AMES — Despite a statewide record 2014 corn crop, some Iowa farmers will receive crop insurance indemnity payments this year, according to Iowa State University ag economist Bruce Babcock.
“It illustrates that crop insurance is becoming more of a price instrument than a yield protection tool,” Babcock said.
“It is kind of ironic that crop insurance supporters are always talking about crop insurance being there when Mother Nature strikes. But this year it’s not Mother Nature. It’s the markets,” Babcock said.
Because harvest prices are substantially less than spring projected prices, relatively high yields will result in crop insurance payments, particularly when coverage levels are 80 percent and 85 percent — the two levels purchased by most farmers, said Gary Schnitkey, an agricultural economist at the University of Illinois.
Most farmers buy crop insurance that protects them against reduced yields, most often caused by adverse weather, and against revenue loss, which typically occurs, as it did this year, when commodity prices fall during the growing season.
The 2014 projected prices, established by the federal Risk Management Agency in the spring, were $4.62 per bushel for corn and $11.36 per bushel for soybeans.
With large plantings and generally favorable weather across the grain belt, prices declined during the growing season.
For crop insurance purposes, the harvest prices, determined by taking the average of settlement prices on Chicago Board of Trade futures contracts in October, were $3.49 per bushel for corn, a 24.5 percent decline from the spring price, and $9.65 per bushel for soybeans, 15 percent lower than the spring price.
Schnitkey noted, however, that yields were so good in Illinois — a statewide average of 200 bushels of corn per acre — that payments will be much less common there than in Iowa, with a statewide average of 183 bushels per acre.
To illustrate how payouts are determined, Schnitkey cites the example of a farmer with 85 percent coverage and an actual production history of 190 bushels per acre. That farmer’s guaranteed revenue would be derived by multiplying the historical yield (190 bushels per acre) by the level of coverage (0.85) by the fall price ($4.62), yielding a guaranteed revenue of $746.13 per acre.
“We’re not talking huge checks, but there definitely will be some claims. We are already seeing it,” said Pat Swanson, who with her husband farms in Mahaska County and operates Son Risk Management, a crop insurance agency in Ottumwa.
In southern Iowa, Swanson said farmers are more likely to qualify for indemnity payments for soybeans than for corn.
“Our corn yields have been excellent across the board, and most of our customers have 80 percent coverage on corn. I don’t see a lot of corn claims this year,” she said.
Soybean yield, on the other hand, “are all over the board,” she said.
With 85 percent coverage, the soybean standard among her customers, and a 15 percent drop in price from spring to fall, “if you didn’t hit your APH (actual production history), you will probably have a claim,” she said.
Still, this year’s claims will be far less than in 2012, when widespread drought slashed yields and caused grain prices to skyrocket during the growing season, Swanson said.
“With indemnities based on much higher fall prices, farmers had record incomes with greatly reduced production,” she said.
Looking ahead, Swanson said continued low grain prices could present problems for less-well-established farmers who may have trouble securing operating loans when crop insurance won’t cover the costs of production.
Mark Recker, who farms 1,400 acres in southern Fayette County, said he thinks farmers in his area will have crop insurance claims this year.
His opinion, he said, is based not only on the spring-to-fall decline in commodity prices but also on the fact that both corn and soybean yields were from 10 to 15 bushels per acre below average.
“We had a wet June and a dry August that took a toll on yields,” he said.
As Recker was wrapping up his harvest last week, he said he was tallying yield numbers and working with his crop insurance agent to determine if he has a claim.
“It’s worth doing the math,” crop insurance agent Swanson said.