Enhanced coverage option

Shay

Foulk: And it all comes down to this. 2 on, 2 out, bottom of the 9th. The Farmers lead by 1.

Scott

Pedigo: Full count, here comes the play at the plate, and it's the Ag View Pitch!

Shay

Foulk: Welcome back everyone to another episode of the Ag View Pitch. Today you have Shay Foulk with Scott, and Scott, I was hoping you could just take a minute to give the listeners a background, first time time having you on here, and I appreciate making the time.

Scott

Pedigo: Yeah, no problem, Shay. Hey, um, Scott Pettigrew, um, I am with Compeer Financial. Um, been with the company now for well going on 9 years. Um, my job is to sit down with farmers and go over their best option for crop insurance every year and, and go through a lot of other stuff with them. Um, you know, obviously the PSC and our county decisions. We help farmers with just about everything to do with FSA offices and obviously the crop insurance plans. So that's my little background.

Shay

Foulk: You're located right there in Northwest Illinois where I am, so close to home. And I thought it'd be important here to have a conversation, a little bit of a discussion looking at this enhanced coverage option that's come out Farmers and is an available option for crop insurance moving into 2021. So I was wondering if we can talk a little bit about this ECO and if you want to give us a brief background and then I'm going to ask you some specific questions.

Scott

Pedigo: Yeah, absolutely. Don't make them too tough today because ECO just came out, well, we just really get down to the nuts and bolts of it as of Monday. So we're really excited. So Yeah, ECO, I'll just kind of jump in. ECO is a new product developed for farmers to add the top 9% or 4% band of coverage to their policy. ECO is a county-based product that goes off of the county averages. And it is a really, really sweet product that we're really excited. The good news about this, if you're used to buying the top 10% band that you're normally buying, that is never have been— you never had the option to have it without subsidies. So this product now, you'll be having it down with us. This will be subsidized product from the government, and they're paying right now at 55% for this.

So this is the first time ever that we're able to take this top 9% or 4%, whatever coverage you choose, 90% or 95% with subsidies on it. So that's really cool.

Shay

Foulk: And just to recap, so this is a federally subsidized product. You know, it's, it's a, it's pretty high coverage. It's taking that top 9%, um, fairly, fairly low deductible for the amount of coverage that you have on that. And this is, this is an option maybe that producers are looking to, you know, just have that higher level of protection. And we'll talk price point here in a little bit. Um, but what do you see as some of the key advantages for this program, uh, rolling out not only timing-wise, but also just, um, you know, with how this program was designed?

Scott

Pedigo: Well, that's a great question, and I'm kind of not to beat all over the path, but as you know, Shay, with the product, the cost just getting so, you know, the input cost just getting higher and higher and higher all the time, farmers are looking for a little edge. And with this edge, they're looking for something to add additional coverage to their pulse. So with that being said, 85% sometimes does not cover all your costs. So they're sitting there trying to find a way, and the government's trying to find a way to come up with something to make them have an edge over somebody else. And I believe that is why they chose this product and came out with it. Does that answer your question?

Shay

Foulk: Yeah, no, it does absolutely. And something that you and I were talking about here offline is we're at a good time. We've seen some strength in the commodity prices here over the last year, not to mention volatility. In both the yield environment and in the market pricing environment too. So I think this is a very timely product and it's really interesting. So let's get into the weeds of it. When you look at your normal coverage, I'll call it that, of what you've seen historically here with the revenue protection or your yield protection up to, you know, that 75% yield level, how does, how does this enhanced coverage option, this ECO, how does that play into it? From 75%, uh, since ECO's covering this top 9%. Can you explain that?

Scott

Pedigo: Yeah, um, I'm not going— the 75%, I, I made a chart for that, but it's really not— I don't have many customers in today's world that's taking 75%. Most of them are at 80 to 85% coverage in where I sit. Um, so let's just— I'm going to just talk about, um, let's just do 80% for example. So let's just take— we're going to talk corn. Corn's easy. Everybody loves corn. So let's just talk corn. I'm just going to say if you had 215 APH and you did that by 80%, you have 172 bushels of coverage. Today, the U of I is tracking right at $4.13 spring price. That's what they're predicting the price. So that's $710 of coverage. Like you were saying earlier, you have to do something more with the $710 coverage. Cash rent's going up, seed costs going up, fertilizer keeps going up. So they're sitting there saying, what am I going to do for $710?

