Category: Crops

Margin Protection Crop Insurance FAQ

Ann Johanns
Steven Johnson

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 insurance plan that provides coverage against an unexpected decrease in operating margin (revenue minus input costs). This decrease could be caused by reduced county yields, decline in commodity prices and/or increased prices of select variable cost inputs or any combination of these perils. Because MP is area-based (county yields), an individual farm may have a decrease in its margin but not receive an indemnity or vice-versa. RMA Frequently Asked Questions

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, shallow loss product to an underlying base product with individual coverage (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 2023 crop MP policy be due?

Answer:  September 30, 2023, 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 2023 crop?

Answer:  The MP projected prices using 2023 crop December corn futures is expected to average nearly $6.00/bushel for the discovery period. The November soybean futures price will likely average more than $13.20/bushel. These record 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: Yes, 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 a different insurance agent or insurance agency. 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 the Enhanced Coverage Option (ECO). SCO and/or ECO are not allowed to be purchased on the same crop you purchased MP on. Note MP cannot be purchased if you have Whole Farm Revenue Protection (WFRP) 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: Since this is an area-based plan, how are the costs determined?

Answer: Variable costs reflect futures prices for fertilizer and diesel fuel. Interest rates are determined by the 30-day fed fund rate averages. Note that these select 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 base policy indemnity will be paid out first, that amount could be subtracted from the MP indemnity if the MP indemnity is larger.

Question: When will my agent be able to quote an accurate cost per acre premium for purchasing MP on a crop?

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.

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 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.

Variable-price inputs subject to price changes are, for example, diesel fuel, interest, and certain fertilizers for which projected prices to the following April are calculated by the USDA Risk Management Agency (RMA). 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. Price 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: Do the variable-price input costs vary by county?

Answer: The cost per acre will vary by county whenever the expected county yield (ECY) differs. Since most counties have slightly different yield values, the variable-price input costs and thus premiums would vary.

Question: Do the variable-price input costs vary between irrigated and non-irrigated acres?

Answer: Yes, when the expected county yield (ECY) differs between irrigated and non-irrigated practices in a county. Note some counties do not have enough irrigated acres so in these situations the RMA will have the same ECY for both practices. In areas where there are more irrigated acres, there will be a different yield between the two practices; thus different variable-price input costs and premiums.

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

Ag Decision Maker File A1-53, Margin Protection Crop Insurance

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Client Corner: Where can I find average prices for corn and soybeans?

Ann Johanns

Contributed by Ann Johanns, aholste@iastate.edu, extension program specialist

Where would I find average (monthly or yearly) prices for corn and soybean for my county? I have seen state data, but wondered if county data is available.

A publication available on Ag Decision Maker lists monthly corn and soybean prices for the state of Iowa. The monthly averages are as reported by the USDA National Ag Statistics Service Iowa Field Office. Marketing year and calendar year averages are also provided, .

While price reports at a county level are not published, more frequently reported price information can by found on the Iowa Department of Ag and Land Stewardship webpage. This website provides low, high, and average daily prices along with monthly averages for six areas of the state. The daily price is the closing cash grain bids offered to producers as of 2:30 p.m. (Dollars per bushel, delivered to Interior Iowa Country Elevators). The prices available through this website are from USDA Ag Market News. The daily report for Iowa is available at: https://www.ams.usda.gov/mnreports/ams_2850.pdf.

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Crop insurance coverage-frequently asked questions

Ann Johanns
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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Managing farm costs key to profitability in 2021

Ann Johanns 2 Comments
Alejandro Plastina

Written by Alejandro Plastina, Extension Economist, plastina@iastate.edu

Corn and soybeans futures prices have recently rallied to their highest levels in years, providing hope for a market-driven profitable 2021 crop year. However, the only certainty about future prices is that they will continue to change until their expiration date, and they could plummet as fast as they rallied. Unless farm operators use futures or options to create a floor for their crop prices, current future prices might foster a false sense of security.

