February 24, 2023

Making Your 2023 Crop Insurance Decision

This episode of the Purdue Commercial AgCast is a great opportunity for producers to review their crop insurance choices for the upcoming season. Purdue University Center for Commercial Agriculture’s ag economists Michael Langemeier and James Mintert walk participants through key considerations for their 2023 insurance options. In particular, they discuss a handy thumb rule to use when considering an increase in coverage levels for RP insurance.

Companion slides and the audio transcript can be found below.

Audio Transcript:

James Mintert: Welcome to Purdue Commercial AgCast, the Purdue University Center for Commercial Agriculture’s Podcast, featuring farm management news and information. I’m Jim Mintert, your host today, and joining me today is Michael Langemeier, who’s the Associate Director of the Center for Commercial Agriculture. We’re going spend a few minutes here talking about making your 2023 crop insurance decision. We do this annually, Michael, but I thought this year we do it a little bit earlier because I know a lot of people are making those decisions here at the tail end of February. We normally try to do this the beginning of March, but this year we thought, let’s push it up a little bit because this is really the timeframe when crop insurance agents are contacting customers and really starting to focus on what kind of decisions you want to make. And a lot of people are maybe thinking about making a small change. So, let’s talk a little bit about crop insurance and we’ll start off by doing some details here in terms of making sure everybody’s on the same page with respect to some key crop insurance terms. There’s really three basic choices you can make with respect to crop insurance coverage. And I’ll let you kind of talk about those a little bit, Michael.

[00:01:09]
Michael Langemeier: Yeah, sometimes there’s confusion related to crop insurance units. And so, let’s just review that a little bit. The highest level of aggregation for units is enterprise units. This is the addition of all basic units in one county for a single crop. So, they’re aggregating all your farms or units in one county for a single crop. That’s cheaper. When you aggregate units, aggregate farms that’s going provide a lower cost product. If you want something that’s a little more disaggregated, you could go to basic or optional units.

Basic units is all of one crop in a county for a specific share of production. Those are insured separately. Particularly if you have a lot of share rent arrangements. All of those would be a separate basic unit. And so, it’s less aggregated. The disadvantage of base using basic units is it’s more expensive.

And then finally you can go to a very disaggregated product the optional units. Here, each farm and crop are insured separately. But again, that’s even more expensive than basic units.

James Mintert: There are individual situations where the basic and the optional units fit in, but by and large, we encourage most people to look pretty closely at the enterprise units, particularly when you think about making your crop insurance decision from kind of a long run perspective, really not just a one-year decision. And the amount of money you can save by going to the enterprise units is pretty substantial. So, we’re going to focus most of our attention on that, right?

Michael Langemeier: Yes. And a lot of times you can actually have a higher coverage level for the same cost as you can have basic units with a 5% lower coverage level. So, a lot of times, if you’re thinking about lowering coverage level because of cost, if you haven’t used enterprise units, think about using enterprise units and stay at that coverage level, or even increasing your coverage level.

James Mintert: Yeah, that’s a good point. So, let’s talk a little bit about revenue protection. Revenue protection ensures against the revenue loss due to a change in price decline in yield or low yield relative to your guarantee. Or a combination of the two. And so, you’re really doing something with respect to guaranteeing individual farm revenue. Let’s talk a little bit about that revenue protection guarantee and, and in particular how that’s computed.

Michael Langemeier: Yes. If you’re looking at the revenue protection guarantee, it’s a trend adjusted or APH approved yield. We’ll talk about trend adjusted here in a little bit, multiplied by your coverage level. 80%, 85%, for example, and then the greater projected price or harvest price. And so that greater a projected price or harvest price is extremely important when you’re looking at revenue protection guarantee. Because if the harvest price increases during the year and the harvest price is higher than the projected price, your revenue protection guarantee actually increases.

Now let’s back up and talk about that trend adjusted. We were talking earlier, trend adjusted is a little bit of a misnomer in this case. Essentially what they’re doing is they’re changing the historical yields to adjust for technology. And so, a lot of people in the corn belt are seeing increases in corn yields of two bushels per year. And so, they’re adjusting those historical yields to reflect the fact that yields are increasing two bushels per year. If you’re talking about corn,

James Mintert: Yeah, so another way to think about that is when you think about the trend adjustment versus the APH, just the straight average, the trend adjustment effectively think about yield from 10 years ago and let’s, I’ll pull a number out of the air here and say, let’s say your yield 10 years ago was 160. And if the trend adjustment was, let’s say, with a bushel per acre per year in your particular county, they would go back and use, instead of using 160 for that 10 years ago.

