Research from the University of Illinois shows farmers try to keep their annual crop insurance costs in a range below fifteen to twenty dollars an acre. Essentially, as you'll hear in this interview from Todd Gleason, they buy up the coverage until premiums reach this level.
by Gary Schnitkey, University of Illinois
In 2020, Revenue Protection (RP) was used on 93% of insured acres in Illinois, making it by far the most popular crop insurance product. Herein, we examine coverage levels while insuring with RP. Average coverage levels were high. Most farmers choose coverage levels such that premiums are between $15 and $23 per acre.
Coverage Levels in Illinois
The highest RP coverage level is 85%, with lower coverage levels available in 5% increments down to 50%. In 2020, 44% of RP corn acres in Illinois were insured at an 85% coverage level, 35% at an 80% coverage level, and 16% at a 75% coverage level (see Figure 1). These three higher coverage levels accounted for 95% of the acres insured by RP.
Average coverage levels were calculated to summarize information. For example, the coverage-level information in Figure 1 was used to arrive at an average coverage level for corn in Illinois. In 2020, the average coverage level was 81%, with weights provided by acres insured. As can be seen in Figure 1, the 81% is composed of 44% of acres insured using an 85% coverage level, 35% at an 80% coverage level, and so on. Average coverage levels over 80% imply that the majority of acres were insured with 80% and 85% coverage levels.
Average coverage levels in Illinois have increased since the introduction of revenue products in 1997, reaching their current level in 2013. The average coverage level since 2013 has been stable at 81%.
While stable over time, the average coverage level varies across the state (see Figure 2). In 2020, most counties in northern and central Illinois had average coverage levels above 80%. Most counties in southern Illinois had average coverage levels below 80%.
Relationships Between Average Coverage Levels and Premiums
Counties with higher coverage levels tend to have lower premiums than counties with lower coverage levels. To illustrate, Figure 2 shows farmer-paid premium for RP policies with 80% coverage levels. As can be seen in Figure 2, lower premiums occur in northern and central Illinois where average 80% premiums are usually between $7 and $14 per acre. Northern and central Illinois tend to have high coverage levels. On the other hand, many counties in southern Illinois had average premiums for 80% RP over $20 per acre. Southern Illinois tended to have lower average coverage levels.
The regional patterns suggest that farmers may make their coverage level choice to even out, or budget, their farmer-paid premium. Figure 4 shows average farmer-paid premium over all coverage level choices. The average premium in Figure 4 tend to even out over Illinois much more than the 80% premium shown in Figure 3.
To illustrate the budgeting process, take two counties that have their premiums colored orange in Figure 4. DeKalb County is in northern Illinois and had an average premium across all coverage levels of $12 per acre. The 80% average premium was $7 per acre. In DeKalb County, a higher proportion of farmers took 85% coverage levels, thereby raising the average premium above the 80% premium. The average coverage level in DeKalb County was 84%, meaning that the vast majority of farms take RP at a 85% coverage level (see Figure 1). On the other hand, Jefferson County in southern Illinois had an average premium across all coverage levels of $17 per acre. An 80% coverage level had an average premium of $21 per acre. More farmers in Jefferson bought lower coverage levels y resulting in an average coverage level of 75% (see Figure 1).
Academic literature has evaluated this phenomenon (Bulut). Most farmers will only spend a certain amount on crop insurance. Values in the above figures suggest that many farmers will not spend over $15 to $23 per acre on crop insurance. Of course, variation in spending exists across farmers.
Average Coverage Levels Across the Midwest
Average coverage levels across the Midwest States are shown in Figure 4 for corn. Higher average coverage levels are located in the heart of the corn belt, with lower coverage levels radiating out from the middle of the Corn Belt. The correlation coefficient between average coverage levels and average premiums is -0.61. While that correlation is high, other factors influence coverage levels choice across the Midwest.
Many farmers have settled on using RP at high coverage levels as their crop insurance coverage. Many farmers appear to make coverage level choices so as to keep premium levels below $15 to $23 per acre. Product type and coverage levels have been stable over several years. Crop insurance choices in 2021 likely will be much the same as those made in 2020.
This year, a new endorsement is available called the Enhance Coverage Option (ECO). ECO will provide county revenue coverage above the underlying RP policy in a band from 90 or 95% down to 86%. One challenge this policy will face is premium costs. Aggregate statistics suggest that farmers place constraints on the amount they spend on crop insurance. Those constraints may prevent many farmers from buying the additional coverage. Purchases of ECO may be more likely in northern and central Illinois where premiums are lower.
farmdoc Daily article: Schnitkey, G., N. Paulson, C. Zulauf and K. Swanson. "Coverage Levels on RP: Relationship to Premium Levels." farmdoc daily (10):206, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, December 1, 2020.
