the average daily closing price for MGE September spring wheat futures in February is $3.60 and the average daily closing price for MGE cash durum in August is $3.70.)

• The CRC calculation for determining the revenue guarantee for durum becomes one of yield times price. In this example, the base price ($3.60 + $1.15 = $4.75) times the yield (19.5) equates to a revenue guarantee of $92.63 an acre.

• The CRC indemnity payment is the CRC revenue guarantee minus the harvest revenue. The harvest revenue is determined by taking the actual yield per acre—in this example 22 bushels—times the harvest price (with a lower limit of the base price minus $2). So, the harvest revenue (22 x $3.70) is $81.40, and the indemnity payment ($92.63 - $81.40) is $11.23.

• The total returns to producers then becomes the CRC indemnity payment plus the cash sale of durum and any loan deficiency payments. So, if the producer in this example sold his 22-bushel-per-acre crop for $2.80 a bushel, his total return (22 x $2.80 + $11.23) would be $72.83 an acre—or $19.80 less per acre than the revenue guarantee.

"As this example clearly shows, there is no guarantee the indemnity payment plus cash sales will equal the revenue guarantee," Swenson stresses. "The reason is because the harvest revenue is based on the cash price for top-milling durum at the Minneapolis Grain Exchange. This price is typically 70 cents to $1 higher than local cash prices, or more, depending on quality. Producers who didn’t understand this point need to re-examine the economics of the insurance policy."

"Because of CRC, durum does project better revenue than spring wheat if yields are worse than average," Swenson says. "Also, the durum CRC performs particularly well if prices drop further. Therefore individuals who are risk averse or project a poor crop year or further deterioration of prices may choose durum."

The CRC program will probably not have much impact on durum acreage in the traditional durum producing areas of north central and northwestern ND either, Swenson says. At local cash prices of $2.80 and $3.10, respectively, for durum and spring wheat and with both crops insured at 85% CRC levels, spring wheat shows greater returns than durum if yields are average or better. Durum at the 65% CRC level and wheat at the 85% level have quite similar returns. However, in both cases durum will provide better returns if there is a short crop and also if prices drop lower than those used in the example.