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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.

  • 24/7 Phone Support – Trained staff take your calls via a toll-free hotline at 1-800-447-1985.
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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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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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Plans for a Whole Lot of Corn (3/31/16)

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

Hart_Chad-thumbThe end of March is an active time for the crop markets and USDA. It’s when we get our first look at the 2016 crop year from the producers’ perspective with the release of USDA’s Prospective Plantings report. We also receive an update on demand via USDA’s Grain Stocks report. And as we typically see, these reports contained a few surprises to mull over as planting approaches, mainly for new crop prospects. Starting with the stocks/demand picture, the trade estimates going into the stocks report were fairly close to the USDA numbers. As of March 1, 7.81 billion bushels of corn were being held in storage. That’s 1% higher than last year at this time. Quarterly corn disappearance for the December-February time frame was 3.43 billion bushels, slightly lower than last year. Overall corn demand and usage has been relatively stable. Soybean stocks came in at 1.5 billion bushels, up 15% from last year. That is the highest soybean stock number for March since the 2006/07 crop. Quarterly soybean disappearance for the December-February time frame was 1.18 billion bushels, 1% lower than last year.  So the build-up of soybean stocks has more to do with supply than demand. In total, old crop usage turned up to be in-line with expectations.

That’s not the case with plantings and the potential for new crop production. The biggest discrepancies between trade expectations and the planting report were for corn and wheat. Projected corn plantings came in at 93.6 million acres. The trade expectation was roughly 90 million. So prospective corn plantings are 3.6 million above expectations and 5.6 million above last year. Meanwhile, projected wheat area dropped to 49.6 million acres, roughly 2 million below expectations and 5 million below last year. Soybean planted area was also down to 82.2 million acres, which was 800,000 less than expectations and 450,000 below last year. Looking at specific state projections, the boost in corn area is coming mostly from the Great Plains and Corn Belt. The largest moves are in Kansas and North Dakota, adding 650,000 acres each, as traditional wheat area heads to corn production. Illinois and Iowa are adding 400,000 corn acres each this year. Out of the 48 states listed in the corn table, only 7 are projected to have fewer corn acres than last year, with the largest reduction being 20,000 acres. The soybean planting story hinges mainly on Missouri. Missouri farmers indicated they would plant nearly one million more acres of soybeans this year, following the planting issues they had last year. Illinois and North Dakota are projected to gain significant soybean area as well.  However, many states (including Iowa) are projected to lower soybean plantings. Iowa and 9 other states are set to reduce soybean plantings by at least 100,000 acres each. Hence, despite the strong surge in area from Missouri, the national soybean planting area is projected to decline.

Given trend yields of 168 bushels per acre for corn and 46.7 bushels per acre for soybeans, the projected acreage points to another round of massive crops. Corn production would reach 14.38 billion bushels, which would be another record corn crop. Soybean production would approach 3.8 billion bushels, which would be the 3rd largest soybean crop in history. And for markets already dealing with large supplies, these prospective plantings do not help. So the markets will be looking for Mother Nature to slow the supply train down.

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Why it is not OK to use NASS yields to calculate ARC-CO payments

plastina_alejandro_2014Alejandro Plastina, ISU Extension Economist, provides explanation of the yield data used in calculating ARC-CO payments in Iowa.

On February 22 2016, the USDA National Agricultural Statistical Service (NASS) released the final county crop production estimates for 2015: 73 Iowa counties had higher corn yields in 2015 than in 2014, 22 had lower yields, and 2015 corn yields were not reported for Mills, Monroe, Taylor, and Union County; 86 counties had higher soybean yields, 11 had lower yields, and 2015 soybean yields were not reported for Taylor and Mills County.

Knowing that higher county yields reduce the likelihood and the potential amount of ARC-CO payments, the NASS release spurred the interest of producers to recalculate their own projected ARC-CO payments for the 2015/16 crop marketing year. However, two important details often overlooked when calculating projected ARC-CO payments are (1) that county yields are determined on a per planted acre basis, as opposed to a per harvested acre basis; and (2) that the official county yields used in the final calculation of ARC-CO payments are published by USDA Farm Service Agency (FSA), as opposed to NASS.

NASS yields are calculated as production (in bushels) divided by harvested acres. Since they are not determined on a per planted acre basis, they cannot be used to calculate ARC-CO payments.

FSA yields are only available after the end of the crop year and are calculated on a per planted acre basis. Therefore, most of the difference between FSA and NASS yields is explained by failed acres. The average difference between FSA and NASS county corn yields in Iowa for 2014/15 (the only year for which both yields are publicly available), amounts to 4.75 bushels per acre.

arcco3232016In an effort to reflect the impact of failed acres on the yield used to project ARC-CO payments, the ISU Projected ARC-CO Payment Calculator uses “corrected” yields in the calculation of the 2015/16 actual county crop revenue. The “corrected” yields are based on NASS production data and obtained by dividing production (in bushels) by planted acres. For 63 Iowa counties the “corrected” yields in 2014/15 were closer to the official FSA yields than NASS yields were. For example, the corn yield used by FSA to calculate ARC-CO payments for Lyon County in 2014/15 is 149 bushels, while the NASS yield is 172.9 bushels, and the “corrected” yield is 155 bushels. The average difference between FSA and “corrected” corn yields amounted to 0.42 bushels per acre.

Judging by the release date of 2014 county yields by FSA on October 23, 2015, it can be expected that FSA will release final 2015 county yields in October 2016, at about the same time as the 2015 ARC-CO payments. Until then, the ISU ARC-CO Payment Calculator will use a “calculated” yield and projected marketing year price until the price for the marketing year is finalized the end of September.