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by Gary Schnitkey, Ryan Batts, Krista Swanson, Nick Paulson, Jonathan Coppess - University of Illinois and Carl Zulauf, The Ohio State University
link to farmdoc Daily article
We project net incomes for a typical Illinois grain farm in 2020. Before the onset of COVID–19, 2020 net incomes were expected to be low without a turnaround in exports, likely resulting in pressures to continue Market Facilitation Program (MFP) payments. With COVID–19 at the forefront in 2020, the Coronavirus Food Assistance Program (CFAP) was implemented to provide relief to offset losses due to the virus and COVID–19 control measures. Even with CFAP payments and larger payments from commodity title programs, incomes are projected to be negative in 2020. More Federal aid could result in 2020 incomes being close to 2019 incomes. Looking ahead, the recent increases in Coronavirus outbreaks suggest this environment may not improve soon and could result in very low incomes in 2021.
Incomes in Historical Perspective
Figure 1 shows the average yearly net incomes on grain farms enrolled in Illinois Farm Business Farm Management (FBFM). Overall, incomes have been much lower since 2013 as compared to the period from 2006 to 2013. Incomes averaged $189,000 per farm for the years from 2006 to 2013. From 2014 to 2019, incomes have been over $100,000 less per farm, with a $78,000 yearly average. From 2006 to 2013, corn use in producing ethanol was growing, leading to higher corn prices. Soybean prices also were high, as the market signaled the need for soybean acres as soybean exports from the U.S. to China were increasing. Since 2013, corn use in ethanol has stabilized, leading to lower commodity prices. In 2018, exports of soybeans declined, further lowering commodity prices.
Average incomes were $147,000 in 2018 and $74,000 in 2019. Compared to other years since 2013, the years 2018 and 2019 were not particularly poor income years. However, much of the income in 2018 and 2019 resulted from the Market Facilitation Program (MFP), which was put in place to counter lower prices caused by trade disputes. MFP accounted for 13% of revenue in 2018 and 10% of 2019 revenue (see farmdoc daily, June 10, 2020). Without these payments, incomes would have been very low in both 2018 and 2019.
Approach Used to Estimated Historic Incomes
The incomes in Figure 1 are calculated by FBFM using a modified cost approach for a calendar year. Each year’s income statement attempts to match production with sales. In 2019, costs of 2019 grain production are given along with “revenue” from 2019 production. To match revenue with production, values are placed on a number of items for which the revenue has not been received. These items include:
- Grain inventory. Much of the grain produced in 2019 has not been sold as of the end of the year. The unpriced inventory is placed on the end-of-year balance sheet for 2019 at an estimated value.
- Agricultural Risk Coverage (ARC) and Price Loss Coverage (PLC) payments for 2019. The ARC/PLC payment for 2019 is based on 2019 production but will be received in October 2020. These payments are not known on December 31, 2019 because the payments are based on a Market Year Average (MYA) prices, which run from September 2019 to August 2020 for corn and soybeans.
ARC/PLC payments likely will be higher than the December 31, 2019 receivable. Lower MYA prices will result in higher ARC/PLC payments than estimated on December 31, 2019.
To summarize, three items will take a larger role in 2020 income projections than usual:
- Unrealized loss on 2019 crop. Farmers who held 2019 grain inventory likely will have large losses on holding that crop into 2020. Marketing weights suggest that 60% of the corn crop and 46% of the soybean crop is held into the next year.
- Changes in 2019 ARC/PLC payments. Expectations of the size of these payments increased because of lower prices.
- Coronavirus Food Assistance Program (CFAP) payments (see farmdoc daily, May 22, 2020). CFAP provides partial compensation for losses on grains held unpriced on January 15, 2020.
Income projections for 2020 are made using output from the Farm Projections Tool, a Microsoft Excel spreadsheet that can be downloaded from the FAST section of farmdoc. Farmers can use this spreadsheet to make projections for their individual farms. Special adjustments are made to the output to account for the above three items, which are not accounted for by the program automatically.
In this article, the farm for which 2020 projections are made represents a typical farm in central Illinois:
- A 1,600 acre grain farm with 200 acres owned, 400 acres share-rented with a 50–50 share lease, and 1,000 acres are cash rented at $260 per acre.
