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   Home / Crops / Insurance / Risk Management

Disclaimer: This web page is designed to aid farmers with their marketing and risk management decisions. The risk of loss in trading futures, options, forward contracts, and hedge-to-arrive can be substantial and no warranty is given or implied by the author or any other party. Each farmer must consider whether such marketing strategies are appropriate for his or her situation. This web page does not represent the views of Kansas State University. 

Falling Corn and Soybean Prices Reduce Indemnity Payments for Most Farmers [1]

What, Prices are NOT lower?   Professor, all farmers and livestock feeders know Corn and Soybean prices are high, not low!  That is true; grain prices are higher than they were on the crop insurance sales closing dates.  However, when some of the estimated crop insurance underwriting losses were being covered in the press last summer, those prices were much higher.  As a result, some analysts were giving press releases suggesting crop insurance underwriting losses might reach $40 billion dollars.  What those press stories failed to state was that those summer prices had no effect on indemnity payments for most corn and soybean producers.  Or if it was stated, most readers probably never read past the head line of a $40 billion loss.

The harvest price used to settle the Revenue Protection (RP) contract for most farmers is the October average closing futures prices for December corn and November soybeans futures contracts.  The official prices are posted on RMA’s website at: http://www3.rma.usda.gov/apps/pricediscoveryweb/DailyPrices.aspx

The current RMA Harvest prices are in Table 1.

The harvest price will not be final until the end of the month for most states, but the current average harvest price is much lower than last summer. Soybeans are currently down $2.24 from its summer high close and corn is off 77 cents.  This is a 9.2% reduction in corn prices and 12.7% reduction in soybeans prices. 

Assuming the harvest price average remains at current levels, then the falling harvest prices are cutting into indemnity payments for most farmers.  Because most farmers have RP, the market is reducing those payments by about 10% from last summer levels when many experts were arguing that farmers would be paid more in indemnity payments than their “expected” crop value.  Even by the experts’ narrow definition of “expected” crop value, these falling prices will prevent most farmers from exceeding their “expected” crop value.  The exception is those farmers who don’t have yield losses; their crop revenue will far exceed the “expected” crop revenue.  Farmers are nearly always better off with a crop, with very few exceptions.

While RP payments will be lower using the correct harvest prices than if they had been paid on market traded prices in August, RP payments will greatly exceed indemnity payments for those farmers who excluded the harvest price (RP-HPE) or purchased Yield Protection (YP).  An Indiana farmer with 80% coverage and a drought-damaged crop will likely receive RP payments that are 30-40% higher than would have been paid under RP-HPE, after premiums are deducted.  Those farmers with 80% RP-HPE and a 40% yield loss will collect nothing and still owe the premium.  Indiana corn farmers who excluded the harvest price cut their premiums on average by nearly 50%, but then the RP-HPE coverage either paid reduced payments or failed to pay.  Very few farmers excluded the harvest price and this year shows why most farmers don’t exclude the harvest price.  This is the type of year where farmers will need the indemnity payments.

Farmers that excluded the harvest price will benefit from prices falling because they will have less revenue to count against the lower RP-HPE guarantee.  However, it is nearly impossible for the harvest price to end up below the base price this year and as a result, there will be farmers who purchased RP-HPE with yield losses and will receive no indemnity payment.

Those farmers with YP neither benefit from lower prices or higher prices.  Their indemnity payments are based exclusively on those lost bushels.  Those lost corn bushels will be indemnified at $5.68 and soybeans at $12.55 per bushel, far below their market value.  However, because the base (spring) price will be lower than the harvest price, YP will pay higher indemnity payments this year than revenue protection with the harvest price excluded (RP-HPE), unless yields are approaching zero.


[1]Prepared by G. A. (Art) Barnaby, Jr., Professor, Department of Agricultural Economics, K-State Research and Extension, Kansas State University, Manhattan, KS 66506, October 5, 2012, Phone 785-532-1515, e-mail – barnaby@ksu.edu.

 

 
Department of Agricultural Economics   K-State Research & Extension   College of Agriculture   Kansas State University