Crop insurance decisions: a commodity crop alphabet soup - RP, SCO, ECO

Steve

Johnson: And it all comes down to this. Two on, two out, bottom of the ninth. The Farmers lead by one. Full count. Here comes the play at the plate, and it's the Ag View Pitch!

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch, and we are following up here from our conversation on the ARC and PLC discussion now with more specifics on the crop insurance decisions that we all get to make. And again, we've got Steve Johnson, retired Iowa State University. How's it going?

Steve

Johnson: It's going great. And again, I, I think the topic is very timely as we go through the alphabet soup. Move beyond ARC PLC. Let's focus on all these exciting things like SEO and ECO and crop insurance.

Chris

Barron: Yeah. Well, you know, and that's just it. You know, you sent me some slides that we will be sending these slides off to all of you that we email to you. If you would like an email of these slides, please let us know and, you know, send us a message or an email back that you— if you didn't get the slides and you want them to go along with this podcast, let us know. Steve, you did a really good job of putting some very distinct slides together that, that really paint the perfect picture, in my opinion, looking at this, of the 2021 crop insurance decisions. Why don't you go ahead and just kind of start talking about some of the, the basic things that maybe we already know, that we've had some experience with on the farm buying these insurance products, but then there's a couple of new ones here too to have you talk about.

Steve

Johnson: Sure, crop insurance, multi-peril crop insurance, hasn't really changed. It's evolved over the last 21 years now, but most farmers take revenue protection because it is a farm-based product and it's revenue. It takes yield, your farm yields, your APH yields, your usually 10-year simple average times a projected price and that's determined in the month of February. So we're going to stay with revenue protection, but then you You need to make a decision what level of coverage, 65%, 70%, 75%, 80%, 85%. You can't go over 85% level of coverage. So, understand the basics and then make sure you realize that the government is subsidizing these products. The government is probably paying somewhere around 60% to 70% of your premiums until you get to higher levels of coverage. And so, there's that interaction of that unit coverage. Are you in basic or enterprise or optional units?

That is really important. So if you're going to make any changes for '21, you want to be talking to your crop insurance agent. And then you can buy supplemental products like hail and wind and green snap. You can buy up the coverage level. You can, uh, look at different ways of increasing the projected price, February simple average, that determines your premium. But the likelihood is, is these supplementals vary by approved insurance provider. There's 15 of them, you know, so not all crop insurance supplementals are the same, but those decisions are required by March 15th. So Chris, nothing— I mean, we just haven't seen a lot of changes. You just need to have the basics.

Chris

Barron: I like the, the diagram, you know, and a couple of the new things, the, the Quality Loss Option, the QLO. Do you any idea on like cost on that additional?

Steve

Johnson: It's a quality loss option, is brand new for '21, never existed before. So this was developed by RMA and it's targeting those of you that might have had quality losses in the last 5 years. Let's say you planted late in '19 and the crop matured late and you harvested the crop and you found out there's all sorts of like test weights, you had to have quality adjustments, make sure your agent checks that box. There is no charge for the quality loss option unless you have to use it, and it's very minimal. So if you do nothing different in '21, check QLO. Always check TA. Those are just, uh, no-brainers because you're not paying much for TA. That was developed at the University of Illinois, Dr. Bruce Sherrick, in 2012, and that's been a no-brainer because we use trend-adjusted yields. Everybody gets a higher yield than what your APH is.

So there are very few changes except the premiums are going up, but remember why the premiums are going up because the the spring projected prices determined in the month of February, the simple average of December corn and November soybeans are going to be a lot higher. So we're going to see higher premiums but higher revenue guarantees. So don't get sticker shock when you price crop insurance. If you stay with the same product, the same unit structure, the same supplementals, you're going to pay more for crop insurance in 2021, but for the right reason, because the prices are a lot higher.

Chris

Barron: Yeah, I was just doing the math here, you know, it, uh, if you've got $4— or excuse me, $4.40 corn, and take that times a 200-bushel APH, you got $880 of coverage. That's probably significantly, you know, higher than, than last year. Obviously, uh, you know, there's— that's, that's where the premium's coming from, right? I mean, it's just higher.

Steve

Johnson: You still got to take it times the level of coverage. So where are you going? You're going to—

Chris

Barron: well, Well, times 85%.

