Risk management navigation in 2023: crop insurance

Shay: Welcome back everyone to another episode of the Ag View Pitch. Today you have Shay Foulk and John Sheets. John, how are you today?

Jon

Scheets: I am fantastic. How about yourself?

Shay: I'm good. I'm looking at a little snow out of the window. But I mentioned to you here, we're actually headed down to the Ag View Executive Business Conference this week in Florida. Looks like we're going to have a little over 100 people there for the conference that we put on. Pretty good lineup and I don't know. I think you said I might just be sitting on the beach and drinking mai tais and margaritas or something, but that's okay too, isn't it?

Jon

Scheets: That doesn't hurt. Yeah.

Shay: So, John, if you could just give a quick background on, you know, who you are, what you do, and then we'll dive into some of the topics here today.

Jon

Scheets: Yeah, sure. Again, my name is John Sheets. I live in central Illinois, born and raised. Farm, operate a farm and a small elevator kind of in the central Illinois region. I also work in the crop insurance field. I've been involved in crop insurance for, I guess, 16, 17 years, all with a company called Crop Risk Services. My role right now is kind of lead our team in what we call business development. That involves essentially finding ways to make better ideas, products. You know, we think about what the farmer is purchasing at a crop insurance level. Obviously, the federal side is kind of standard. We love those products, want to utilize them. But, you know, the last 3, 4, 5, 6 years, definitely the farmer demand for more is out there. And obviously that's part of my responsibility to see if we can't get ourselves to some levels above those federal levels that they've given us.

Shay: Yeah. And John, you and I got linked in at a Lohmann Re Insurance event here about a week and a half, 2 weeks ago. And I'll just tell you guys right now, John was really sharp as a presenter. I highly recommend that if there's anything that you guys, you know, have questions on today after listening to the podcast, reach out to him, pick his brain, super sharp. And, and, you know, whether or not there's products or services that would help, uh, just highly recommend you getting in touch with John here. So John, the first thing that I did want to jump into, we were talking offline a little bit on ERP Phase 2. For farm operations that are listening, you know, these programs don't get any less complicated over the years. You think that maybe some of this stuff would get streamlined. But a lot going on here.

Can you give a 60-second rundown on ERP Phase 2 and maybe what guys should be thinking about?

Jon

Scheets: Yeah, absolutely. And you're exactly right. Things definitely are not getting less complicated. So Vilsack made the announcement that ERP Phase 2 is kind of out there, which basically means if we had a crop insurance loss in '20 or '21, we need to grab a Schedule F from those years, and we need to get into the FSA offices and, and we need to see if there is or is not some potential ERP money out there. There is some, some wording I think still needs to be clarified on what is what they call allowable revenue. And that's going to be kind of the, the fine threshold of, of what government payments are allowed to be considered part of this or not part of that. When you think about those 2 years, obviously we had a handful of acronyms when we think about CFAPs and all those type of monies that was distributed.

Some of those will be counted against us and some of those will be counted for us. So a little bit clarification probably will need to be had once we get into those FSA offices. Those, those times of getting in, it's going to start here fairly quickly. I believe it ends somewhere towards the middle or end of June as far as when we have to be in in those FSA offices and give those Schedule Fs. There's about $3 billion worth of money assigned to this program. As I always say, with any government program, I want to be the first one in the door, not the last. Uh, when that money is gone, it may just be gone. So if we had a loss in '20 or '21, we've got our Schedule Fs in hand, uh, I would highly recommend getting ourselves to the FSA office and, and see if there's some potential money out there for us.

Shay: Now, what's the difference between Phase 1 of this and, and Why are there two phases? You know, what's kind of the idea behind this?

Jon

Scheets: Yeah, so, you know, honestly, there was nothing more than just kind of splitting some government money, quite honestly. A little bit of different rules and regulations as far as the loss part of it, but it was just a way in which it kind of broke a bigger number up into smaller numbers when they thought about administering those into the agricultural sector. They just kind of split those from the beginning and said, hey, we're going to allow a certain amount of money out of Phase 1. We're going to allow a certain amount of money out of Phase 2. And I think that's just more of a fiscal type thing from a, from a government standpoint.

Shay: Okay, real good. I think that's a great overview. I appreciate your outlook on that, John. I want to jump into, you know, the 2023 outlook here from, you know, risk management, risk mitigation. Part of what Chris and I are doing in this podcast series is looking over, you know, some of the 10 things that we think are most important for producers to keep in mind. Here over the winter and as you head into the year ahead. And number 6 on our list is this risk mitigation. John, that's why I wanted to get with you on, you know, some of the crop insurance and risk management tools that are out there. When you think about the year ahead for 2023 compared to, we'll call it the last 3 years, what's your, what's your general thought, general overview? Where should farmers be focused and concerned? What are your thoughts there?

