Crop insurance may be part of the permanent U.S. agricultural law that Congress will not delete in re-writing the farm bill, so plan for premium costs in your crop budget for next year. However, some of those premium costs could eventually climb higher if Congress directs the USDA’s Risk Management Agency to have farmers pay a larger share of the cost for the Harvest Price Option.
The HPO was an automatic part of crop insurance in 2012, unless a farmer decided to opt out of it for a lower premium cost. But the use of the Harvest Price Option raised the price guarantee on corn from $5.68 to $7.50 and on soybeans from $12.55 to $13.59 per bushel. As a result some of the higher coverage levels will return substantial indemnity payments to producers.
First, do you know what you will be getting for an indemnity payment, if you carried crop insurance through the 2012 drought? If you had revenue protection, Iowa State University ag economist Steven Johnson says multiply your APH yield by your coverage level to get your guarantee. Subtract your actual yield from the guarantee, and if it is lower, the remainder will be your loss per acre. If you had Revenue Protection, multiply the $7.50 Harvest Price by the loss to determine the amount of your indemnity payment per acre.
In his example, Johnson used a 175 APH, a 75 percent coverage level, and ended up with a 31.3 bushel per acre loss after deducting the 100 bushel per acre actual yield. By multiplying the 31.3 by the $7.50 price of corn, the net indemnity is $234.75 per acre. While 75 percent coverage is lower than many policies, it had a lesser premium cost. For producers willing to move toward an 85 percent coverage level, the producer in Johnson’s example would have received a $365.62 indemnity per acre. However, a producer which opted for only the spring guarantee at the 85 percent coverage level reduced his indemnity check to $276.90 per acre, a revenue reduction of $88.72 per acre.
While the Harvest Price Option returns more indemnity payment, it also costs more in premium payments. But the squawk about the harvest price option is coming from federal budget hawks who say the premium for the HPO should not be subsidized by the taxpayer, and should be borne by the producer.
Ohio State University ag economist Carl Zulauf says critics complain about the increased cost resulting from the HPO for 2012, particularly about the common coverage levels which allowed the insurance payment to exceed that for a farm only expecting to get the spring guarantee, and Zulauf should be asking the question of whether the principles behind the farm safety net is being violated, since a loss is shared between the farm and public, but now greater profitability is being guaranteed to the farm.