Margin Protection Crop Insurance FAQ

Steve Johnson, headshot

Contributed by Steve Johnson, Retired Extension Farm Management Field Specialist, sdjohns@iastate.edu

Question: What is Margin Protection Crop Insurance?

Answer: Margin Protection (MP) is an area-based crop insurance plan that provides coverage against an unexpected decrease in operating margin (revenue minus input costs), caused by reduced county-level yields, reduced commodity prices, increased prices of certain inputs, or any combination of these perils. Because MP is based on county average yields, an individual farm may have a decrease in its margin but not receive an indemnity payment, or vice-versa.

Question: Why does MP have a September 30th deadline to purchase the policy?

Answer: The discovery periods for both the MP projected price and selected variable costs are mid-August through mid-September. Thus, the MP Expected Margin from the Risk Management Agency (RMA) and premiums are not known until after September 15th. MP is typically an add-on product to an underlying base product such as Revenue Protection (RP) policy or a Yield Protection (YP) policy.

Question: If I have a base policy and MP, will I owe the full premium for both policies?

Answer:  Insureds will owe the full premium as determined from the actuarial tables for your base policy. However, you will receive a premium credit for your MP policy because any indemnity payments from the base policy will wholly or partially offset indemnity payments from the MP policy, reducing the potential indemnity payments under the MP policy. This is the basis for the premium credit. The amount of the premium credit will depend on the producer’s historical unit yields relative to the county yields for the same years. The premium credit is determined when all information needed to establish liability under the base policy is known, which is after the approved yield has been established and the acreage report filed.

Question: When will the premium for my 2022 crop MP policy be due?

Answer:  September 30th, 2022, the same time when the premium is due for the underlying base policy.

Question: If MP crop insurance policies have been around since the 2017 crop year. Why is there so much interest for the 2022 crop?

Answer:  The MP projected prices using 2022 crop December corn futures is expected to exceed $5.00/bu and November soybean futures may exceed $12.50/bu. These high projected prices create a much larger minimum trigger margin and thus the potential for a potential indemnity. 

Question: Can I buy MP with another Federally reinsured crop insurance policy for the same crop?

Answer:  You can buy MP and also buy a Revenue Protection (RP) policy or a Yield Protection (YP) policy (denoted as a base policy) on the same acreage. The base policy and the MP policy must be purchased from the same Approved Insurance Provider (AIP), however, the base policy and the MP policy may be purchased from different insurance agents or insurance agencies. If you buy a base policy, you will receive a credit to your MP premium because indemnity payments from the base policy are used to offset indemnity payments from the MP policy. To receive a premium credit, the base policy type and practices must match the type and practices elected on the MP Policy. You may buy any optional coverages or endorsements available for the base policy, except the Supplemental Coverage Option Endorsement (SCO) or Enhanced Coverage Option (ECO). SCO and/or ECO are not allowed on the crop if you purchase MP. Note MP cannot be purchased if you have a Whole Farm Revenue Protection Policy covering the same crop in the same county.

Question: What are the premium subsidies for MP?

Answer: MP offers the same premium subsidies as other existing area-based plans, which vary by coverage level, as follows:

  • For 70% coverage, the subsidy factor is 0.59;
  • For 75% and 80% coverage, the subsidy factor is 0.55;
  • For 85% coverage, the subsidy factor is 0.49; and
  • For 90 and 95% coverage, the subsidy factor is 0.44.

Question: If there is an MP indemnity, when are losses paid?

Answer: MP losses are paid when final area (county) yields are available, in the spring of the following year or approximately after June 16.

If an indemnity is due, the Approved Insurance Provider will issue the payment no more than 30 days after the date the final county yield is determined.

Question: What are the inputs used to determine MP coverage and losses? How are they determined?

Answer: Two types of production inputs are specified, those subject to price changes and those that are not subject to price change.