That would effectively turn into a 170. Sometimes people refer to that as normalizing a yield. So, you’re basically taking those old yields and saying, what would those yields have been if you were using current technology? And so for most people, we recommend taking the trend adjustment. There is an extra cost to do that, but for most situations that we’ve looked at, that’s the thing to do, right?

Michael Langemeier: Yeah. And usually when I talk about crop insurance, when I show premiums, like we’re going to go like we’re going to today, I use the trend adjusted yield.

James Mintert: Yeah. So, it’s kind of a default for us. Yes. But make sure you’re, you’re focused on that. The other thing to think about is that projected price or the harvest price that’s a kind of a consideration there.

They’ve changed the way the insurance product is structured. It used to be you had to pay extra to get the harvest price option. Now the default option includes the harvest price, but you have an option of exiting out of that. Right. And again, we recommend leave it alone. You want that harvest price option because there are some years when that can be a very important component of your crop insurance.

Michael Langemeier: Yeah, it’s a little cheaper if you leave out the harvest price option, but quite frankly, it’s not worth it. And the prime example is 2012. We saw that really large increase in prices during the summer of 2012. And if you didn’t have that harvest price adjustment, you didn’t get a very big crop insurance indemnity payment compared to those that had that had that option that included the harvest price. Their indemnity payment was a lot larger. And those are the types of years where you really need that large indemnity payment to cover that loss. And so, I recommend using a product where you can get to choose the greater of the projected price or the harvest price.

[00:06:01]
James Mintert: So, let’s explain how the projected price and the harvest price are actually calculated.

Michael Langemeier: Yeah, it’s really quite simple. The projected price is based on settlement prices for future contracts during February. This is for corn and soybeans and it’s a de contract. And then the harvest price is based on settlement prices for futures contracts during October.

 It’s a contract for corn and November contract for soybeans in both cases.

James Mintert: Yeah. So, we’re recording this on the what, 24th, I guess, of February. We use prices up through the 23rd of February to approximate what that February average is going to be. So, recognize if you’re listening to this a little bit later, the actual final price for the projected price will differ a little bit from what you’re using in this broadcast, but probably not very much.

Michael Langemeier: It’ll probably be similar. We also had to assume volatility and volatility actually we won’t have, that information available until the end of February. And so, the premiums we’re going to show you could be slightly different. The final premium. But I don’t think it’s going to they’re going to be very different.

James Mintert: Yeah, we talked about this earlier. I don’t think it’ll be enough that would influence anybody’s decision making. So that’s, that’s kind of the key point. So, you took a look, Michael, at the crop insurance prices, the so-called projected or February prices, going back to, I think, to 2007 and looked obviously at a projected price for this year.

You’ve got a projected price for this year based up through the 23rd of February of $5.95 and looking at those historical February averages that’s only been higher than that one time.

Michael Langemeier: Yes, in 2011, it was actually $6.01 and last year was $5.90. And so a pretty good projected price you know for 2023. Now, obviously with a higher projected price that does lead to a higher premium. But you have to remember, I’m getting a higher revenue guarantee because I have a relatively high projected price.

James Mintert: Yeah, I think that’s the rub. Sometimes people focus on the cost, but recognize that you do have that higher revenue guarantee. You’re effectively buying more insurance. So, let’s talk a little bit about, maybe a little bit of philosophy here. Some people think about using crop insurance is a way to manage price risk, and it does effectively help manage price risk, but it’s probably not the best tool to use to routinely protect price risk protect against changes in prices and really think about why do most producers purchase revenue insurance.

We had this discussion earlier, Michael. It’s like an interesting concept, right? You’re really focused on doing things relative to what you’re going to collect at harvest. But there’s an option in here, which is kind of important, right?

Michael Langemeier: Yeah. This conversation is really important. If, you’re comparing yield protection product to a revenue protection product, and you look at that revenue protection product, and of course adds an indemnity payment if the price declines.

