Flood damaged crops, crop insurance payments, and lease contracts

William Edwards, retired extension economist, on issues from flooding regarding crop insurance, rented acres and looking ahead to 2017.

edwardswm_finalSome Iowa corn and soybean producers are facing substantial if not complete crop losses due to flooding. Fortunately, nearly 90 percent of Iowa’s corn and soybean acres are protected by Multiple Peril Crop Insurance (MPCI).

Crop insurance

Most Iowa producers purchase crop insurance policies with a 75 to 85 percent level of coverage. This means that if crops are a total loss, the producer must withstand the first 15 to 25 percent of the loss. However, in 2016 nearly 90 percent of the crop acres insured in Iowa were covered under Revenue Protection policies, which offer an increasing guarantee if prices increase between February and October. So far, this has added about $.80 per bushel to soybean guarantees, while the current corn futures price is actually below the February average. Moreover, since Revenue Protection (RP) policies are settled at the average nearby futures price during the month of October, rather than local cash prices, farmers receive a bonus equal to the fall grain basis in their area.

Producers with crops that have been totally destroyed by flooding will not have to incur the variable costs of harvesting. This could save around $20 per acre for soybeans and perhaps $50 per acre for corn, depending on potential yields and drying costs. Nevertheless, even producers who carried insurance at a high coverage level could be looking at net revenues near or below those obtained from normal yields this year.

2016 flooded bean field

Potential losses

For example, assume an insured tract has an expected corn yield and insurance proven yield of 175 bushels per acre. A normal crop marketed at $3.00 per bushel would bring $525 per acre. The insurance indemnity payment for an 80 percent RP guarantee, zero yield, and a February futures price of $3.86 would equal 175 bu. x $3.86 x 80% = $540. Saving $50 in harvest costs would give an equivalent of $590 per acre, or $65 above the value of a normal crop.

For soybeans, assume both the expected yield and the proven yield are 60 bushels per acre, and the crop could be marketed at $9.00 per bushel. Gross income for a normal crop would be $540 per acre. The insurance payment for a complete crop failure and a $9.65 October futures price would be 60 bu. x $9.65 x 80% = $463. Savings of $20 in harvesting costs brings the equivalent of $483 per acre, or $57 below the value of a normal crop.

In many cases, of course, flooded acres will make up only a portion of the insured unit, so production from non-flooded acres will be averaged in with the zero yields from the flooded acres.

The real question is how much will it cost to clean up fields and bring them back into production next year? Most Iowa farmers have not had experience with fields being under water for extended periods of time, so effects are difficult to estimate. Problems will range from physically removing debris to leveling eroded areas to restoring fertility.

Flooded field, 2016

Rental contracts

What do these questions imply for rental contracts? A great deal of uncertainty, for one thing. Lease agreements in Iowa continue in effect for another year under the same terms if they were not terminated on or before September 1.

Landowners will have to bear the burden of mitigating flood damages – that goes with owning property. But, a better solution may be for renters and owners to work together to repair the damage and bring the land back into production. Farm operators may have access to machinery that can help accomplish the job that owners do not. In return, tenants should be compensated for their efforts, either directly, through a significant discount on the 2017 rent, or with a long-term lease.

Next year

In some cases there may be doubt as to whether land flooded this year can even be planted next year. Risk Management Agency rules state that land must be physically available for planting to be insurable. Land that cannot be planted due to weather events that occurred before the sales closing date (March 15 in Iowa) is not eligible for prevented planting payments. When operators report their 2016 production, they can request that their 2016 yield histories reflect a value equal to 60 percent of the county “T-yield” rather than a zero or very low yield.

Close communication and cooperation between owners, crop insurance agents and renters can be a “win-win” strategy in the long run, but recovery may take several years.

Additional information about managing flood damaged cropland will be available from Iowa State University Extension and Outreach as the waters recede and the situation is assessed. Keep in mind, dealing with issues from flooding can be stressful. Reach out to resources such as the Iowa Concern Hotline, with trained staff who are available to listen.

Iowa Concern –All calls, chats, and emails are free and confidential. Language interpretation available.