So I'm going to get all that paid down, there isn't much profit there. So a lot of guys are saying, well, there's options out there to make it— you know, better. So if you're taking an 85 or an 80% coverage, I tell a lot of guys, hey, just go ahead and grab onto an SCO product. SCO, it's called Supplement Coverage Option. Supplement Coverage Option kind of protects you from 80% to 86%. Now, I don't want to get too far ahead of myself here because when we start talking about that, you have to choose ART county at the FSA office to be able to purchase SCO on your insurance policy. So with that being said, uh, last year with the price being down, when we set our price, everybody went to the TL— or excuse me, the York County side of things. When they went to that side of things, we were able to do that. With this new product coming out ECO, you do not have to make that election.

You can do ARC County or PLC to elect ECO. I don't want to confuse people, and like you said, and you know, we were texting back and forth, we were talking about keeping this all straight. It is very difficult, and that's why I always tell people you got to have good insurance agents to know and be able to sit down with you and make sure you understand what decision and what train track you're going down to. To help you navigate this.

Shay

Foulk: Right. We joke that insurance is the most complicated thing that you do once a year. And oftentimes, you know, you might— depending on your crop insurance agent, there's a lot of really good ones out there that have helped farm operations throughout the years. If you have any question in your mind, particularly with the discussion that we're having here today, Scott, I'll plug this in, is we're going to have resources linked to this podcast.— Absolutely.— information that we're talking about. A lot of great information out of the University of Illinois. And just to clarify too, Scott, with that SCO coverage, so we're running an 80% example here, but SCO coverage will cover from 75% up to 86%. Depending on what you buy up to. So—

Scott

Pedigo: Correct.

Shay

Foulk: —let's continue on with this scenario. So if you normally have 80% on your coverage there, what does it look like with this ECO?

Scott

Pedigo: Okay, so, I— if you are taking 80% coverage and we're going to go to 86% with SCL, we can go ahead and capture from the 86% all the way up to the 95% coverage level. Like I said, this is ensuring up to $79.92 of coverage. This top 9% band. So let's just say that today with that coverage at 215 APH, you're going to have $834 of coverage all day long. And that is looking a lot better than $710. So that gives Guy a little bit more wiggle room. It just gives Guy a little bit more marketing room. So we use this crop insurance, as you know, as a marketing tool. I always tell guys, if you ever beat your spring price for a sale, make the sale because you know you're only bettering your total revenue at the end of the year. And we see that very—

Shay

Foulk: like you said, you know, in your area of the world, it's more common to have that 80 to 85% coverage. And I think as we look at this ECO option, You know, what farm operations get caught up with sometimes is they can probably tell you the exact dollar amount that they wrote that check out for. But what we like to do for the insurance is take that back onto a cost-per-bushel basis and a percent cost of production. And so, you know, with this scenario, I'm going to plug some numbers into Profit Manager that I'm running here in the background. So at that 215 at $4 a bushel, with a spring price of $4.13, there's some different variables here depending on your land cost, return to management, and things like that. But you're only looking at somewhere between that 4% and 5.1% cost of production for these insurance products to buy up to those levels.

You know, it's costing you essentially 10 bushels, we'll call it, to purchase this extra amount. So what is that amount of protection providing for your farm? And what does it do? It doesn't matter the dollar amount that you're writing the check for, um, if you have a payment triggered. And I think that's where I want to take the conversation next. How are these payments actually triggered when you buy up to this 95%, Scott?

Scott

Pedigo: Well, Shay, as you and I were talking before, before we got going here, as you did see this U of I, um, link that I shared with you yesterday in an email, um, it's looking to be like it's going to be about 50% of the time this 95% is going to trigger. And so I do not like telling people that just because I don't want to get anybody's hopes up, you know. I don't want to say, hey, we're going to give you the money back 50% of the time. That's just not me. I try to sell it in, hey, you got $837 of coverage, run with it, go do the best you can do, don't ever look back. That's like telling somebody, hey, uh, um, your home insurance is going to pay 50% of the time. I hope that never happens to nobody. So I always tell people, this is insurance. This is giving you protection at $830. Go do the best you can do.