But it’s more complicated than that. It’s more nuanced than that. One of the real advantages of the revenue protection product is that if that harvest price is higher than the projected price, your revenue guarantee goes up. And so in essence, your insurance, your insuring against bushels at harvest. Not bushels you know, in February. And so that makes a lot of difference and really makes most people take a closer look at revenue protection versus yield protection.

James Mintert: Yeah. I’ll state that maybe a little differently. Michael, you’re ensuring against what revenue would be at harvest? But you’ve got the option, if it turns out that the February price was higher than the harvest price, you’ve retained that alternative. Yes. And that’s a key component here. The fact that you get the choice effectively of the higher of the two prices, whether it’s the February price or the harvest price.

So that makes the revenue insurance pretty attractive relative to yield insurance. The other thing to think about though is crop insurance, by definition really effectively provides a put option that does help manage downside price risk between the spring and the fall. This year’s relatively high projected price means the implied put options strike price is higher than it has been in prior years. I mean, really only one year was it higher than that? But that put option component is only effective, or using option terminology, only in the money, if the harvest price falls by one minus the coverage level.

So thinking about at 85% coverage level, Michael, that means price would have to decline by more than 15% for that put option to wind up being in the money. And I think it’s useful maybe not a necessarily a forecast, but useful to think about how often that has happened in the past. And you took a look at that.

Michael Langemeier: Yes. It’s not that common. It’s not as common as you might think. And in fact, if you look at the ratio of harvested to projected or February crop insurance prices they fell below 0.85, just three of the last 16 years. That was in 2008, 2013 and 2014. And moreover, I think the largest drop was in 2008, 2014 of about 24%. About a 22% percent in 2013 and so it’s rare that you see that larger drop in price from February to October.

James Mintert: So, we don’t have time to get into it in this particular podcast. But what that implies is there are other ways that you can manage downside price risks that probably are a little more effective than simply relying on crop insurance. It is true though that crop insurance does provide some downside price protection. But if you really want to focus on the price protection aspect, there are some other ways you could do that. Obviously, you could do it in the futures market. If you want to do something that’s a little more analogous to what’s available in the crop insurance, you could do it directly in the option market.

So, you might want to think about that from a standpoint of, you know, if you’re going to think about choosing a higher coverage level just to get the higher projected. Just to manage price risk. There might be some cheaper alternatives.

Michael Langemeier: And then to circle back to what we were talking about earlier, that revenue protection coverage, yes, it provides some downside risk, but it’s extremely useful because if the harvest price is higher than the projector price, your revenue guarantee goes up. And so, I know I’m belaboring that a bit, but that makes that revenue protection product so attractive.

[00:11:51]
James Mintert: Yeah, good point. So, let’s compare some crop insurance bundles for corn and we focused, when you do that, you have to focus on an individual county.

So, we’ve picked one particular county here in southwest Indiana and we chose that partly because some of the southern counties in Indiana, and certainly this would apply to Southern Illinois and other places around the corn belt. Where you’re a little bit on the bubble with respect to what coverage level really makes the most sense, and people maybe are going to bounce back and forth a little bit on these coverage levels.

So, you’ve taken a look at that. So again, just to kind of restate what’s going on here. We used the 5.95 projected price that was current up through the 23rd of February. We used estimated volatility of 0.19, and that’s again, that’s kind of a mid-February volatility level. And keep in mind that will change because it’s going to depend on what happens that last week of February.

The farm and county trend yield for this particular op choice that we made was 183. And then looking at the projected price greater than the harvest price. So, you’re looking at 75, 80 and 85% coverage levels, and those are the three levels that are most common, particularly in the southern half of Indiana, Southern half of Illinois, et cetera.

Michael Langemeier: Yes. And let’s compare the estimated premiums using enterprise units. We’ve got about $17 per acre for the 75% revenue protection, about $29 per acre for the 80% and $51 for the 85%. And so, it goes up rather dramatically as you move from 75 to 85%, but also you’re going to remember the farm level revenue guarantee also goes up. It’s $817 with a 75% coverage level, and it’s $926, an increase of more than a hundred dollars jumping from 75 to 85%. And what we’d like to do here is take a look at these one at a time, Jim.