Inputs subject to price changes are, for example, diesel fuel, interest, and certain fertilizers for which projected and harvest prices can be obtained from third-party markets. Price changes for these inputs, along with county yield changes and changes in the price for the commodity, determine whether an indemnity is paid. Inputs subject to price change by crop are:

CornDiesel fuel, interest, diammonium phosphate, urea, potash
SoybeansDiesel fuel, interest, diammonium phosphate, potash

Fixed-price inputs are seed, machinery operating costs (other than fuel), and similar expenses. These inputs affect the amount of insurance coverage, but do not directly determine whether an indemnity is paid. Inputs not subject to price change by crop are:

CornPre-harvest machinery, seed, lime, herbicide, and insecticide costs;
SoybeansPre-harvest machinery, seed, lime, and herbicide costs.

Question: Since this is an area-based plan, how are the costs determined?

Answer: Variable costs are from futures prices for fertilizer and diesel fuel. Interest rates are determined by the 30-day federal fund averages. Fixed and variable costs could vary slightly by county.

Question: ­Do you get both the MPCI and Margin Protection indemnity or the difference? ­

Answer: You get the higher of the two indemnities. Since the MPCI indemnity will be paid out first, that amount could be subtracted from the MP indemnity if the MP indemnity is larger.

Question: When will agents be able to quote an accurate cost per acre for MP?

Answer: After Sept. 15th when the projected prices and costs will be determined. The final premium credit will also be impacted by the farm’s APH in the underlying base policy.

Additional Resources:

An MP Premium Calculator can be found at: www.marginprotection.com

A USDA Risk Management Agency (RMA) fact sheet on Margin Protection can be found at: https://www.rma.usda.gov/en/Fact-Sheets/National-Fact-Sheets/Margin-Protection-for-Federal-Crop-Insurance

Crop insurance coverage-frequently asked questions

Map showing ISU Extension Farm Management Specialists
Iowa State University Extension and Outreach Farm Management Specialists

Iowa State University Extension and Outreach Farm Management Specialists, https://www.extension.iastate.edu/ag/farm-management, provide expertise regarding crop insurance and adverse events. Losses due to adverse weather conditions such as hail, frost, freeze, wind, drought, and excess moisture are insurable losses under multiple peril crop insurance. In 2021, the impact of drought conditions has continued for much of Iowa. Losses due to drought are an insurable loss under multiple peril crop insurance.
Another dynamic added to the mix is yield loss due to chemical drift, which is not a covered loss under multiple peril crop insurance.

Question: How many of Iowa’s corn and soybean acres are covered by crop insurance?

Iowa farmers planted 23 million acres of corn and soybeans in 2021. Approximately 90% of those acres have been insured using Revenue Protection (RP) multiple peril crop insurance. These insurance policies can guarantee various levels of a percentage of the farm’s average yield times the higher of the projected price (average futures price in the month of February) or the harvest price (average futures price during the month of October), using the November 2021 futures contract for soybeans and the December 2021 futures contract for corn. Most farm operators carry a guarantee of their APH from 65% to 85% level of coverage. The projected prices (futures average prices in February 2021) were $4.58/bu for corn and $11.87/bu for soybeans, respectively.

Drought damaged corn; photo courtesy of Meaghan Anderson, Extension Field Agronomist
Drought Damaged Corn; Photo courtesy of Meaghan Anderson, Extension Field Agronomist

Question: What should an insured farmer do once a crop loss is recognized?

  1. Notify the insurance agent within 72 hours of the discovery of damage, but not later than 15 days after the end of the insurance period. A notice of loss can be made by phone, in writing or in person. Although drought loss is not immediate, farmers should contact their agent as soon as they feel a loss is present.
  2. Continue to care for the crop using good farming practices and protect it from further damage, if possible.
  3. Get permission from the insurance company, also referred to as your Approved Insurance Provider (AIP), before destroying or putting any crop to an alternative use.

Question: Who will appraise the crops and assess the loss?

The crop insurance company will assign a crop insurance adjuster to appraise the crop and assess the loss. The insured farmer must maintain the crop until the appraisal is complete. If the company cannot make an accurate appraisal, or the farmer disagrees with the appraisal, the company can have the farmer leave representative sample areas.
These representative sample areas of the crop are to be maintained – including normal spraying if economically justified – until the company conducts a final inspection. Failure to maintain the representative sample areas could result in a determination that the cause of loss is not covered. Therefore, no claims payment to the producer.
Once appraised the crop can be released by the company to be:

  1. Destroyed – through tillage, shredding, or chemical means; or
  2. Used as silage or feed.

Question: Once released, may I harvest my corn as silage for feed?