Shay

Foulk: Right. The chart that Scott's referring to here, it's posted by Farm Doc Daily, a weekly farm economics article, and it's titled Years in Which Enhanced Coverage Option Pays. And when you go in and you look at this chart, it's pretty staggering really to look at even if buying up to 90% coverage with this enhanced coverage option, if you take that back historically over the last 30 years, it's paying out roughly 23 of the last 30 years. And if you buy up to that 95%, it's showing that it's paying out 90 to 95% of the time. Again, we're, you know, Chris and I talk about this often, we're not insurance salesmen. We can maybe play one on TV. Every operation has to make their own decision. And it's important to sit down with your insurance agent and talk through this. On what these specific examples might look like. But again, we'll have this linked into the podcast.

Some of these visuals can really help with the conversation on understanding how this payment works out. So let's talk, you know, okay, so whether you have a reduction in yield at the county level or you have an increase in price, for the amount of revenue protection that you have with this option, with that 215 yield that you were running your scenario on earlier, what would trigger a payment if a producer had bought up to 90 or 95% with ECO?

Scott

Pedigo: So just for rough, I, I'm just using an ECO indemnity calculator sitting here in front of me. So I just like to be a realist. I don't like to go in there and plug in numbers that are unexpected. When I first got this calculator, they're saying that Stark County, Illinois is projected to have 164 bushels come next fall. Don't like that. We have not seen 164 in Stark County at all. So the RMA has came out and said Stark County, Illinois is going to have a 220.1 projected yield. That's what they're saying for 2021. That's the yield they're expecting. Then I just went out there and said, you know, we are kind of dry. I'm dry at home. We're sitting here. We're supposed to get an inch and a half of rain last Saturday. 4/10. We're really dry. Talking to some cattle guys, they're fighting the well problems because they can't get enough water for their cattle because of the well so dry.

So I did not go to 164. I just went ahead and put a 200-bushel in, and I came in and put a fall price at $4 just because I don't know what's going to go on with this, you know, where— what's our government— we had no idea what the China deal is going to be anymore. There's just so much unknown. So I just put $4 in there. And, um, that came out to be $62 gross indemnity. Now, when you pay your premiums, you're going to net $39.94 payback for you for that scenario. So let's just keep talking on that. So you projected a $220.1 and you harvest— the county came in at $200. At a $4, that little swing paid you net back $39. That's unbelievable. And I will take that odds every day. Right. Um, and so the biggest hurdle we're going to have as an insurance agent is getting out there, talking to these people. So that's why I was so happy when you asked me to do this. We got to promote that.

We got to get out and tell people. Um, I think if you're not doing it and your neighbor is, they're going to have a leg up on you and they're going to be— you're going to be edged out by these, you know, this subsidy dollars that they're gaining and you're not, and getting these extra payments.

Shay

Foulk: So I want to take a quick half step back here and let's talk on that example you ran there in Stark County. And I know there's, there's price projections out and I don't want to, you know, pin you up against the wall and talk about that as far as premiums. What, what were you putting in as part of your calculation on that for a premium?

Scott

Pedigo: Scenario? Well, I do have the premium sitting right here in front of me. The premium in Stark County, and I will just say, like you said, only unknown that we have today is our spring projected price. We don't know that. We won't know that till, you know, February. So that is an unknown, and that is we're running the $4.13 because our friends at U of I, they're projecting that price. So the $4.13 is that, and our volatility— we do not know our volatility factor today. Because, you know, we don't know the volatility in the spring, in between the spring and next fall. So I'm running a 0.16 volatility and a $4.13 spring price, and it's coming out to the premium of $22.15 in Stark County. I ran some in Iowa yesterday. It's all roughly close. You know, good dirt, you're going to be at $22. Mediocre county is going to be $18.