All ISU Extension and Outreach Farm Bill decision tools are available online at: http://www.extension.iastate.edu/agdm/info/farmbill.html

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Relatively Quiet Report for Corn and Soybeans (6/10/15)

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

Hart_Chad-thumbThere are only a few changes in the U.S. corn and soybean outlooks from USDA. For corn, the only change is a 25 million drop in corn usage for ethanol from the 2014 crop. All other supply and demand numbers remain the same. And the season-average price midpoints hold at $3.65 per bushel for the 2014 crop and $3.50 per bushel for the 2015 crop. For soybeans, demand is ratcheted up a little bit. On the 2014 crop, both domestic crush and export demand are raised 10 million bushels. On the 2015 crop, crush is raised another 5 million bushels. Combined, this lowered 2015/16 soybean ending stocks to 475 million bushels. But the price outlook holds steady at $10.05 per bushel for the 2014 crop and $9.00 per bushel for the 2015 crop.

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A Very Quiet Report

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

A Very Quiet Report (6/11/14)

97hartsmUSDA released its June update for crop supplies and demand and the updates were few and far between. For corn, there were no changes to the supply and demand estimates for the 2014 crop. Yield is projected at 165.3 bushels per acre.  Production is projected at a record 13.935 billion bushels, 10 million bushels above last year’s record crop. Total use is set at 13.385 billion bushels, down 250 million bushels from last year. 2014/15 ending stocks are set at 1.726 billion bushels, up 580 million bushels from the previous year. And the midpoint of the season-average price range remains at $4.20 per bushel.

For soybeans, there was one adjustment, but it was for the 2013 crop. 2013 domestic crush was increased 5 million bushels. Otherwise, as with corn, the projections remain the same. Yield is projected at 45.2 bushels per acre. Production is projected at a record 3.635 billion bushels. Total use is set at 3.45 billion bushels. 2014/15 ending stocks are set 325 million bushels, up 200 million from the previous year. And the midpoint of the season-average price range is $10.75 per bushel.

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The 1st Official Look at 2014

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

97hartsmThe 1st Official Look at 2014 (5/9/14)

With the May World Ag. Supply and Demand Estimates report, USDA provides its 1st official set of projections for the 2014 crops. We can compare these numbers to USDA’s unofficial numbers from the Ag Outlook Forum they hold in February each year. On the supply side, the number to watch is the yield. And is typically the case with the 1st estimates, USDA maintains trendline yields for both corn and soybeans. Those are 165.3 bushels per acre for corn and 45.2 bushels per acre for soybeans. Given the acreage estimates from the March Prospective Plantings report, then 2014 shapes up to be a record year for corn and soybeans. On the demand side, all of the sectors (feed, ethanol, crush, and exports) are in play. And the current projections are generally higher than those from February. Ethanol and export demand for corn was raised for both old and new crop corn. The weak spot on the corn side is feed demand, as fewer animals translate to slightly smaller demand. Export demand for soybeans continues to soar to record levels, while domestic crush demand also grows (but more slowly than anticipated in February). In the February outlook, season-average price estimates were set at $3.90 per bushel for corn and $9.65 per bushel for soybeans. With the higher demand numbers with the May report, these estimates move to $4.20 for corn and $10.75 for soybeans. So with Iowa production costs in the $4.50 range for corn and $11 range for soybeans, the USDA projections still indicate negative returns for both crops, but the gap has shrunk significantly.

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New Guidelines for Cover Crop Termination Affects Crop Insurance

Contributed by Steven D. JohnsonFarm Management Specialist, Iowa State University Extension, sdjohns@iastate.edu, 515-957-5790

Johnson_Steve_sm

If you planted a cover crop last fall and need to terminate it this spring in fields that will be planted to corn or soybeans, when should you kill the cover crop? Timing for termination of a cover crop can affect whether the crop insurance coverage attaches for the corn and soybean crop yet to be planted.

The USDA’s Risk Management Agency (RMA) has issued new guidelines for cover crop termination in 2014 that are slightly different from last year.  RMA officials made these changes after meeting with officials from USDA’s Natural Resources Conservation Service (NRCS) and the Farm Service Agency (FSA). Through the interagency working group a consistent and flexible cover crop policy can be applied across all USDA agencies.

With the new guidelines farmers can hopefully obtain the conservation benefits of cover crops while minimizing risk of reducing yield to the following crop due to soil water use.

The NRCS Guidelines for 2014 use four strategic management zones across the nation. Iowa has two of those zones. As the accompanying map shows, about a third of Iowa (western portion) is in Zone 3, while the rest of Iowa is in Zone 4.

If you are in Zone 3, you must terminate the cover crop at or before planting the subsequent crop, which is likely corn or soybeans. In Zone 4, the rest of Iowa, you must terminate the cover crop at or within 5 days after planting the subsequent crop if you want the subsequent crop to be insured.

cover crop termination zones 2014

Termination is not about a date; it’s about when you are going to plant the subsequent corn or soybean crop.  The cover crop, if it is not 100% destroyed, will compete with corn or soybeans for moisture in the soil. That’s the reason for the different zones.

Termination means growth has ended for 100% of the cover crop in the field. These NRCS Guidelines basically state that you have to terminate growth of the cover crop before crop insurance coverage attaches to the corn or soybean crop you plant in that field.

You can still graze or hay a cover crop, but crop insurance will not attach to the crop following a cover crop if termination of the cover crop is not done according to these new guidelines. The key is you want to kill the cover crop if you want the crop insurance coverage to attach. Contact your crop insurance agent if you have questions. The 2014 Cover Crops Crop Insurance and NRCS Cover Crop Termination Guidelines FAQs are at: http://www.rma.usda.gov/help/faq/covercrops2014.html.

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