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Supply and Demand Move Higher (7/12/16)

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

Hart_Chad-thumbThe July updates from USDA pushed both crop supplies and demands higher. But in the longer run, stock levels are projected to be higher, with steady to lower prices. On the supply side, the revised acreage and stock numbers from last month were fully incorporated into the projections. Corn production was increased by 110 million bushels, while soybean production rose by 80 million.

On the demand side, there were several offsetting moves. For corn in both old and new crop settings, feed and ethanol usage were lowered, while food and export usage rose. For soybeans, export demand was increased for both old and new crop. Crush demand was lifted slightly for the new crop, but seed and other uses were lowered for the old crop. Putting all of the shifts together results in slightly lower old crop ending stocks, but higher new crop (2016/17) stocks.

Season-average prices were held steady for soybeans, at $9.05 for the 2015/16 crop and $9.50 for the 2016/17 crop. Corn season-average prices were reduced by 5 cents on the 2015/16 crop to $3.65 per bushel and by 10 cents on the 2016/17 crop to $3.40 per bushel.

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Positive Demand News from USDA (6/10/16)

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

Hart_Chad-thumbUSDA’s June updates contained good news on the demand front for corn and soybeans. International demand continues to strengthen, while domestic usage holds steady. With no major changes on the supply side, this implies lower ending stocks and projections of higher prices. Starting with corn, the losses and delays in the South American harvest have opened up some off-season selling opportunities for the U.S. Old crop (2015/16) exports were raised 100 million bushels as a result. Although corn imports were increased slightly, the overall impact for old crop corn is a 95 million drop in ending stocks and a 10 cent increase in the season-average price to $3.70 per bushel. That drop in ending stocks, combined with another increase in new crop (2016/17) exports of 50 million bushels, lowered new crop ending stocks by 145 million bushels. The changes added 15 cents to the new crop corn season-average price estimate, raising it to $3.50 per bushel.

For soybeans, both old crop domestic and international demand were on the upswing. Crush added 10 million bushels, while exports grew by 20 million bushels. With the 30 million bushel drop in old crop ending stocks, USDA raised its 2015/16 season-average price by 20 cents to $9.05 per bushel. As with corn, the export demand increase extended into the new crop as well, adding another 15 million bushels. That pushed new crop ending stocks below 300 million bushels and lifted the 2016/17 season-average price estimate by 40 cents, to $9.50 per bushel.

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How accurate and useful is the ISU Cash Rent Survey?

Alejandro Plastina, extension economist, explores results of a follow-up survey on the accuracy and usefulness of the ISU Cash Rental Rate Survey.

plastina_alejandro_photoCash rents, land values, and rates for custom work in Iowa are topics that usually attract lots of attention from a number of stakeholders in the agricultural sector. Even more so when the economic outlook for the sector is particularly promising or particularly discouraging. So it comes as no surprise that the Cash Rental Rates for Iowa Survey is received with different degrees of acceptance by different groups depending on the economic outlook. This year we requested feedback from the online respondents to the Cash Rent Survey about the accuracy and usefulness of the survey results.

Who responded?

The Cash Rental Rates for Iowa 2016 Survey had 1,585 responses, of which 320 responses were submitted through the online questionnaire (the rest were mailed using USPS). All online respondents were invited to participate in a short follow up survey about their perceptions of the Cash Rent Survey. One hundred and forty-five respondents completed the follow up survey. All of them reported being familiar with the survey (figure 1).

Comparing the participation of different categories of participants in this opinion poll versus the corresponding participation of the same categories in the Cash Rent Survey (figure 2), farm operators accounted for the same share (47%); but agricultural lenders, professional farm managers and Realtors had a greater share (21% vs. 14%, and 16% vs. 12%, respectively); while landowners had a smaller share (15% vs. 25%).

Figure 1. How familiar are you with the ISU Cash Rental Rates for Iowa Survey?Figure 2. How would you classify yourself?

How accurate are survey results?

Ninety-one percent of the respondents indicated that the Cash Rent Survey reflects typical cash rents by county moderately, very, or extremely accurately (figure 3). Forty-seven percent of the respondents indicated that the Cash Rent Survey reflects typical cash rents by county very or extremely accurately.