James Mintert: Yeah, so one way that you can look at this and, and trying to make that choice, should I buy 75 or 85% coverage, or should I buy 80 versus 85% coverage, is to simply look at the change in the farm level revenue guarantee. And I’m going to use the example that you were just working through, Michael. So, moving from 75% coverage to 80% coverage, cost or provided an additional $54 of revenue guarantee. The cost to obtain that additional coverage was an additional $11.83. So, an easy way to look at that is just look at the ratio of the cost increase to the change in the revenue guarantee. So that you’ve got 11.83 divided by 54.

That works out to 22%. So, think about that 22% in terms of how often that additional 5% of coverage might get triggered. And then if you want to go one step further and consider the 80% coverage versus the 85% coverage, you get picked up again. You picked up I think $54 or $55 of additional revenue guarantee.

But now the cost, in this particular county, in this particular scenario, was going to go up quite a bit more. Instead of going up 11.83 for the additional coverage, it now goes up 22.65. And when you look at that ratio of 22.65 divided by $55 of additional coverage, that ratio is 41%. So all of a sudden you’re paying a lot more to get additional coverage when you go from 80 to 85 than you were when you were going from 75 to 80. But to me, that ratio really makes that decision a lot more straightforward.

Michael Langemeier: Definitely. And obviously it’s a more of a no-brainer going from 75 to 80. I mean, there’s some people going to pick 75% for Posey County, but it’s just not that expensive compared to that increase in the revenue guarantee. You’re going to get going from 75 to 80%. Going from 80 to 85% is considerably more expensive. And so, I think using that ratio I think is very useful. When you’re looking at any particular county and looking at different coverage levels.

James Mintert: Yeah, I mean if you think about that 22% ratio, one way to think about that is to say, well, you know, would this trigger a payment more than once every five years?

And if that’s the case, then you might look pretty favorably on that 80% coverage. In the case of going from 80 to 85, you’d have to trigger a payment every two to maybe three years, right, before that’s going to be worthwhile strategy for you. That brings up a related point. When you think about crop insurance, one of the things you want to think about is from a longer-term perspective, you have to make a choice every single year, but you really want to be thinking about this from a longer-term perspective.

Michael Langemeier: Definitely, I mean, you want to think about what was my risk the last 15, 20 years? How many of those years did it look like I would’ve gotten a payment buying this particular product? And one of the tools you can use to help you think about the net cost of buying crop insurance is a tool that the University of Illinois has.

It’ll actually evaluate, you know, based on some historical data which of the coverage levels look like they looked like they were the best in terms of that cost versus revenue and for Posey County, I did take a look at that. I did take a look at that, that website they have for this tool and 80% seemed to be the sweet spot for Posey County. There wasn’t a lot of difference between the 75 and 80%. But 80% seemed to be the product that appeared to be the most attractive.

James Mintert: And conversely, going up to 85%, starts looking kind of expensive for what you’re getting for the additional coverage.

Michael Langemeier: Yes, it’s additional $22. That’s quite a bit when you’re talking crop insurance.

[00:17:07]
James Mintert: Yeah. So, there are some additional coverage options. They’re called crop insurance endorsements and one of them is called the supplemental coverage option, which is just referred to usually by the acronym SCO. You want to explain that a little bit because this is a different beast.

Michael Langemeier: Yeah, the SEO is really used by people that chose PLC for corn, soybeans, or wheat. Here we’re primarily talking about corn and soybeans today. And so, if you did use PLC when you were doing that arc county PLC choice, the SEO is a pretty cheap insurance. But it only goes up from your revenue protection to 86%.

And so when we’re talking 85% coverage level, you’re only ensuring an additional 1%. It makes more sense when you’re talking you know, Southern Indiana, Southern Illinois. because there you’re usually comparing 86% to 80%. And so using this SEO product, you can actually have 86% coverage level. And again, this product has pretty high subsidies. And so, it’s not that expensive for those that may have chose PLC for corn or soybeans.

James Mintert: But there’s a caveat Yes. And that is, that is based not on your yields, on your individual farm yields, but rather on county yields. So, at this point, you are now pairing a individual farm coverage level product RRP with a county level product. And that complicates life quite a bit.