Steve

Johnson: Okay, yeah, I mean, if you are at 85%, all right, that's the maximum level that you can be at for multi-peril coverage. I question, I don't know whether farmers are going to say, well, I'm going to stay at 85%, or they say, you know, but that premium went up and, you know, maybe I can go to 80%. But now here's another decision. Can, how can I cheapen up this crop insurance Well, you could buy an 80% RP and you could buy a supplemental coverage option, that's that FCO product, and you could buy that up to 86%. So, there's that 6%, I call it cream in your coffee, but when you buy that 6% FCO, it's subsidized at the 65% level. So, I think you're going to be surprised that you want to start pricing crop insurance a little different way, not just assuming that whatever I did last year, so that's fine, or you run out of time.

I think you want to probably price SCO, but remember there's a linkage. You've got to make sure that you elected and enrolled in PLC on that crop by FSA farm numbers if you're going to buy SCO. Again, your FSA office doesn't care. This is between you and your crop insurance agent, and when you file your acreage report next summer, you probably have a little box there that you need to check if you did take, uh, the SCO product because it'll get tied back to, uh, this idea of PLC. So again, SCO is a good product to price this year. Spend an extra 20 minutes with your agent and just make sure you understand how the product works, but I think SCO And then trying to combine this idea of revenue protection at reasonable levels. You decide.

Chris

Barron: Gotcha. Yeah, the other thing too that, you know, when I look at this with our clients and get your perspective on this on the insurance side of things, but I always tell our clients when we look at value on all of our things that we can buy for our business that keeps us in business, either enhances yield protects yield or protects revenue. In this case, it's a pretty high value. A lot of times we see, you know, we look at our line item costs in terms of a percentage and what our cost is on a per bushel basis. And so when we look at this, in a lot of situations, you know, you might be talking 14, 15 cents a bushel for your coverage. You know, I like to look at, you know, instead of what I'm writing the check for, for the insurance, what is it as a percent of cost what is it on as a cost per bushel and how's that compared to last year?

It might only be 2, 3 cents a bushel more and you're getting a lot higher level of coverage, and in some cases you're almost protecting all your risk. What's your thoughts on that?

Steve

Johnson: That's exactly where I'm at. I think revenue protection crop insurance is probably your cheapest risk management tool. And you say, how can you say that? I'm writing a check in October because the government is subsidizing such a large percent of that. You tell me what other insurance product you're buying in '21 that the government says, you know, I got this, you know, I'll pay 50 or 60 or 70% of your premium. I think that is an important decision, and that's why I think the good risk managers recognize that they don't want to cut to bare bones crop revenue protection because they see that subsidy. That is where the government money is coming from in '21. Not an MFP, not a CFAP 1 or CFAP 2. It's the fact that the government is continuing to subsidize your multi-peril crop insurance decision.

Chris

Barron: Well, and it, it's just one of those things that it's totally, you know, it's— there's not any other industry out there that gives you that opportunity, you know, to protect that level of risk. It's It's, you know, a lot of times I'm looking at it right now on an average with our clients where we're guesstimating, and I don't have as many data points in there as I'd like, but it's showing 3.8% of the total cost of production to protect 85% of the risk. I mean, it's a—

Steve

Johnson: yeah, this fertilizer or seed or crop protection, fuel, none of those, none of those are guaranteed revenue, but revenue protection crop insurance is. And that's why I think it's been So yeah, that, that's why it's so popular. And then leverage the ability to pre-harvest market because I'm guaranteed the higher of the February simple average price that, that projected spring price, or if the harvest price is higher like it was last year, like it was in '12, I get an adjustment. I get a higher revenue guarantee. So again, if you ever take revenue protection away from farmers, we're going to have a farmer protest. They will revolt. Mm-hmm. So the fact is, is that you've got a tool, you're number 21.

Let's make sure you understand how RP works and then ask the tough questions, especially around unit coverage and around this idea of supplementals and check the box for TA and check the box for QLO. Try to simplify crop insurance and don't back those decisions into March because there's going to be a problem with these crop insurance agents that are thinking all these farmers are going to want those quotes at the same time. And Chris, we're probably not going to see the actual premiums for the '21 product until we get into the latter part of the week of March 1st. So think about that. You're going to have about 2 weeks and you're probably not going to know the exact premium, but this is when you want to work with your agents. They would love to have questions in early February rather than in early March.

Chris

Barron: Well, and by the 15th of March, you have a pretty good idea what that price level is going to be. It's not going to change a huge amount during that discovery period after you get about 50% of the way through the month either.

Steve

Johnson: But, you know, or go to, go to FarmDoc. You've got a FarmDoc tool.

Chris

Barron: Exactly.

Steve

Johnson: Go to the University of Illinois FarmDoc, and they've got a crop insurance premium calculator, and run this analysis, you know, not only RP at various levels of coverage and optional versus enterprise unit. But take a look at pricing FCO. It'll interact with the FCO. And by the way, we haven't talked about that other new product, ECO, Enhanced Coverage Option. Brand new for '21.