Some might jump back at that and say, wow, Scott, that's— You know, that's an extra, you know, that's doubling my premium on our corn acres. You are correct. And I am here to tell you, I will fit this product for anybody's needs. I had some guys that sit down with me in my office, Scott, I don't even want to touch that. And I will say, that is fine. I have to say, yes, I want this, but I do not want to pay $22. So what I start doing is start messing with things to try to fit them. So what I mean by that is I never want to come off that 95% trigger. Never. I want to have that coverage level at 95%, and then I'm going to start bringing the protection factor down.

What I mean by the protection factor is, let's just say if you're going to get a $100 payment, which you're not, I'm just making it for round numbers, and I move my protection factor down to 85%, you're going to get $85 of that $100. So it's going to trigger. But you're going to get 15% less off that. And that brings the premium down, brings the premium down every time you come down. So like I said, don't run away. That is a top dollar. That's— I'm telling you, that's the most you're going to spend is $22.15. But let's fit it for your needs and fit it for where you can afford it, because I want you to have it.

Shay

Foulk: And so just, you know, real quick, running a scenario too, we have an insurance calculator and we also have an indemnity calculator too. So I'll be interested here when we get offline to compare notes on that, Scott. Yep. You know, if producer If producers have questions on this, they can certainly reach out to us at Ag Solutions. We'll help talk through some of the scenarios. Again, we're not insurance salesmen. I didn't have you on today to sell your product. What we see on the risk management side, which is the business that Chris and I are in, is when you look at the cost of production percentage with the volatility that we have not only in today's marketplace, in today's weather environment as we've seen over the last 4 or 5 years, and also looking at the price point that we're at today.

Relative to the last 5 years historically, there's a lot to be left on the table in the event something happens either on price or yield that can make a huge difference for the profitability and also just the investment that you have in risk in your farm operation. So, you know, with that 90— you know, at that $22 for, you know, my farm scenario in Illinois, that's 2.9% of my cost of production. That's $5.5 bushels of protection that it's costing me to protect 95% of my revenue. Yeah, and, and that's just incredible in my eyes.

Scott

Pedigo: So, Jay, what I tell, what I tell a lot of guys here that sit down with me, I always tell them, and this is not bashing any company out there or anything, but I always tell guys, guys, you could spread fertilizer, you can buy the best seed there ever was, you can do anything just absolutely perfect But if it doesn't rain, if they have a wind event, it has something like that, you can't produce. So no matter what you spend in inputs, you cannot produce if it isn't there. So I always tell people, you can do all the right things, and they most— you know, 95% of farmers, they do do the right things, but things happen, and that's why we take insurance.

Shay

Foulk: Right. Well, and there's two other key points that I want to hit on here. So when you look at historical frequency of of, you know, how this ECO payment at 95% would trigger or at 90%, which there's another webpage that we're going to link to here in the podcast that looks at that. You know, corn historically is going to trigger a little bit more often depending on the county. I don't know what the state average is, but I'm seeing numbers anywhere from 50 to 80%. And again, that's based off region and looking at the historical production practices there. Soybeans, maybe not quite as much, but still pretty good percentage. If you're at 90% to 95%, looking anywhere from 20% to 60% of the time, depending on where you're located geographically.

Scott

Pedigo: Do you have any additional comments on that? No, you're spot on. You're spot on with that. So one thing I do want to kind of go back to on the corn As you were just saying on the 90% level things, that brings the premium down tremendously and still triggers a lot. I'm just looking here as a 90% in Surt County, you're looking at $7.81 per acre. So that dramatically decreases the payment, and I think that is still a smart option. Any time you're doing anything more than your federal crop, you're making a smart decision. So just wanted to— so I don't blow everybody away at the $22. No, and that's great.

Shay

Foulk: And one thing that I want to clarify, you know, with that, with that $22 and that $7.80 that you referenced there, just so we're crystal clear on that, is that a premium in addition to what you would normally be paying on your— Correct. 75 to 80%. So, you know, what, what's kind of that baseline area for 80 to 85% coverage that we're seeing as premiums moving into 2021 here? Yeah, great question.