Michael Langemeier: Yes, we’re going to talk about the enhanced coverage option next. It’s the same problem with the enhanced coverage option. The rps pretty straightforward. If I have 80% revenue protection, that’s based on my farm yield, my variability of my farm yields. And then if you go up to the use SEO and go up to 86%, that extra 6% is based on county yields. And your farm yields may not be correlated with county yields. And so it may not provide the coverage that you think it’s providing.

And let’s talk about ECO because it’s the same way. You can get coverage up to 90% or 95% coverage level by mixing revenue protection and then adding to that SCO and ECO. ECO being the enhanced coverage option. But again, that caveat that extra coverage is based on county yields rather than your farm yield.

James Mintert: Yeah, so that’s really from our perspective, makes it a little bit difficult to anticipate what kind of coverage you’re really gaining by purchasing these two products. But nevertheless, they are out there and there are a few people that have chosen to buy those. The ECO indemnity payments are capped. You might explain how that works.

Michael Langemeier: Yes. The ECO payments are capped and what they’re trying to do is they’re trying to make sure that you only get up to like 9% of the revenue guarantee if you’re looking at the 95%, that’s 86% SEO up to 95% ECO. And 90% they’re trying to ensure that you only get 4% of the revenue guarantee, you’re going from 90% to 86%. And so, it is important to keep in mind that they are capped and it is related to the revenue guarantee.

[00:19:52]
James Mintert: So, let’s look at that. So, if you go for example, from the 85% coverage level, again, this is the same example In Posey County, southwest Indiana. The 85% coverage level for RP was $51 and 22 cents based on our estimates. If you add the SEO and the ECO product at 90% coverage level on ECO, that bumps your premium up by about $14 an acre to $65, and you’re gaining an additional guarantee, but it’s a little hard to interpret what that means. You’re gaining a $54 additional county revenue guarantee, but it’s a little hard to anticipate what that means on an individual farm basis. Right?

Michael Langemeier: Very difficult. And because again, if your farming and county yields are not correlated, that guarantee may or may not be triggered depending on the relationship between a farm and county yields.

James Mintert: So, the point we’re trying to make is the revenue guarantee at that 85% level for this particular farm that we’re hypothesizing here was $9.26. You really can’t just take the $54 of additional county revenue and add it to the $9.26 because you’re basically at that point adding apples and oranges. Right?

Michael Langemeier: Definitely. You definitely have to keep those separate.

James Mintert: And then your other alternative would be to take that same SEO coverage, which again, as you mentioned, goes to 86% at the county level and then add ECO, but instead of adding it at the 90%, add it at the 95% level. And that becomes even more expensive. The gain in premium or increase in premium there you’re going from $65 an acre for the SEO, ECO 90% coverage level to $84.55. I’ll say that again. That’s roughly $85 an acre in crop insurance expense. And again, you know, the county revenue guarantee goes up from 54 to 108.

You get an increase there of 108. But again, you can’t simply just add that to your individual farm guarantee of $9.26 and say, I’ve got over a thousand dollars of coverage, because that’s not necessarily the case.

Michael Langemeier: Yeah, definitely. And to get to the skinny here really there is going to be some people that are going to look at this ECO 90% and ECO 95% if they really can’t afford much downside risk. But I think that the large majority of people you know, if they do need more coverage to protect, gets downside risk, probably should stop at the 85% revenue protect.

James Mintert: Again, I think that recommendation gets back to the idea of thinking about your crop insurance from a long run standpoint. What are you going to do, for example, over the next five years, the next 10 years, and do you really want to spend that much additional money on the insurance product?

It is an insurance product, so think about it that way. Look, let’s look at the returns and potential indemnity payment.

[00:22:38]
Michael Langemeier: Yeah, what I’ve tried to do is I’ve tried to compare the, the revenue protection, 75%, 80%, 85% also the ECO 90%, and ECO 95%. So I’m comparing those five different products and looking at potential payouts using three scenarios.

And so let me talk a little bit about how I developed the prices for the scenarios. First of all, I use the $5.95 projected price for all three, because that’s about where it’s going to be. But I used different harvest prices for the first, second, and third scenarios. And what I did is I took a look at the iFARM Price Distribution Tool, University of Illinois, and looked at what was the bottom quartile in terms of expected prices for corn.