Chris

Barron: That's— I wanted to get to that too, because I've seen some quotes on that. And ECO, that Enhanced Coverage Option, is, from what I've seen, is a fairly expensive add-on. However, You know, I have this conversation with a couple of insurance agents I know that, you know, you really question, you know, can you justify spending that extra money there? Does it make more sense to maybe, if you're going to spend those extra dollars, do you look at optional units instead of enterprise units? Or is there— are there ways to spend that money? And I'm getting to a question here in a second for you, but, um, you know, how do you allocate these dollars? Because, you know, I can show you operations that have, you know, a real low amount of either working capital or their rents and their cost of production significantly higher than, say, the average.

And so their risk tolerance level isn't quite as good as maybe the average. And so they have to look at some of these enhanced coverage options as a way to manage risk that they just can't tolerate otherwise. So, you know, I guess my question is, is, you know, what's your thought on the ECO dollars of investment versus maybe looking at optional or spending those monies, those dollars in a different bucket?

Steve

Johnson: I think you always start with revenue protection because it's using farm-level coverage, and that is critical. The fact is, is that you want to ensure your yields on your farm, your actual production history. Always start there and then understand there's this interaction of optional versus enterprise units. With different subsidy levels. If you move to enterprise units, again, those have been available from 2009 crop, the government subsidizing a higher percent, or you're taking more risk. I want to make sure I'm very focused on RP and the level of coverage and what that premium is. Then I'm going to take a step back, and my step back is going to focus on my risk tolerance and what am I willing to accept as a deductible. 80% RP is good enough, great, is recognized that. I'm willing to take that risk of 20% of a deductible.

But if you don't have the same risk tolerance, then you've got to take a look at SCO first because SCO can provide that county-based revenue guarantee, county yield, but it is that gap between that 75 to 86% or the 80% to the 86%, I think FCO is going to be a cheaper way to add on more coverage, but you're reducing your farm level coverage. ECO is a shallow risk product. Here's the best way to explain ECO. Let's say you've got $5,000 deductible on your pickup truck. And you say, you know, like, I, I really think I'm going to wreck this thing. I'm going to go to $500. Well, you're going to pay a lot more to have a shallow risk product like $500. What ECO does, it has two triggers called a 90% trigger or a 95% trigger. It's using county-based revenue, but it is triggering loss if you fall below 95% to the 86% level.

Again, two triggers, 90 and 95, but you're picking up that top-end coverage and it picks up at 86%. You're either providing 4% coverage, 86 to 90, using a 90% trigger, or you're providing a 9% coverage. At least have the discussion of ECO. Do that now. Do that now. ECO is going to seem pretty expensive, but like I say, it's covering that very top end that you are concerned about. Risk tolerance and what you're willing to accept as a deductible should be driving that interest that you got in both the SEO as well as the ECO product.

Chris

Barron: Trying to think how to ask this question, but one of the the concerns on the ECO with that being a county-based protection. Let's say that the county situation is different than your individual farm situation to where, you know, the county yield is actually really good and you just happen to be in that little pocket that doesn't catch the rain. Is there, is there like a little area you could get into to where the ECO, you've paid for it but you're in a bad spot to have an advantage from it?

Steve

Johnson: Remember the answer to my last question. The answer was start with revenue protection. Exactly. Start with your farm level coverage. If your farm yields are highly correlated with the county, then I think SCO and ECO probably fit. If your farm rarely tracks with the county, be careful about using SCO.

Chris

Barron: Okay.

Steve

Johnson: Or ECO. And there's the importance. There's revenue protection. How about hail? I'm an enterprise unit, so I better buy hail. You know, we found out the hard way across Iowa this year, boy, it would have been a great year to have wind and grain snap with that derecho that hit. So make sure you're asking the really tough questions around revenue protection and the supplementals, and then pricing at various levels of coverage, understanding optional versus enterprise before you jump to SCO and ECO to try to save money.