Jon

Scheets: Yeah, I mean, I could go on forever for this. You know, I always, I always kind of have a theme for the year. And when I present to farmers and agents and, you know, you kind of like to categorize things into, you know, what should we be looking at? And as you heard, Jay, whenever I did a presentation there week before last, I talk a lot about margins this year. And obviously we know where we sit for margins. You know, when we look at commodities, you know, we're fairly close relatively to where we sat 12 months ago. 12 months ago, we were tickled, right? The income potential was, was very, very high. Obviously, inputs were very, very low in consideration to this year. And I kind of call this the year of inputs. And that's obviously what's biting and getting into a lot of those margins.

So from my standpoint, it's this, you know, we're— when we're having conversations, whether it's with bankers, lenders, whatever it may be from a financial standpoint, and our policy doesn't get us to where we need to be. And that doesn't necessarily mean just a breakeven level, but just to a standpoint of, you know, whether it's cash rent, purchasing of more land, growth opportunities. There are cases where people say, hey, I need more revenue out of this policy to ensure that. And that essentially is where my time is kind of late this year and thinking about guys saying, hey, I like my 80, I like my 85% RP policy. That's fantastic. I like the subsidies. I like the support. Is there more out there? And that's obviously been my focus of finding some products that get us above some of those levels.

There are some new federal policies that have been implemented the last couple of years, and farmers have definitely adapted and participated in those products like ECO, SCO, which are more of a county-based type policy. Which means, hey, I'm going to buy these levels above some of our federal. They can get us all the way up to 95% in some cases, but they're more in a federal type or excuse me, they're more in a county-based type format, which means I'm kind of betting my farm against county average. Those have their place. I also like products that, that have individual field, right, that I want to ensure and cover myself. And I'm not as worried about what's happening around me. And that's where some of the products that, that we kind of help build internally within Crawford Services come in handy because I get a lot of that. You know, I like the policy I have from a core standpoint.

I just need some levels above that. And definitely the farmers and the industry has changed a lot in the last 3 or 4 years. And there's been kind of an influx of those products to get us, you know, close as we can to the 100% level. And that is kind of the wish I get a lot from people of, You know, how do I insure everything that I'd like to insure? And we're trying to get ourselves closer to those numbers.

Shay: So where do you see the biggest gap in coverage from farm operations that, that talk to you or work with you from the services side? Where do you think that some farm operations have the biggest area to improve or something that they should be giving more consideration to?

Jon

Scheets: Yeah, so this is, this is a tough question to answer, but I'll, but I'll answer it by saying this. Never in my life have I had or have we had so many options to get us to whatever levels we need to be at. And it's, it's an awesome time because we can, we can join different ideas and products into one and get ourselves to where we need to be. We can buy our core underlying policy. We could buy one of these SCO, ECO county-based policies, and we can still buy some individual coverage above those federal policies as well. So there's just so many options that we didn't have 3 or 4 or 5 years ago, which I love. And I think maybe the most underutilized thing is kind of the joining of some of those products. And granted, it's, you know, each person has a little different take on what their risk tolerance is.

But I would challenge you guys to sit with your insurance agent and talk through those things of how they can kind of merge and mirror each other. We're sitting at a point, our discovery windows are going to start in February. Again, I mentioned we're somewhat relatively close to where we sat a year ago. I think we're trading at, what, $5.85 on Dec '23 corn and, you know, $13.30 and some change probably on soybeans. The good part about those numbers is from a volatility standpoint, and volatility has a massive amount to do with what we pay for farmer premium, and volatility is just the volatility of the market, right? That's what it is. Last year it was extremely high, historically high, which aided in making our premiums that much higher. Uh, we're seeing so far those numbers coming down, and as volatility comes down, essentially that means we're going to get more bang for our buck.

So we might have the opportunity to have a little less premium than we did, uh, comparative to our '22 policy, uh, but actually have as much coverage, if not more in some cases, than we did compared to last year.

Shay: Very good. I want to do an outlook on some products ahead. But you said something here a couple minutes ago that got me thinking. You mentioned risk tolerance, and every farm operation has a different amount of risk tolerance. Generally speaking, do you think people understand risk management or risk mitigation as well as they should from the standpoint of how it might impact their operation in a year like 2023? This is— I'm putting you on the spot here a little bit, but yeah, fantastic.

Jon

Scheets: I appreciate it. You know, the long story short is no, quite honestly. Again, I would challenge people to not use just a crop insurance policy as an indemnity tool. I would use it as a marketing tool, right? It is, for all intents and purposes— I hate correlating it and using it as a put option, but it has that feel, right? We have guarantees behind that policy that allow us to go do something in the marketplace. Whether that's in a future standpoint, whether that's in a cash standpoint, it gives us that support to do that. And the reason we're buying, in my opinion, some of those levels above where we traditionally have is because I want to, I want to take advantage of that, right? When we think about last year, we got into some dry times here in the Corn Belt, we ran up, right? We saw some $7, $7.50, we saw some really attractive numbers.