Check with your crop insurance company. In a county where corn can be insured as grain only, the corn will be released, or harvested as silage or sold as feed. Any grain will be counted as production for your claim. In a county where corn can be insured as silage, the harvested silage will be counted as production.

Question: What is the difference among insurance units?

Many farmers have chosen to insure their crops using enterprise units in order to pay less expensive insurance premiums. Under enterprise units, losses are calculated by crop by county. Therefore all the corn planted by a farmer in a given county would be added together to determine a loss. If a farmer has chosen optional units, then losses are calculated by crop by field unit. Premiums are typically higher if choosing optional units but a good yield on one field does not cancel out the loss on another field.

Question: When will farmers be receiving indemnity payments for their crop insurance losses?

Adjusters will be busy with the increase in losses in areas that have been impacted. As soon as you are finished harvesting notify your insurance agent and an adjuster will be assigned to you. Insurance companies cannot defer payments to the next tax year, but claims adjusted late in the year may not be paid out until the following year.

Question: What is the maximum price that the harvest time indemnity price (average October futures price) can reach?

The maximum harvest indemnity price values for 2021 are twice of the projected price; or $9.16/bushel for corn and $23.74/bushel for soybeans, respectively.

Question: Can indemnity payments be deferred for income tax purposes until 2022?

A taxpayer using the cash method of accounting claims the income in the year they receive the payment. The insurance company will send the insured a 1099 form showing the amount and tax year to report the income.
A farmer, if they are using the cash method of accounting for reporting taxes, can elect to defer crop insurance payments if the loss is due to yield loss and they normally sell more than 50% of their crop the year following harvest. They cannot defer any loss that is due to price loss. Farmers that are using the accrual method of accounting for reporting taxes cannot defer crop insurance payments.

Question: Will I be asked to provide proof of my bushels this year for crop insurance verification?

All multiple peril crop insurance users are subject to production verification on a random basis. If a claim that exceeds $200,000 is filed for an individual crop and policy, verification of production is automatically required by regulation. This also requires a 3-year audit.

Additional Resources

Ag Decision Maker Crop Insurance Files, https://www.extension.iastate.edu/agdm/cdcostsreturns.html#insurance
Managed Haying or Grazing of CRP Acres, https://www.extension.iastate.edu/agdm/livestock/html/b1-60.html
Ag Decision Maker Crop, Livestock, and Weather Outlook resources, https://www.extension.iastate.edu/agdm/outlook.html
ISU Extension and Outreach Drought Resources, https://www.extension.iastate.edu/disasterrecovery/drought
Special Rule for Taxing Crop Insurance and Disaster Payments, https://www.calt.iastate.edu/blogpost/special-rule-taxing-crop-insurance-and-disaster-payments
RMA Crop Insurance and Drought-Damaged Crops, https://www.rma.usda.gov/en/News-Room/Frequently-Asked-Questions/Crop-Insurance-and-Drought-Damaged-Crops
RMA Extends Deadlines, Waives Interest Deferral for Emergency Drought Relief, https://www.rma.usda.gov/News-Room/Press/Press-Releases/2021-News/RMA-Extends-Deadlines-Waives-Interest-Deferral-for-Emergency-Drought-Relief
RMA Authorizes Emergency Procedures to Help Drought-Impacted Producers, https://www.rma.usda.gov/News-Room/Press/Press-Releases/2021-News/RMA-Authorizes-Emergency-Procedures-to-Help-Drought-Impacted-Producers

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Updated Checklist for Iowa Agricultural Employers

Melissa O'Rourke

Melissa O’Rourke, ISU Extension Farm and Agribusiness Management Specialist, shares tips for agricultural employers

The average farm operation does not have an HR (human resources) department. And likewise, many smaller Iowa agricultural service and supply businesses are not able to support an HR management position. Most farm and small ag businesses start as a family operation – but as they grow, it becomes necessary to hire non-family employees. All business owners should have a team of professionals – legal, tax, accounting and insurance – that can provide advice applicable to business HR needs. But to get the farm business owner started, Iowa State University Extension and Outreach provides a resource to guide Iowa farmers and other agricultural employers to key policies and procedures to be considered when hiring employees. 