Winter is a great time for farm operators to concentrate on calculating their own costs of crop production, not only because they have more control over costs than crop prices, but also because knowing their break-even prices might ease the struggle to lock-in profits before harvest time. The latest issue of the ISU Extension and Outreach, Estimated Costs of Crop Production, reports average cost estimates for Iowa farms in 2021, and provides guidelines to help farmers calculate their own costs of production.

Estimated Costs of Crop Production in Iowa
Figure 1.

Total costs of corn and soybean production per acre are expected to increase, respectively, by 2.1% – 3.4% and 2.6% in 2021. However, higher expected corn yields over a 30-year trend for 2021 suggest that on a per bushel basis, costs would increase by 1.0% – 2.6% to remain below their 2019 marks (Figure 1). Fuel and insecticide costs, interest expenses on pre-harvest input financing, and crop insurance premiums are projected lower in 2021.

The estimated cost of production for continuous corn is $3.88 per bushel for a target yield of 166 bushels per acre, and it goes down to $3.82 for target yields of 184 and 202 bushels per acre. The estimated costs of production per bushel for corn following soybeans are $3.34, $3.31, and $3.32 for target yields of 181, 201, and 221 bushels per acre, respectively.

Cost of production estimates for herbicide tolerant soybeans amount to $9.16, $8.94 and $8.74 per bushel for target yields of 50, 56, and 62 bushels per acre, respectively. The total cost per bushel of soybeans is projected at $9.04 for non-herbicide-tolerant beans at 56 bushels per acre, according to the report.

The cost estimates are representative of average costs for farms in Iowa. Very large or small farms may have lower or higher fixed costs per acre. The full report is available online through the Ag Decision Maker website. The publication also includes budgets for alfalfa hay establishment with an oat companion crop and by direct seeding. Annual production costs for established alfalfa or alfalfa-grass hay as well as a budget for maintaining grass pastures are included. Actual costs can be entered in the column for “Your Estimates”, or by using the electronic spreadsheet Decision Tools on the Ag Decision Maker website.

Breakdown of costs for 2021

Costs of Crop Production in Iowa - 2021
Figure 2.

For corn, land costs account for about one-third of total costs of production (Figure 2). Values of $187, $222, and $256 per acre rent charges for the low, medium, and high quality land were assumed. Variable costs represent just over half of the costs of production, and nitrogen and seed costs account for about 43% of the variable costs. Nitrogen price is projected stable at $.34 per pound in 2021, but total nitrogen costs are projected to go up by 6 to 11% reflecting the higher application rates recommended by the ISU Corn Nitrogen Rate Calculator. Corn seed costs are expected to increase by 2% to $262 per bag.

Land costs account for 44% of total costs of soybean production, and variable costs account for an additional 42%. Seed and fertilizers amount to 44% of variable costs. Phosphorus and potassium were charged, respectively, at $.39 and $.30 per pound. Machinery costs are projected to decline by 6% primarily due to lower diesel costs: $2.02 in 2021 versus $2.53 in 2020.

Profitability Prospects for 2021

There is substantial uncertainty regarding crop prices in the coming season. The most recent USDA projections for 2021/22, published in October 2020, put the average US farm prices for corn and soybeans at $3.65 and $10.00. In this scenario, production of herbicide tolerant and non-herbicide tolerant soybean would be profitable for all target yields considered in the report. Net returns per acre to herbicide-tolerant soybean production would range from $42 to $78 per acre, depending on target yield and tillage practice.

Corn production would not be profitable in a continuous corn scenario if the price per bushel is $3.65. Net returns to corn following soybeans would range from $55 to $74 per acre under conventional tillage, and average $82 and $75, respectively, under strip tillage and no-till.

Current futures prices seem to indicate that corn and soybean prices might average $4.45 and $11.40 per bushel in 2021/22, respectively. In this optimistic scenario, corn production would generate profits north of $95 per acre in a continuous corn rotation, and above $200 per acre following soybeans. Profits from soybean production would exceed $110 per acre. However, futures prices are currently reflecting a market reaction to unexpected USDA production and stocks figures, and they could retrench fast once the market reassess the real impact of the new information. In any case, farm operators can always improve their profitability or limit losses by focusing on managing costs and using their break-even estimations to implement a tailored marketing plan.