- The farm is located in central Illinois and has non-land costs equal to those contained in central Illinois budgets for high-productivity farmland: $561 per acre for corn and $359 per acre for soybeans.
- Yields for 2020 are projected at trend-levels of 216 bushel per acre for corn and 68 bushels per acre for soybeans.
- The farm has $1,200,000 of debt.
Incomes are estimated for a pre-COVID scenario and a post-COVID scenario (see farmdoc daily, April 28, 2020 for a discussion of price scenarios). Prices used for the pre-COVID scenario are $3.90 per bushel for corn and $8.75 per bushel for soybeans. Under this scenario, net income is projected at $44,330, which is down from 2018 and 2019 levels. A $44,330 income would be at an insufficient level to maintain the financial position of most farms. Most farms would use working capital to provide for cash needs, resulting in reductions of working capital. Many farms would see net worth declines. This pre-COVID income estimate does not include any MFP payments. Due to low incomes, pressures likely would have built for a continuation of the MFP program into 2020, particularly without improvement in trade relations and growth in exports. Whether or not MFPs would have occurred in 2020 given the pre-COVID scenario is an open question.
Under the pre-COVID prices ($3.90 for corn, $8.75 for soybeans), ARC/PLC payments would not result for 2020 (payable in 2021), and the pre-COVID income statement in Table 1 does not include any ARC/PLC payments. Note that many Illinois farms would have received 2019 commodity title programs. These payments will be received in 2020 but should have appeared on the 2019 income statement, and been a receivable on the year-end 2019 balance sheet.
Post-COVID income is projected using 2020 cash prices of $3.20 per bushel for corn and $8.60 per bushel for soybeans. These prices are close to current bids for 2020 fall-delivery. As a result, crop revenue is reduced from $1,005,830 for the pre-COVID scenario to $890,960 for the post-COVID scenario, a decline of $114,870 (see Table 1). A number of other changes also are incorporated into revenue:
- Coronavirus Food Assistance Program (CFAP) payments are included at $29,187 (see farmdoc daily, May 22, 2020). These payments are in the process of being paid. Our estimates represent CFAP payments of 40% of 2019 production (208 bushels per acre for corn and 64 bushels per acre of soybeans).
- Marketing loss on 2019 crop. Grain held into 2020 likely was sold at lower values than that placed on year-end 2019 balance sheets. The -$43,680 loss is based on 40% of 2019 production being sold in 2020 at a loss of $.55 per bushel for corn and $.65 per bushel for soybeans.
- Increase in 2019 ARC/PLC payments. Lower Market Year Average (MYA) prices will result because of the lower, post-COVID prices, increasing ARC/PLC payments for 2019. This will show as a gain on 2020 income statements because 2019 ARC/PLC payments would have been under-estimated for 2019.
- 2020 ARC/PLC payments. These payments were unlikely in the pre-COVID scenario but are likely in the post-COVID scenario. The post-COVID scenario includes $43,000 of 2020 ARC/PLC payments. We estimate these payments at roughly $60 per base acre for corn and $0 per base acres for soybeans.
A -$25,053 net income would be very low, and result in negative net incomes on most Illinois grain farms. However, the -$25,033 does not include other forms of assistance such as the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) programs administered through the Small Business Administration (SBA). Both are loan programs, not direct payments. However, PPP loans are forgivable provided used for qualifying business expenses (see farmdoc daily, April 14, 2020). Though EIDL loans are not forgivable, an emergency advance portion, for those who received it, did not have to be repaid (see farmdoc daily, May 12, 2020). A significant number of farms have enrolled in these programs, but likely not the majority of grain farms in Illinois. Moreover, any forgivable aid from these programs likely will not be enough to cause incomes to be positive.
Also not included in the -$25,033 is additional Federal aid currently being discussed in Congress and at the USDA. Given the above projections, additional aid at the levels of last year’s MFP program would be needed to bring incomes close to 2019 levels, with last year’s income levels not being at a particularly high level.
Of course, much could change projections. Favorable market news is possible, perhaps leading to higher prices. Surprises often occur in agriculture. Of course, more negative results are possible as well.
Much of 2020 income is dependent on Federal aid. More Federal aid could cause 2020 incomes to be near or above 2019 levels. More worrisome is 2021, which likely will have lower levels of Federal aid. Given recent setbacks in Coronavirus control, it seems reasonable to expect social distancing measures to be relatively long-lasting, quite possibly into next summer and beyond. If this is the case, ethanol demand could remain low, and the economy will not be in full recovery. Demand for crops could remain low going into 2021, and 2021 could be a very low-income year for Illinois grain farms.