The Checklist for Iowa Agricultural Employers on the Ag Decision Maker website is an overview of points to consider in preparation for hiring one or more employees for a farm or other agricultural operation.

The checklist is organized into categories of factors to check from the start to finish of the hiring process. References for more information are provided throughout the checklist, most of which come from either ISU Extension or other research-based university extension sources. State and federal government agency resources and contacts are included.

The links to resources have been revised and updated recently. We know that website links and resources can quickly become outdated, so we’ve tried to go through the document and bring those connections up to date. Several new resources have been added since the previous version of the checklist.

Worker misclassification has been recognized as a key issue by state and federal regulators. Too many businesses have taken a route to save expenses by wrongly classifying workers as independent contractors rather than correctly recognizing them as employees – so we’ve included resources to guide employers in that regard.

Additional information on job analysis and job descriptions is also included in the checklist. It’s important that farm and ag business employers think about the business needs, and clearly define what skills and qualifications are needed in the operation. Well-written job descriptions can be the key to guiding an effective hiring and employee retention strategy.

Employers should not consider the Checklist for Iowa Agricultural Employers to be exhaustive, or consider it as legal advice. Consult with personal qualified tax, accounting, insurance and legal advisers as they will be familiar with the farm business, and can provide expert advice on specific needs.

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March USDA Prospective Plantings and Grain Stocks Summary

Chad Hart, ISU Extension Grain Marketing Economist, provides a summary of the March 31, 2021 USDA reports.

For most of the March 31, 2021 stats, USDA’s new numbers were below expectations and that was good news for the markets. Corn and soybean plantings are above last year’s levels, but below trade guesses. Corn stocks were below both last year’s level and trade expectations, while soybean stocks were below last year, but slightly above expectations. The acreage change will drop USDA’s projected corn production by 141 million bushels (now setting at 15 billion bushels) and soybean production by 121 million (new estimate for 2021 is 4.4 billion bushels). The changes will further tighten 2021/22 projected ending stocks. For soybeans, if I held soybean usage to USDA’s earlier estimates, ending stocks fall to 24 million bushels (an incredibly low number). Thus, expect some major shifts in both crop usage and price estimates for the 2021 crops, once USDA starts the monthly projections in May (until then, USDA’s last complete set of estimates is from the Ag Outlook Forum in February).

Chad shares insights on these numbers and more in his latest Ag Market Outlook video. Latest slides on Ag Market Outlook.

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Iowa Farmers’ Business and Farm Transfer Plans: A Comparison between 2019 and 2006

Contributed by Beatrice Maule, undergraduate research assistant, Wendong Zhang, assistant professor and extension economist, David Baker, Director, Iowa State University Beginning Farmer Center

The loss of farmers that Iowa has witnessed in the past 70 years is strongly linked to the attitudes and mindsets towards farm succession. The number of farms has decreased and their sizes increased. On top of that, the average age of farmers has increased and they progressively started to keep more and more responsibility in the farm, even though their successor was well into adulthood and consistently helped on the farm. This, together with low incentives, has kept young farmers away from the land. However, Iowa’s economy needs young farmers to remain competitive and strong. This article is a short synthesis of a longer policy brief published in December 2020 that examines Iowa farmers’ business and farm transfer plans, retirement plans as well as successors.

Background

In 2019, a survey of family farms in Iowa was conducted with the main scope of comparing dynamics and attitudes behind farm succession. The focus was mostly on intangible assets and one of the key components of the survey was the comparison with the 2006 Iowa Farm Transfer Project. The population of the study consisted of 739 farmers, age 18 and older, who operated the farm in 2019.

The average age of farmers who responded to the survey was 61 and they indicated that they have been responsible for their farm for 40 to 50 years. The average age has increased since 2006, when the average was 56.