What was the upper quartile for expected prices for corn? And so, for the first scenario, I said $5. That’s approximately what that bottom 25 percentile is right now for these futures. $5. And then for the third scenario, I said $6.50. That’s approximately what the upper 25, percent is. And so, I tried to use some realistic price scenarios.

And then in the scenarios, I did try to also adjust the yields, and I’ll talk about the numbers here in a second. But for the first scenario, I said, okay, let’s just say we have 183 bushel yield, both farm and county, and see what that drop in price would mean in terms of indemnity payments for the different products.

And then for the second scenario, this is a scenario that actually could happen if your farm yields are not highly correlated with the county yields. I said the farm yield dropped approximately 21%. I made it big enough it triggered at the 80% but the county yield was 183, so it stayed the same.

And then finally in the third scenario, I dropped both yields by 21% both the farm and the county and saw what the indemnity payments would be in that case. But I wanted the scenario with yields here, where the county and the farm did not match up to illustrate the problem with that extra revenue guarantee you get from the ECO. You may or may not get that, and so we’ll talk about that scenario. Let’s start with the first one where we’re looking at that drop in price. $5.95 projected price, $5 harvest price. That’s a large enough price drop that we get a small indemnity payment of 85% of $11. We get an ECO 90% additional payout of $55 and a 95% additional payoff at $109. And so in that scenario where you do see a, a price drop like that, again, that’s 25% chance or less we’d see a price drop that’s steep, but it is possible. You get some pretty good payouts for 85%, 90%, and 95%.

So let’s go to the second column, Jim. And this is the case where the projected price and harvest price are identical, but the farm yield’s 145 and the county yield’s 183. You get some pretty good payouts for revenue protection particularly at the 85%, $8 per acre payout at 80%.

That’s a large enough drop in yield to get a payout there. And a $63 you know payout from the 85%, but you get nothing from the 90% and the 95%, because county yields did not change. And so that’s the problem you know, with the 90% and 95%, that’s the problem. When you’re associating those products with the county yield, if the county yield doesn’t change and your farm yield change, you’re not getting as much protection as you’re getting under the revenue protection products. And so that’s why I wanted to show that scenario. And then finally the last column we’re looking at a rather large drop in yields in both farm and county, and obviously in that case you get some pretty good pay outs.

James Mintert: Yeah. So again, I think coming back to thinking about where would the SEO and ECO products fit in. Truthfully, it probably doesn’t fit in that well with people that are already buying 85% coverage. Right. It’d probably make more sense if you’re at one of the lower levels, like maybe 75%. In which case you could pair the SEO, which would bump you up to 86%, and then you might or might not go with the ECO. So, you might, you know, if you’re really intrigued by this, you might look at what that would cost if you’re thinking about one of those lower coverage levels.

But certainly, the higher coverage levels you’re paying quite a bit extra and not gaining much, is how I’d put it.

Michael Langemeier: That’s the way I would put it.

[00:26:35]
James Mintert: All right. Let’s take a look at soybeans here, and Michael, you went back and looked at the projected February crop insurance prices for soybeans and gee, I think tentatively anyway, the projected price for this year is one of the highest on record.

I think last year was the highest on record. It was at $14.33 for soybeans. Your projection right now up through the 23rd of February was $13.78, and I think that’s the second highest over the last what 15 years or so, right?

Michael Langemeier: Yes, it is. And it’s quite a bit higher than what we saw in 2011, for example. You know, it’s at least 30 cents higher than what we saw during that 2011, 2012, 2013 period you know, specifically looking at 2011.

So, a pretty high projected price for soybeans. A little lower than last year. But the bad news related to this relationship between harvest and projected or harvest and February crop insurance prices is, it’s not very common for that price to drop 15%. In fact, only one of the last 16 years did the soybean price drop more than 15%, and that was in 2008.

James Mintert: Yeah. And so strictly speaking, there was a couple of years where it may be just fractionally fell below that 85%, but so close to 85% that the payment that would be triggered be would be negligible.

Michael Langemeier: Yes. And again, you know, circling back again you’re not looking at the revenue protection product for soybeans necessarily because you’re worried about the drop in price, though that is important. You do get some downside risk protection there. You’re really looking at that potential to increase your revenue guarantee if the harvest price is higher than the projected price.