Cost Calculations

Knowing costs is key, as it is to understand the assumptions behind the budgets used in the calculations. When using the ISU cost of production estimates for 2021, keep several things in mind. First, fertilizer and lime costs include volume and early purchase discounts. Second, farmers paying land rents higher than the ones projected in the report might face higher costs of production. Operator landowners on fully paid land will have much lower accounting costs, since the cash rent used in the report will only be an opportunity cost and not a cash cost (as it is for tenants).

Reference yields for corn and soybean budgets in the annual Iowa State University Extension and Outreach report reflect 30-year trend yields. In the latest projections used for the 2021 report, corn yields are 2 bushels higher than for 2020, while soybean yields remained unchanged.

Starting in 2021, the amount of nitrogen applied to corn production follows the recommendations from the ISU Corn Nitrogen Rate Calculator. The projected corn-to-nitrogen price ratio used in the calculator amounted to 12.35. Such methodological adjustment resulted in an average 6% increase in the amount of nitrogen applied to corn following corn, and an 11% increase in the amount applied to corn following soybeans.

Conclusions

Producers must have a strong grasp of their own production costs, and the ISU Extension report provides a step-by-step guide to help them estimate break-even costs, and serves to benchmark operations and trigger relevant questions on how to better manage enterprise costs.

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Big report day for USDA

Ann Johanns 2 Comments
Chad Hart image

Chad Hart, ISU Extension Grain Marketing Economist, provides a summary of the latest USDA reports: WASDE, Annual Crop Production, and Grain Stocks.

As the market reaction shows, today’s release was a set of favorable reports. In the Annual Crop Production report, USDA ended up reducing 2020 crop plantings by roughly 200,000 acres and the national corn yield estimate by 3.8 bushels per acre. That reduced 2020 estimated corn production by 325 million bushels. Soybeans saw a similar drop, with the national yield estimate down 0.5 bushels per acre and estimated production lowered 35 million bushels. Looking at the state-level data, the corn production losses covered most of the Corn Belt, from the Dakotas to Ohio, with only the southern states (Kansas and Missouri) seeing an increase in the yield estimates. Iowa’s corn yield estimate was lowered 6 bushels, to 178 bushels per acre. For soybeans, the state-level data showed more variability, with Illinois, Missouri, and North Dakota gaining in yield, while most other states declined. Iowa’s soybean yield estimate was lowered by a bushel, to 53 bushels per acre.

The December crop stock levels came in at or below expectations. While USDA’s estimate of soybean stock levels landed well within the trade range of estimates, the corn stocks were estimated at least 250 million bushels below any of the published trade guesses. Crop usage for feed and exports has continued to chew through this year’s crop quickly.

Turning to the WASDE report, USDA bumped up 2019/20 corn feed usage by roughly 75 million bushels, which lowered 2019/20 carryout. For 2020/21, plugging in the 325 million drop in production (from the Annual Crop Production report), total supplies were lowered by 400 million bushels. To partially offset, USDA lowered expected feed (down 50 million), export (down 100 million), and ethanol (down 100 million) usage, based on higher expected prices. But that still implies a 150 million bushel decline in 2020/21 ending stock, dropping the estimated stocks to 1.55 billion, which would be the lowest level we’ve seen in several years. With all of these corn changes, USDA raised its 2020/21 season-average price estimate by 20 cents, to $4.20 per bushel. The changes to the soybean balance sheet mainly concentrated on the 2020/21 outlook. Given the smaller crop, USDA raised soybean imports by 20 million bushels, partially offsetting the yield loss. But soybean usage continues to expand. Domestic crush was raised 5 million bushels.  Exports were raised 30 million bushels. The only soybean usage category that declined was seed and residual, by 13 million. Overall, 2020/21 soybean ending stocks were lowered 35 million bushels, to 140 million bushels in total, continuing the trend of tightening over the last several reports.  USDA’s 2020/21 season-average price estimate was increased 60 cents, to $11.15 per bushel.

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