Sixty-five percent of respondents indicated that they grow corn and/or soybeans in their farm, and 60% consider farming their primary occupation, a moderate change since 2006, when 54% indicated the same answer. On average, they indicated that they mostly are not first generation farmers and that the farm has been in the family since 1927.

It is interesting to note that the majority of respondents acquired their farm by purchasing it from family members. However, 79% of respondents indicated that they receive some sort of off-farm income. Almost as many respondents acquired their farm in other ways, including by purchasing it from non-relatives. Most farms are largely a sole proprietorship, with a partnership with a spouse the second most common response. It is important to note, however, that the number of farms that are in a partnership are almost half that of sole proprietorships.

Eighty-seven percent of respondents indicated they have a will, a slight increase since 2006, and 28% have a trust. Overall, 57% also stated that they have considered estate taxes when making a decision about succession, and a little less than 35% consider estate taxes extremely important.

When asked about their highest education level achieved, 41% of respondents indicated that they have a high school degree, 25% had a 4-year college degree and 26% had a technical degree. These have all seen a significant increase since 2006.

Lastly, farmers mostly get their succession information from their banker or accountant, followed by ISU Extension and Outreach and from their attorney. Not extremely significant but well-worth noting, there is also a number of respondents that stated they get most of their information from magazines and articles.

Retirement Plan Analysis

When asked about retirement plans, 56% of respondents indicated that they will semi-retire, 23% stating that they will completely retire and 20% that they will never retire. It is important to note that, when comparing these responses with the 2006 Farm Transfer Project, the number of farmers who will retire has remained unchanged, while the number of those who indicated they will never retire decreased significantly. On average, farmers plan to retire at 67 years old. When asked the main reason why they would retire, respondents indicated that it would be because they are “getting too old.” A further analysis indicated that, among those who indicated “getting too old” as a reason for retiring, the majority indicated they would retire between 70 and 79 years old. When asked what type of involvement on the farm they would have upon retirement, 25% indicated they would have the same as now, just less intense, followed by “helping out during busy times only.” Close to 7% indicated they would have no involvement on the farm in retirement. The majority also stated that they wouldn’t move from their current residence upon retirement.

Figure 1. Source of income for farmers who plan to retire or semi-retire, 2019 (percent)
Figure 1. Source of income for farmers who plan to retire or semi-retire, 2019 (percent)

When asked how they plan to finance their retirement, Figure 1 shows that almost 58% indicated that they will rely on Social Security and 52% on income from the farm. It is important to highlight that in both 2006 and 2019, the sale of property, farmland, livestock and other farm assets was the least common answer. The majority of respondents indicated that they will rely on income from the farm to support between 50% and 75% of their total retirement income, immediately followed by 25% to 50%. This shows that the majority of farmers plan on relying heavily on this source of income which results being mostly in the form of a formal cash rent farming agreement.

When asked what they will miss the most about farming once retired, 76% of respondents said that they would miss the “way of life.” Additionally, 36% indicated that they will be pleased to give up the long hours on the farm and 34% were happy to give up the manual work that their profession requires.

It is important to note that 66% of farmers do not have a formal succession plan and 40% have identified a successor. Sixty-two percent of respondents have discussed succession with their spouse and 48% with their children. Around 22% haven’t discussed plans with anyone and 31% haven’t identified a successor. Among the respondents who have not identified a successor, the majority are confident that a family member will inherit and keep the farm; very few indicated that it will be sold. When it comes to identifying a successor, Figure 2 shows that a little under 58% of respondents indicated their son or sons will take over the farming operation and 8% indicated their daughter or daughters will. The latter has been a decrease compared to 2006, when 16% indicated their daughters. Other common answers are niece/nephew(s) and non-relatives. The average age of the identified successor is 33. The majority of respondents indicated that the successor already works on the farm, either part-time or full-time; however, 63% of respondents stated that they have family members who will inherit part of the farm but will not run it.