The most prevalent response among farm operators, landowners, and agricultural lenders was that the Cash Rent Survey reflects typical cash rents by county very accurately, followed closely by moderately accurately (figure 4). The most prevalent response among professional farm managers and Realtors was that the Cash Rent Survey reflects typical cash rents by county moderately accurately.

Figure 3. How accurately does the ISU Cash Rental Rates for Iowa Survey reflect typical cash rents by county?Figure 4. How accurately does the ISU Cash Rental Rates for Iowa Survey reflect typical cash rents by county, by type of respondent?

The accuracy of the Cash Rent Survey in reflecting annual changes in typical cash rents by county was perceived to be better than the accuracy in reflecting their levels. Ninety-six percent of the respondent indicated that the Cash Rent Survey reflects year-over-year changes in typical cash rents by county moderately, very, or extremely accurately (figure 5). Fifty-seven percent indicated that the Cash Rent Survey reflects year-over-year changes in typical cash rents by county very or extremely accurately.

The most prevalent response among farm operators, landowners, and agricultural lenders was that the Cash Rent Survey reflects typical cash rents by county very accurately, followed by moderately accurately (figure 6). The most prevalent response among professional farm managers and Realtors was that the Cash Rent Survey reflects typical cash rents by county moderately accurately, followed by very accurately as a close second.

Figure 5. How accurately does the ISU Cash Rental Rates for Iowa Survey reflect year-over-year changes in typical cash rents by county?Figure 6. How accurately does the ISU Cash Rental Rates for Iowa Survey reflect year-over-year changes in typical cash rents by county, by type of respondent?

How useful are survey results?

Ninety-seven percent of the respondents indicated that the Cash Rent Survey was at least moderately useful to them (figure 7). Seventy-six percent of the respondents indicated that the Cash Rent Survey was very or extremely useful to them.

The most frequent answer among farm operators and agricultural lenders was that the Cash Rent Survey was extremely useful, followed by very useful and in a distant third place moderately useful (figure 8).

The most frequent answer among landowners was that the Cash Rent Survey was very useful, followed by extremely and moderately useful.

Professional managers and Realtors indicated most frequently that the Cash Rent Survey was moderately useful, followed by very and extremely useful.

Figure 7. How useful is the ISU Cash Rental Rates for Iowa Survey to you? Figure 8. How useful is the ISU Cash Rental Rates for Iowa Survey to you, by type of respondent?

Summary  

Although this opinion poll about the usefulness and accuracy of the Cash Rental Rates for Iowa Survey was not designed to be representative of all stakeholders in Iowa, it shows that most farmers, landowners, agricultural lenders, professional farm managers and Realtors, and other agricultural professionals that participate in the survey find it useful and accurate.

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April Demand Update (4/12/16)

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

Hart_Chad-thumbThe World Ag Supply and Demand Estimates update for April contained some modest changes for the crop balance sheets. For U.S. soybeans, the only changes were a 15 million bushel bump in export demand and a slight decline in seed demand, based on last month’s Prospective Plantings report. Projected soybean ending stocks were lowered to 445 million bushels, but the midpoint of the 2015/16 season-average price range remains steady at $8.75 per bushel. For U.S. corn, the adjustments were mixed. Feed demand was reduced 50 million bushels, based on the quarterly disappearance pattern from the Grain Stocks report. Corn usage for ethanol was increased 25 million bushels as ethanol production has held near record levels over the 1st three months of the calendar year. Thus, corn ending stocks were raised 25 million bushels and the midpoint of the 2015/16 season-average price range fell 5 cents to $3.55 per bushel.

World corn production for 2015/16 was increased by 3 million metric tons, with 1 million of that going to increased imports for Mexico and Southeast Asia and 2 million projected to be held in stock. China’s feed usage of corn is projected to rise by 2 million metric tons, but that increase is expected to be met by drawing down existing internal stocks. World soybean production for 2015/16 was lowered slightly as declines in Chinese and Indian production offset an increase from Argentina. Global soybean trade was raised, based on stronger exports to China, Japan, and Mexico.

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