Scott

Pedigo: So I got an enterprise unit pulled up here at 85%, Stark County. I got a farm yield of $2.15 and looking to be about $11.75 for this year. So it did come down a smidge again from last year. So I'm one of them guys, I get to sit down and tell people, "My price came down a little bit." So I always like telling them that. It did come down a smidge. So you take $11.75, if you want the full boat, it would be another $22 on top of that. So you're looking at roughly $34 an acre for both of these combined. So, yep.

Shay

Foulk: So $33.90 in the scenario I'm running in Profit Manager, that's 4.3% of your cost of production that you're putting out there for a payment that again, you know, we're not, we're not making guarantees, we're not making suggestions or recommendations, or at least I'm not. That's Scott's job, you know, at the, at the crop insurance level. But from that 95% level of coverage, when I buy up to that at a 200 APH with a $413 spring price, you know, I have $332 investment at risk. But when I go back down to that 85% coverage and then change my premium back to that $1,175, and I come back down here to my dollars at risk, I now have $14,000 at risk. And so the difference in that payment, we'll call, you know, we'll just call it $14,000. For what it is, um, the insurance check that I would write for that additional premium is somewhere in the, in the $5,000 to $6,000 range, you know.

So you, that's what you're working with. I mean, do you write a check for $5,000 or $6,000 more on a, on a 220, you know, 220 acres or whatever that you're running there? You write that extra $6,000 check, or it doesn't matter what the number is, um, look at it on a percentage of your cost of production, look at the bushels that you need to cover that cost, and then look at what that insurance premium and that extra insurance coverage can do for you. So again, I really appreciate you taking the time to go over this enhanced coverage option. Any last thoughts before we end today's talk here, Scott?

Scott

Pedigo: No, not at all, Shay. But like you said, you hit the nail on the head there. I couldn't agree more with you. And no, I think we got everything wrapped up for the ECO side of things. Just want to make things clear though. I think we did say this. This is a county-based product from, you know, 86% to 95% or 90%. This is a county-based product. So that's all new. For those who are listening, the first year out, they just got a few commodities on there. And we just got off a webinar yesterday and they are adding a ton more commodities for 2022. Okay. What I mean by that is, so if your commodity does not have it, they're talking yesterday, they're adding apples, walnuts, and stuff like that. So that, you know, for all the producers out there, if you're listening, that this will be coming for a lot of others in 2022. So that's great.

Shay

Foulk: I appreciate you hitting on that. And then also, you know, as we look at these elections for your coverage, if you just want to reemphasize what the timeline and dates are on making these decisions on these crop insurance products. Absolutely.

Scott

Pedigo: Yes, so we have to have the election made by March 15th, you know, no matter what, got to have it signed, dated, sent in to the AIPs that we were working with by March 15th. We did kind of talk there a little bit about the PLC ARC counting decisions. That is the same timeframe., for that too. So, um, I had a call yesterday, one, one, one plug in there for people. Um, I talked to some guys yesterday about the PLC, ARC County. They are telling me to wait as long as possible to make that decision so we can have the, you know, the best insight look at the decision we need to make right now. PLC in ARC County, irrelevant. They have not— with our prices where we're at today and the yields where we're at today, They're irrelevant. PLC, it's called price loss coverage. Price loss coverage, it needs to be below 30.70 before any price will trigger on PLC.

In our county, it's the same basis. It's got to fall, the yield plus revenue's got to fall below that 86% mark of your county to trigger a payment on that. So I just want to kind of make that clear. Then they're kind of irrelevant. So just kind of want to fill everybody in where we can.

Shay

Foulk: Yeah, you got a busy couple of weeks there at the beginning of March, Scott.

Scott

Pedigo: I know you do. Yep. All right.

Shay

Foulk: Well, hey, thanks a lot for taking the time on this conversation. Again, if you have any questions, reach out to us here. I'll put Scott's contact information in the bio or podcast description. Be talking with your local crop insurance agent. Reach out to Chris and I if you have any questions on this. Scott, thanks again for your time. I really appreciate it.

Scott

Pedigo: Hey, thank you for having me.

Shay

Foulk: I really appreciate it too. And thank you everyone for listening to another episode of the Ag View Pitch, and we will catch you next time.