Take those guarantees and use them, right? Go sell some crop. We can make a fair amount of money at those levels, obviously. And that's where I say, hey, I've got a guarantee to my policy. Let's exercise them and let's use them. So, you know, long story short, the answer is probably not as much as we should from a risk management standpoint. Crop insurance, yes, is a fantastic indemnity tool and protects us as well as any insurance can. But in the same token, I'm not sure we use it or exercise it enough when we think about kind of the other side of what we do, which is actually the physical selling of grain.

Shay: Yeah, I love that correlation. I mean, most operations are rolling off of pretty high margins, not only on 2022 but also in 2021. And if you're sitting there looking at that $5.85, $13.30, we don't give marketing advice, but, you know, those numbers and those levels, if you have risk mitigation, risk management policies and procedures in place, I think there's a lot of people out there that could maybe be a little bit more forward sold than what they are currently, but maybe don't understand what their risk tolerance is or how that plays into their risk management strategy. So just something for the listeners, if you want, again, if you got further questions or want to talk about that, reach out to me, reach out to John here. I did want to get into, um, John, you know, we had some conversations about what is the future crop insurance look like?

And you said some things that I thought were pretty interesting. I'd maybe just have you dive into 2 or 3 of your thoughts or potential outlook on how crop insurance might change in the next 5 to 10 years.

Jon

Scheets: Yeah, I think, I think we're going to see a lot of changes within crop insurance and the way we do and buy probably will look completely different as we go forward. Nothing relatively close, but as you kind of get out year 2, 3, and 4, I think you'll see more of that. I had mentioned to you, Shay, that, you know, we've seen an introduction of some county-based policies the last couple of years. Things like margin protection, ECO, SCO have been out there. Margin protection is another county-based program that has some input flair to it as well. A little bit different buying cycle. So typically we have to buy our crop insurance by March 15th. This is a September 30th, essentially, sign date. So it's a different time window. I do see a lot of influx of those county-based policies continuing into the crop insurance realm.

I had also mentioned to Shay here a couple weeks ago that I think we'll see in '24 maybe an introduction of a product called IMP, which is individual margin protection. So it's going to have that margin protection feel that has currently been able to be sold, which has an input side to it. But maybe we'll have a little bit more of an individual flair. I'll also add, you know, long term, I think things look completely different. And I think, you know, we think about crop insurance, we buy our policy, we report our acres, and once we harvest, we have to report that production. I think there'll be a time and an era when we don't do a lot of that stuff. And I think we'll be buying things off of basically essentially a soil indexing profile. Where we could say, hey, this is the soil profile, this soil profile correlates to this premium attached to it.

And we'll probably be buying crop insurance in a very different manner, which probably also means we're not going to be doing some of the reporting stuff from a production standpoint that maybe we're doing right now. So I think there will be, I think there's going to be a lot of different changes and twists to what we do. And like I said, I think we're going to use all things technology going forward to kind of probably exercise that and make that maybe, maybe more of a simplified program that, like I say, probably comes down to more of a soil index type thing.

Shay: So that probably scares some people. You, you see it from a simplicity standpoint, but some people are probably like, okay, how can the government screw this up? Or how can it be more complicated than it needs to be? So generally speaking, though, what I hear you saying is maybe we're going to have better products and better ways to handle risk, risk in the future due to the more specific policies or the higher level of management that goes into this, this coverage that, you know, might be an option down the road. Do I understand that right?

Jon

Scheets: Yeah, I would agree with that sentiment. You know, the way in which we farm is changing, right? Practices are changing. Technology is obviously changing. And I think there will be some reward mechanisms within crop insurance. There already is, right? When you think about my APH today, and the government allows us to do things like trend adjustment, right? It's basically saying, hey, we realize your database of 10 years is probably lagging, right? What we did 10 years ago, which could be a 20-year database, sure as heck not what we do today. So there is some reward to that today, in certain, you know, cases such as a trend adjustment, a TA is what they call it. But it still probably, you know, doesn't get us to where we want to be or what we're actually striving for. And ultimately, that kind of goes back to the conversation we started with.

And that's why I get a lot of requests from farmers saying, you know, how do I get a 90% policy, a 95% policy? How do I get more? And essentially, they're just trying to cover for what they're aiming and what they're shooting for, which is, you know, more bushels, correct?

Shay: With the crop insurance changes that you see in the future or that could come to fruition, What's influencing that? Is that being driven from, you know, farmer up? Is that being driven by outside policies, by the insurance industry? Where are these changes actually coming from?

