By Laura Temple
While Illinois leads the nation in soybean production, it typically ranks much lower in crop insurance claims. Most Illinois producers choose federal revenue protection for soybeans, according to USDA Risk Management Agency (RMA) data, but early 2018 reports showed claims on only eight percent of soybean acre policies.
With thin profit margins projected for the near future, is crop insurance a place to trim costs? Insurance and risk management experts advise critical analysis before answering that question.
“Risk management is a long-term strategy,” says Don Preusser, president of Precision Risk Management, LLC, a federal crop insurance provider based in Sioux Falls, South Dakota. “Producers shouldn’t consider insurance a single-year expense. They should plan and customize crop coverage to fit their overall, long-term risk tolerance, accounting for factors across their entire operation that change over time.”
Federal crop insurance provides a base for risk management, covering yield and price volatility.
“Crop insurance premiums should be considered an annual known loss in exchange for an unknown future loss in size or timing,” explains Ken Harrison, risk management consultant with Sheer Simplexity, Inc., based in Overland Park, Kansas, who has past experience with the RMA. “With the 2014 Farm Bill, Illinois soybean producers pay about 40 cents for every dollar of federal crop insurance with subsidies covering the other 60 cents. Illinois may get less compared to other states based on claims, but that’s a good deal to protect against losses.”
Preusser and Harrison recommend honest farm risk analysis to develop the best risk management approach for any operation.
“Start with a financial balance sheet analysis,” recommends Preusser. “Where is money spent? What capital and income levels need to be protected? Then choose insurance and risk management strategies and products that align with those needs.”
Harrison stresses the importance of understanding insurance. “Ask how effective federal crop insurance is relative to farm risk,” he says. “Producers should analyze how their farms behave relative to the RMA program, which calculates coverage using 10 years of individual farm yields times chosen coverage level. In recent years, yields have generally exceeded 10-year averages.”
Harrison points out that crop insurance claims are greater in southern Illinois compared to the rest of the state. That impacts federal calculations done at the county level, varying benefits of the program depending on farm location.
“Calculate odds for various risks and the losses the operation can bear,” Harrison continues. “Remember that production agriculture losses add up quickly.”
Both specialists note countless factors figure into risk evaluation, from soil type and crop production management, to market demand and geopolitical affairs. Layering precision production data and controllable decisions like variety selection with unpredictable factors like weather and global demand clarifies the picture of risks to manage.
“When evaluating risks, make sure to account for current yields,” says Harrison. “Soybean yields were stagnant for years, but recently they have been increasing, especially in Illinois. A 10-year history may not reflect current expectations.
“Then ask what the biggest risks are, and consider supplemental options that address them,” he continues. “For example, some producers need crop insurance to manage operating loan risk.”
Accurate evaluation identifies areas where risks – and coverage needs – may have decreased.
“Over time, producers have adopted technology, business and agronomic management practices that improve production,” says Preusser. “As they make investments that may reduce risk, insurance coverage should be adjusted to align insurance expense with exposure.”
He offers well-maintained or new equipment as one example, because risk of breakdowns during optimal planting and harvest windows decreases.
“Forward contracting soybeans can also manage risk because it locks in the price,” he says. “And, coverage is available in case production doesn’t fill the contract.”
The bottom line?
“Don’t guess on crop insurance needs,” says Preusser. “Set a strategy, understand how to manage and reduce risk through operational practices while consistently evaluating and executing the business plan.”