James Mintert: Yeah. So, taking a look at the bundles again, we looked at 75%, 80%, and 85% revenue protection. Again, this is for a sample farm in Posey County, Indiana. That $13.78 projected price off of February here through the 23rd of February. Estimated volatility, kind of a mid-February volatility. Keep in mind, that’ll be set that last week of February. 15% volatility. And then a farm and county trend yield of 54. And so, looking the cost of insurance. Looking at those individually, going from 75 to 80% coverage.

The premium for a 75% coverage was just over $9. The premium for 80% coverage was $16.83, so not quite $17. That increase was $7.79 to bump coverage from 75 to 80%. The increase in the farm revenue guarantee takes you from $5.58 at the 75% coverage level to $5.95 at the 80% coverage level.

So, you picked up $37 in coverage. You take that $7.79 increase in premium divided by the $37 increase in revenue guarantee. That gives you a ratio of about 21%. So again, thinking about what you were talking about with respect to corn, Michael, that starts to look kind of attractive.

Michael Langemeier: Yeah. That’s a reasonable ratio, I think.

James Mintert: And I think from an individual farm perspective, you can think about your own history and the likelihood of triggering a payment and whether or not it’d be more likely than the roughly one out of five that that ratio suggests. And if you go from 80% to 85%, similar to what we saw with respect to corn, the increase in the cost is $14, a little over $14, and the increase in coverage is about the same, $38. So you’re paying not quite, but almost twice as much as you were to go from 75% to 80% to when you would go from 80% to 85%.

That changes our ratio quite a bit. So now you’ve got a ratio of $14.13 divided by $38. That’s 37%. And so again, you can start thinking about that in terms of the likelihood of that additional 5% of cover triggering a payment and whether or not it’s more likely than, that’s roughly what every two and a half years, basically every two, well, between two and three years. Again, similar to what we saw with corn.

Michael Langemeier: And I encourage people to kind of use this ratio to think about increasing coverage levels 75% to 80%, 80% to 85%, particularly for Southern Indiana where they do have a tendency to pick 75% and 80% more than the 85% coverage level. Think of it in terms of how we’re thinking about, what’s that additional premium compared to the extra revenue guarantee that I’m getting.

Because one of the things that some people do is they say, well, I’m willing to pay $30 per acre. They have a number, I’m just making up a number here, I’m willing to pay $30 per acre for crop insurance. I’ll look for the product that’s $30 or slightly under. If you did that with soybeans here, you’d say, well, the, the 85% products only cost me $31. That looks like a pretty good product. Back up here, is that extra revenue guarantee you’re getting going from 80% to 85% worth that extra premium. And we’re arguing here, perhaps not.

James Mintert: Yeah, I mean, you’re talking about paying $14 to pick up $38 in coverage, and do you want.

Michael Langemeier: That’s expensive.

James Mintert: Do you want to do that every year for the next 10 years? We would argue that’s probably not a good deal. So, let’s take a look at adding the SEO and ECO products to the revenue products for soybeans.

Michael Langemeier: Yeah, if you go to the 90% ECO product, you’re bumping premium approximately $8, you get $37 of additional county revenue guarantee. Don’t do the ratio there because you’re not comparing extra cost compared to farm level revenue. So that caveat holds for soybeans too. And then if you want to go from 90 to 95%, you’re paying additional $12 of premium for another $37 of additional county revenue guarantee.

[00:31:50]
James Mintert: Yeah. So again, I’m glad you pointed out that you don’t want to do the ratios like we did with the in revenue product coverage because you’ve got this apples and oranges comparison going on between county and individual farm level coverage, right? So, take a look at the coverage levels and give this some consideration. You’ve got some time. These decisions need to be made by mid-March.

Michael Langemeier: And again, I looked at the Illinois tool again, looking at the net cost of the different products. There really isn’t much difference in the net cost of the 75 to 85%, the 75% was a little bit more attractive, but again, it was really small. It was like a dollar per acre difference. And so those products are pretty appealing, both the 75 and 80% products for soybeans in Posey County.