Jon

Scheets: Another really good loaded question. It comes from a lot of different realms. You know, crop insurance is, is obviously backed by what they would call reinsurers. The reinsurers are kind of the deeper pockets to run, help running the program. And when there are substantial losses, IE 2012, the reinsurance portion of what we do is vital. And they support this system when the wheels kind of fall off. You know, the crop insurance system is a very good system, and it's built to basically kind of, you know, essentially not make money, not lose money, essentially as a whole. And when you think about, you know, I'll use Illinois specifically, our premiums from a crop insurance standpoint are relatively low. And quite honestly, that's because our losses are relatively low on an annual basis.

As premiums go up in other areas of the world, typically that's because losses are a little bit more common, right? But as a whole, when we see those dramatic losses happen, they have to be backed and they have to be backed by some larger substantial money. And those folks are pressuring, right? As they see losses happen, Mother Nature seems to be throwing us a lot more twists here the last handful of years. There's more pressure on what we do from a daily basis. So, you know, we would love to provide, you know, every policy that every farmer asks for and say, heck yeah, let's go for it. The reality is, is a fine line between writing a policy that's, that's sound, that ultimately can be supported and not just have an annual loss to itself. Because, you know, at some point if you, you take $2 out of the kitty and you only put $1 in, it's doesn't last that long.

Shay: Yeah, well, I think that's the, the meat of what I wanted to hit on here, John. Anything else on your mind that you think is relevant or that you would have as kind of a lasting message for, you know, the people listening to this podcast? I'm headed to Top Producer here in Nashville tomorrow, uh, for speaking event, so I think there will probably be some folks listening to this podcast as a follow-up to that. Anything else that you'd like to add?

Jon

Scheets: Uh, no, I'll just add real quick, uh, the, the Corn Belt saw a lot of plant date changes, uh, mainly on the soybean side this year. Um, whatever your plant date was in the past, I would say for the most part it probably got moved up 8 to 10 days. Um, uh, the, the, the Risk Management Agency, RMA, is, is definitely adapting to what is going on agricultural practice-wise. They are seeing the same thing that we see from a crop insurance standpoint, which is Growers are putting beans in the ground first. The obvious reasons are simple, right? Beans are a sunlight-driven plant. The more sunlight you give them, the more flowers they can produce. More flowers, more pods, more pods, more yield type format. So you'll see a lot of things in the industry. You know, I'd say we kind of lead that hopefully from a replant standpoint.

When you think about replant policies that help cover those situations when we're starting to plant beans earlier, Sometimes we can negate what we get from a federal side as far as replant dollars, and that federal replant dollars are a little bit dated when you think about what it's going to give us in return. You know, let's just call it low $40 an acre. There are good replant policies out there that cover us when we get into some early replant situations and say, hey, I want to put back beans in the ground, you know, April 1st, for example. My plant date may be the 15th of April, but if the conditions are fit I see the advantages of it. There are policies out there that help protect you, you know, and can get you $75, maybe $100 worth of replant coverage if we get into a replant situation.

So I would just say for those folks that are doing those practices, make sure to talk to your crop insurance agent. There are policies out there that help protect in those situations.

Shay: Absolutely. John, anybody that's listening, if they want to get a hold of you, what's the best way to do that?

Jon

Scheets: Yep. Phone is always on. Phone number is 217-259-5011. Feel free to reach out anytime.

Shay: If there's anything that you reach out, kind of that last part that John was hitting on, he had some really interesting slides as a part of his presentation on some of those replant or early plant policies. That was one of the biggest areas that actually initiated my discussion with John. John, thank you so much for taking the time to do this. And, you know, just for what you do on the crop insurance side, we always joke with people, you know, crop insurance is the most difficult decision that you have to make once a year. Mainly because a lot of people don't understand it, but also because of the risk management that goes into that and the importance that that can play for farmers' operations. So just thank you for what you do on that. Really appreciate it.

Jon

Scheets: Yeah, appreciate the time, Shay. And yeah, feel free to reach out again. And you enjoy Florida, and I'll be cursing you from central Illinois.

Shay: Yeah, I think you're gonna get some snow, so I'll send you some pictures from the beach. Appreciate it. As we, as we move forward here, for all the listeners, keep in mind this is the second one we're doing as part of this series. If you haven't had a chance to go back and listen to Financial Navigation for 2023: A Lender's Perspective that Chris did the other day, go back and listen to that. The other topics we're going to be covering here is communication, transition planning, management of quality information for good decision-making, access to capital. We hit on risk management here today. We'll talk about budgets and cash flows, labor and how to deal with those challenges, equipment values, commodity prices. And then the big one on people's minds, especially for this year, or one of the biggest ones, is land rents and how values change over time.

Thank you everyone for listening to another episode of the Ag View Pitch, and we will catch you next time.