By Matt Reese
While field conditions are not quite ready for planting to get started, the next two weeks will be a very busy time for Ohio’s crop producers with major decisions regarding crop insurance and farm bill programs.
These decisions take on extra importance with bigger dollar values involved than usual.
“All the numbers are bigger. When you are talking about corn prices as high as we are seeing, it costs more to ensure a crop being estimated at that kind of value than when the prices are lower. Some people will have sticker shock on their crop insurance bill this year. Everyone has to look at their own individual situation and decide with their agent on the best solution and what they need to have. Everything comes down to your individual situation,” said Larry Davis, with Ag Resource Management (ARM). “We have some high input prices this year compared to in the past too, so when you can lock in the high crop prices we are seeing right now, it makes sense to do that.
“I can think back to last summer when we were seeing big increases in inputs. Even as early as August and September many farms were trying to buy inputs and get financing. That would historically be the lowest price time to buy chemicals and fertilizer. The challenges we saw back then and are still seeing are not only are the prices higher, but there are many questions about availability. As we are getting closer to the planting season, there is more certainty around the supply side but the prices remain very high. We are seeing a great deal of upside on a lot of things. We have been advising people to get a good budget in place and do what they need to do to get what is needed. There is some sticker shock for a lot of people on input prices, especially if they have not been following prices since last summer. If you can lock in $5.80 corn, it makes a lot of sense to do that. If you can lock in some of your input costs, hopefully you can also lock in some good crop prices to cover those costs and secure a margin.”
With the prices set and the March 15 deadline looming for both crop insurance and the decisions regarding farm bill programs for 2022, there are plenty of important numbers to sift through in the next couple of weeks.
“Those prices for crop insurance are set using December futures in the month of February for corn and the November futures for soybeans in February. We are seeing as good of prices as we have seen in quite some time,” Davis said. “Farmers will joke about prices going down in February because that is when crop insurance prices are being set. That is definitely not what happened this year. We have seen just the opposite happen and there is a lot of positive strength in the markets.”
Current strong prices for corn and soybeans really limit the potential of payouts from these programs, but that does not make these decisions unimportant. The 2018 Farm Bill reauthorized the Agriculture Risk Coverage (ARC) and Price Loss Coverage (PLC) safety net programs that were originally in the 2014 Farm Bill. Producers must choose to enroll in ARC or PLC for the 2022 crop year through their local Farm Service Agency office.
According to the Farm Service Agency, the Agriculture Risk Coverage-County (ARC-CO) program provides income support tied to historical base acres — not current production — of covered commodities. ARC-CO payments are issued when the actual county crop revenue of a covered commodity is less than the ARC-CO guarantee for the covered commodity. ARC-Individual is based on individual farm revenue.
PLC program payments are issued when the effective price of a covered commodity is less than the respective reference price for that commodity. The effective price equals the higher of the market year average price or the national average loan rate for the covered commodity.
“Because we have so much price strength, it does not look like government programs are going to pay. For some operations, though, PLC looks like a good choice to make this year so you can add SCO (Supplemental Coverage Option) on your multi-peril policy. If you take an 80% coverage level on your named-peril crop insurance (NPCI) you can get to 86% for somewhere around $8 an acre depending on the county,” Davis said. “Then if you wanted to get up to 95% you could add the ECO (Enhanced Coverage Option) policy on there for around another $30 an acre. Those are good options to consider. That additional coverage is going to be on the county average. Those are some things to be thinking about as we get close to that March 15 deadline.”
In addition, those who planted cover crops in 2021 need to get those acres certified with the FSA prior to March 15.
“There is a cover crop program there that was from 2021. Any cover crop that got planted after June 15 of 2021 is eligible for that program. There is an additional $5 per acre that a farmer can collect from that for crop insurance,” Davis said. “That cover crop has to be certified by March 15 by FSA. March 15 is going to be a busy day for a lot of folks. That has to be certified to qualify for the additional $5. That is the from the pandemic relief program instituted in 2021.”
Other factors to consider are the potential for rising rental rates in some situations and the likelihood of increasing interest rates in the near future, Davis said.
“This is a very good time to be thinking about refinancing real estate. We are going to see an increase in interest rates. We are seeing the highest inflation rates in 40 years,” Davis said. “We are going to see rates go up and if you have long term assets out there not locked down, refinancing is something you may want to take a look at.”
University of Illinois Farmdoc Daily authors Gary Schnitkey, Nick Paulson, Krista Swanson, and Jim Baltz and Carl Zulauf (Ohio State University) emphasized the likelihood of a profitable situation for many crop producers in 2022 but also clearly pointed to the many risks. Cash rent situations, the lack of commodity title payments and high dollar inputs have the stakes very high in 2022. To manage risk, the Farmdoc authors suggest the following:
- Buy the underlying crop insurance policy at high coverage levels. Most farmers use Revenue Protection (RP) as their crop insurance product and purchase that product at high coverage levels. Most farmers purchase at 80% and 85% coverage levels in northern and central Illinois. Southern Illinois farmers used 75% and 80% coverage levels. Use of RP at high coverage levels continues to be a good risk management practice for 2022.
- Consider using supplemental policies such as the SCO or ECO, or a private policy offered by crop insurance companies. These products can further reduce risk, although not as well as RP decreases risks. SCO and ECO are based on county yields, which leaves the risk that the county has a good yield while the farm does not. Private products often have limits to their coverage. Furthermore, the premiums of the supplemental policies should be compared to expected net returns given that yields and prices are near projected levels. Often, premiums on supplemental policies will significantly reduce expected profits.
- Price more grain than usual. According to a 2018 survey, Illinois farmers usually have 10% of their expected corn production priced by January 1 and 22% by April 1. Having a higher percentage of grain priced this year may be warranted, particularly since current prices result in profitable production. However, there are still chances of increasing prices, particularly if yield shortfalls occur. As a result, pricing all of the expected production should not be done. Increasing use of pre-harvest hedging as a percent of expected production by 10 percentage points may be warranted.