Figure 2. Who is the successor of the farm business, 2019 (percent)

Decision making and the role of the successor on the farm           

When it comes to making decisions on how to run the farm and the business, 59% of farmers responded that they make decisions alone, without any successor input, an increase since 2006. Nothing stood out as being run by the successor alone, and, on average, only 18% indicated that they make decisions with some successor input. Both have seen a decrease from 2006.

Decisions taken by farmer alone (percent)20062019Farmer > 70, 2019Successor > 35, 2019
Plan day-to-day work18%54%32%41%
Make annual crop/livestock plans19543842
Decide long-run mix and type of enterprises16543641
Decide input level use25584247
Decide the timing of operations15543442
Decide when to sell crop/livestock27644549
Negotiate sales of crops/livestock31644649
Decide when to pay bills44715559
Decide type and make of machinery and equipment16523940
Negotiate purchase of machinery and equipment23583844
Decide when to hire more help21594546
Recruit and select employees24604645
Decide amount and quality of work24594244
Supervise employees25574343
Decide work method/way jobs are done18503237
Decide and plan capital projects24554344
Identify sources and negotiate loans47664751
Livestock management19564750
Keeping farm records45655353
Decide whether to participate in conservation programs (and, if so, which options to take)614246

Table 1 indicates the percent of respondents that make their decisions alone without successor input. In the first column there is a list of decision-making areas, the second and third column are a comparison between 2006 and 2019 on the percent of farmers that make decisions alone. Lastly, the final two columns show farmers get less involved in solo decision making when either they are over 70 years of age or when they have a successor who is 35 or older. Even in these cases, the farmers are making decisions and not necessarily involving their next-generation successors 40% of the time in the farm business activities. It is also important to note that the number of successors that are employed on the farm rose from 21% in 2006 to 28% in 2019.

Only 35% of respondents said that their successors had total responsibility for the farm. Among those who said their successor had total responsibility of an enterprise, it is indicated that the majority owns or rents their own farm, sometimes from their parent. Other activities include daily or seasonal jobs and responsibility for cattle and livestock. Furthermore, the percentage of successors that had at least a college degree increased significantly from 2006, as well as the number of those who have a postdoctoral degree. The number of successors who left high school before graduating has significantly decreased.

Future plans for the farm

When asked what their plans for the farm are, most respondents agreed that it is best to keep it in the family no matter what. However, the majority indicate that the inheritance should be fair to the successors, but not equal. In particular, the vast majority suggested that they’ll give most, if not all, the property to the farming heir. More specifically, some respondents suggested that they’ll give most shares to the farming heir and give cash, life insurance or rental payments to non-farming heirs. Other stated that they do not want the farm to be sold or rented out, and suggested that they will split equally among heirs and let the farming heir buy or rent-out the land from non-farming heirs. Another possible solution that has been suggested is to put the farm in a trust and clearly state in their will that their land shall not be sold, only possibly rented out.

Some also believe that renting the farm out for cash, both as a whole or by splitting it, would be a good investment and a great additional source of income, regardless of whether the heirs farm or not, and allowing the family to retain ownership.

Respondents also indicated feeling the need to give the whole farm to only one successor because of the very high land values and rental rates—they feel the heir will not succeed otherwise. Another solution suggested is to put the farm in a corporation and gift shares to the heirs. Few, but definitely present farmers said that they have no choice but to sell the farm; either because none of their heirs would farm or because it wouldn’t be a great source of income, but they are heartbroken about it. It is important to note that it is not uncommon to see comments such as: “Waiting to see if daughter marry [sic] someone who might want to farm (plenty of people to rent to)”, or some stating that the daughters would end up renting the farm out. One comment particularly stood out: “A leading factor in the decline of rural communities is absentee landowners with no interest in the farm other than the income from cash rent. Farm management companies and outside investors exacerbate the problem.”

In conclusion, it is safe to say that farmers and farming families, differ somewhat from other professions, are very attached to their land and their way of life, to the point of working the land for their entire lives. Often this makes it harder for a newcomer to start their own farming business, this is an important aspect to take into consideration when creating new policies and solutions that target inheritance and beginning farmers.

See the Center for Agricultural and Rural Development paper for additional details on the survey.

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