James Mintert: One thing that we didn’t really talk about in this particular podcast, Michael, is just the idea that this year farmers are maybe a little more concerned than in the past. We’ve certainly picked that up in our Ag Economy Barometer surveys about the high input cost. And so that’s another consideration with respect to what coverage level you choose, right, in terms of managing your total risk exposure.

Michael Langemeier: That’s why I think because there’s not, you know, in this case, there’s not a lot of difference in the net cost of 80%. And when we did the ratio, it looks like going from 75 to 80%, you know, made a lot of sense. I would really lean towards that 80% because you are getting a higher revenue guarantee when input costs are high, that’s a pretty important consider.

James Mintert: Okay. One other point I think too, we should make, if we were doing the same analysis, not for southwest Indiana, but if we were doing it for example, northern Indiana northern Illinois, central Illinois, we’d be comparing 80 and 85%, not 75 and 80%. Right?

Michael Langemeier: And with most of those comparisons, the 85% would look like a pretty good product.

James Mintert: Yeah.

Michael Langemeier: In fact, that’s what happens pretty much all of northern Indiana is close to that 85% revenue protection. In most counties you know, in northern Indiana.

James Mintert: But the technique we outlined here would be…

Michael Langemeier: Would work.

James Mintert: Exactly be the thing you’d want to do. If you have been buying, for example, 80% coverage and you’re in northern Illinois or northern Indiana. Take a look and see what the additional cost would be to go to 85%, and you’ll probably find it fairly attractive.

[00:33:48]
Michael Langemeier: And a lot of times from a cost per acre, this is kind of rule of thumb that I use, for the cost that you can buy an 80% product in southern Indiana, you can get the 85% product in northern Indiana. So it makes a lot of sense that, you know, southern Indiana would be a little closer to that 80% revenue protection, just from a cost standpoint, but also the ratios that we’re looking at here. And the northern Indiana would be moving towards that 85%. And that would be true of the northern two-thirds of Illinois too.

James Mintert: And that simply is a function of the yield variability in the southern Illinois, southern Indiana region versus northern Illinois, northern Indiana and central Illinois.

Michael Langemeier: And in just case we have some people in the Western Corn Belt listening to us, you really couldn’t afford the 80 and 85%. You move into Nebraska and Kansas; they’re looking more at the 70 and 75%. But there’s this whole idea of looking at this ratio makes sense regardless of where you’re at in the country.

[00:34:37]
James Mintert: Yeah. Good point. So, you wanted to take a look at the SEO and ECO products on the soybean side.

Michael Langemeier: Yeah. I don’t think we need to belabor this because it’s a very similar setup to the corn results.

One of the things that is interesting about the soybeans, however, is I did use that iFARM Price Distribution Tool, and it’s very clear to me, Jim, and we’ve talked about this in our webinars, there’s a lot less downside risk for soybeans and so that, that price protection’s not quite as important for soybeans this year as it is for corn. Because corn has more downside risk. And so that’s just something we found when I was doing this analysis. The only payout you get from that lower 25% price. Looking at the iFARM Price Distribution Tool is a 95% e c. And so, it just tells you that there’s less downside risk when it comes to soybeans this year.

The other results are very similar. If your farm yield drops significantly and county yield doesn’t, you don’t get any SEO or ECO 90% or ECO 95% payouts. You would get payouts, of course with revenue protection products, depending on how large the yield reductions were. And then if both farm and county yields are reduced, you get some pretty good payouts for both products. And one of the things you can also look at, and this again, is available with University of Illinois’s Crop Insurance tools. They will tell you the probability of having a 10% loss of yield, 20% loss of yield, 30% loss of yield.

They’ll tell you that, its county numbers, but they’ll tell you what the probability is. And so, you can kind of gauge you know, whether I need that higher coverage level because the probability of 20% reduction in yield in my county is pretty high.

James Mintert: Yeah, good point. So that kind of wraps up our podcast for today. You can subscribe to the podcast if you’re not already doing that on our website. And you can obviously get some more information on our website. For those of you that are listening as a podcast, I wanted to let you know that this is available in a video format, and also you can download the slides that we were referencing during the course of the podcast and take a closer look at those.

So, with that, I want to thank Michael Langemeier for joining us today on the podcast. And on behalf of the Center for Commercial Agriculture, I’m Jim Mintert.

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