Purdue expert offers advice for last-minute crop insurance decisions

March 11, 2014  


WEST LAFAYETTE, Ind. - With the March 17 crop insurance enrollment deadline looming, a Purdue Extension agricultural economist has some advice for producers who have yet to finalize their decisions.

About 80 percent of Indiana's corn and soybean growers purchase crop insurance each year to protect their farms from the financial hardships of significant revenue or yield losses. But choosing the type of insurance and levels of coverage for each farm can be tricky because of the several options available.

"There is no one-size-fits-all when it comes to crop insurance policies," said Michael Langemeier, who also serves as associate director for Purdue's Center for Commercial Agriculture. "It really depends on the individual farm situation."

There are two major categories of crop insurance policies: revenue protection and yield protection. Revenue policies protect farmers against loss from low yields, low prices or a combination of the two. Yield protection policies insure against yield losses. Both offer coverage levels ranging from 50 to 85 percent, with premiums increasing alongside coverage levels.

Under each of those categories, a producer can select an area risk plan, which is based on county yields, or an individual plan, which is based on the production history of the individual farm.

"I think growers really need to think about the revenue guarantee itself and ask themselves what they can afford to lose," Langemeier said. "If an individual farm can withstand some loss, that farm might need a little bit less coverage. But if a farm can't withstand much loss or the cash flow is tight, that farm probably needs more coverage.

"It all comes down to how much coverage you need to be able to sleep at night."

Part of the decision also depends on the production history of each farm. If a farm has lower-yielding soils than the rest of the county, it might make sense to look at an area risk plan, Langemeier said.

For growers who haven't already done so, Langemeier said it's a good idea to discuss crop insurance options with landlords to coordinate their decisions.

"Farm operators are in a lot of different arrangements, and some of those landlords depend on that rental income," he said. "If prices or yields were to fall, could the landlord afford that drop? There are a lot of retired or semi-retired farmers serving as landlords."

Another consideration when deciding between yield and revenue policies is the current market environment. In a more stable price environment, yield policies might make sense, but when prices are uncertain, revenue protection policies might be the better option.

"We've been in an environment since 2007 that has been best suited for farmers to look at revenue protection over yield protection," Langemeier said.

Finally, growers need to assess their debt positions versus their liquidity. Langemeier noted that farms with a lot of debt can't afford much loss, which means they need a higher level of coverage than a farm that can afford to take a small financial hit.

But by the same token, farms in good financial standing need to protect that position.

"It is so important to protect a farm's liquidity," Langemeier said. "That needs to be taken into account when choosing crop insurance because you don't want to see that liquidity deteriorate because yields or prices drop."

Purdue Extension has resources available to farmers still trying to make their crop insurance decisions ahead of the deadline. Langemeier has two papers available for free download on the Purdue Center for Commercial Agriculture website:

* "Comparison of Crop Insurance Products"

* "Crop Insurance Guarantees"

The center also has a free, archived webinar titled "2014 Crop Insurance Decisions," also available on the website. In addition to Langemeier's discussion of 2014 crop insurance, the webinar includes a talk from Purdue Extension agricultural economist Roman Keeney about ways the new farm bill could affect crop insurance decisions in the future. 

Writer: Jennifer Stewart, 765-494-6682, jsstewar@purdue.edu 

Source: Michael Langemeier, 765-494-9557, mlangeme@purdue.edu

Ag Communications: (765) 494-2722;
Keith Robinson, robins89@purdue.edu
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