Chris

Barron: Well, that's really good. And again, I'd recommend people to let us know if you want to see, you know, you did a phenomenal job of putting this slide together that, you know, kind of shows the pie chart and looking at these supplementals and where a person is going to get the best value. Just like you said, you start at that RP inside that circle and you look at the supplementals that are there between the hail, the green snap, and that type of thing. And, you know, if you're going to spend the extra dollars in some of these farm operations we work with, it might make more sense to look at the optional units. I mean, you brought up the derecho. I mean, there was situations last year where, you know, you're, you're two farms away and the difference of damage was pretty significant from one farm to the next. And so it—

Steve

Johnson: yeah, remember that discussion we had on mechanically unharvestable? We had that August, and that was like, whoa, wait a second, I gotta understand. Well, those are all built into revenue protection, right? So just recognize that my crop insurance agent and the knowledge my crop insurance agent has is critical, probably more important now than ever. And I've got to be able to ask those tough questions early so I don't bury them in late February and March, because that's when my neighbors are going to be contacting the crop insurance agent Let's get our heads around crop insurance. Let's knock out ARC PLC in the next 2 weeks and then let's be really focused on crop insurance. Those decisions, this interaction that we get, whether that be with optional enterprise units or whether I should be pricing SEO, ratio, and preharvest marketing. I'm not backing away from that.

We're at the highest old crop futures price levels in almost 7 years. And again, we put a lot of risk premium in new crop, and I think we're going to more planted acres. And La Niña is fading, fading fast, according to Eric Snodgrass with Nutrien.

Chris

Barron: Gotcha. So is there anything else that I didn't hit on that you think is important, or any questions I didn't ask that, that are important for the listeners to, to be thinking about specifically?

Steve

Johnson: I just want to encourage those on the podcast to build their knowledge about crop insurance. I think some of the better marketers that I've worked with over the last 20 years are the ones that pretty much understood crop insurance 20 years ago. When we got the Crop Insurance Act of 2001, they spent a lot of time understanding this. Chris, my concern is we've got a lot of people out there that 21 years later still don't totally understand crop insurance and this all of these products and these interactions. And we're very dependent upon our crop insurance agents. So again, asking those tough questions early, I think it's going to pay off. And the likelihood is this is going to be an annual event. ARC PLC and crop insurance, March 15th deadlines in '21, '22, and '23. We're only making annual decisions. So let's not procrastinate this year. Let's get our heads around this.

So that we can free up time for county FSA as well as our crop insurance agent to answer those questions of the people that just didn't get their heads around this in December, January, and early February.

Chris

Barron: That's awesome. I think, I think the takeaway here is, uh, if you haven't done it, get your appointment at the FSA office and get your appointment set up with the crop insurance agent and at least get a plan put together for what you think you're going to do. And then we'll kind of see what this price discovery thing does, you get to about the middle part of February, you could start pulling the trigger on some decisions, probably the way it sounds.

Steve

Johnson: Yeah, maybe we can do a podcast around that. What do we think that February average price is going to be? That's going to influence premiums, but it also influences the revenue guarantees. So again, I think it's going to be a great year. We're setting ourselves up to create high revenue guarantees. I did the pencil work. Is your 200 bushel an acre APH at 80%, that's over $700 an acre revenue guarantee. Using revenue protection at the 80% level. So I think we're setting ourselves up that we're going to be able to manage a lot more risk, and the risk is coming at us for the '21 crop.

Chris

Barron: Yeah, that's a great safety blanket going into this year for sure. And it's where the commodity prices are at, it's a pretty bright outlook and we're excited to head into it. So thanks a lot. This was a great conversation. I think I'll take you up on that. We'll hook up about mid-February, kind of see what's going on at the price discovery and and dial a few things in a little closer. Does that sound right?

Steve

Johnson: That sounds good. And maybe get some new crop corn and beans sold above that discovery price because we know we're guaranteed at least that February simple average for December corn and November soybeans using revenue protection.

Chris

Barron: You bet. No, it sounds like a great idea. And hopefully you're enjoying this retirement. It sounds like you're working awful hard and you're supposed to be retired, so maybe you can get some rest in the time too.

Steve

Johnson: Well, it's only 2 hours a day, so I think I can handle this. I've got 12 webinars down and I've got 12 more coming. And guess what, Chris, I'm going to be talking about crop insurance, ARC PLC, and pre-harvest marketing.

Chris

Barron: Awesome. Well, you've got it figured out pretty well, and your email will be on there when we send these slides out so people can probably email you a few questions if they have anything in the meantime as well. Is that right?

Steve

Johnson: Yep, yep. And feel free to email me. Again, don't ask me what product to take, but ask me the tough questions about this interaction that we see with ARC PLC, crop insurance, and then the new products STO and ETO.

Chris

Barron: Sounds good. Thanks a lot, Steve. Appreciate your time.

Steve

Johnson: My pleasure.

Chris

Barron: You bet. And thanks everybody for listening. Hopefully this was of value to you. Again, Che will be sending out to those of you who we have your emails on, and we'll be sending you these slides so that you can take a look at these and maybe look at them while you're listening to the podcast or review them afterwards. And there, um, Steve did a great job putting those together. So again, thanks everybody for listening. We will catch you next time on the Ag View Pitch.