Risk Matters

Informational resource for ag professionals interested in risk management. More information @ www.insureaci.com

[riskmatters]

Impact of Crop Ins Subsidy Cap

Is a $125k subsidy cap for crop insurance an attack on family farms?

Depends.

It’s well known that a family farm is the same size or less than the operator being asked, while a corporate farm is easily defined as one acre larger.

Unprepared to make the family farm debate, the impact of this subsidy cap would vary largely on cropping practices, geography, etc...

Example:  In Southwest Nebraska, most producers carry optional units at the 65% to 75% level.  These elections are driven by practice (irrigated), primary risk exposure (hail) & the ability to cover that risk with private products (production & companion hail).

Example:  A producer carrying an 80% Enterprise unit would max the subsidy out at 5,208 acres while a producer carrying a 65% Optional unit would hit the $125k cap at 12,500 acres.

In other words, locations who rely heavily on Enterprise units will see this subsidy cap as a very large issue.  Regions that rely more heavily on private products would see a much smaller impact.

My bet is this cap will see strong resistance for two reasons

1 - “If you give an inch, you’ll end up giving a yard.”

2- Corn belt states leverage the Enterprise Unit more heavily & ag policy is driven by their interests.

(Example on an irrigated farm in Chase County, Nebraska below.)

[riskmatters]

Underwater

Mother nature got just a little bit carried away over Memorial Day Weekend.  Great moisture.  Hail.  Flooding.  Wind.

In some spots, it’s so wet that we’re working to decide if we should replant or not.  This is a quick little guide to walk you through the replant process.  Essentially, we have 2 types of replant payments.

Self-Certified Replant Payment.

Is the area to be replanted less than 50 acres for each unit?

Does the area to be replanted contain the lessor of 20% or 20 acres of the field?

If the answer is yes to these two questions, you may qualify for a self-certified replant payment.  This is a simple process that only requires filling out a form and mailing it in.  (Sample Form)

Conventional Replant Payment

Does crop appraise at less than 90% of production guarantee?

Example.  200 bpa APH, 70% coverage, 140 bpa guarantee.

140 bpa x 90% = 126 bpa

Does the area to be replanted contain the lessor of 20% or 20 acres of the field?

Replant Payment

Corn 8 bpa @ $3.96 = $31.68/ac

Soybeans 3 bpa @ $10.16 = $30.48

Additional requirements exist, so stay in contact with your crop insurance agent to work through the replant process.

Resources

Corn Loss Adjustment Manual

Soybean Loss Adjustment Manual

CRS Replant Guidelines

[riskmatters]

Crop Insurance Cuts in 17/18 Budget

  We’re going to go ahead and bypass the discussion concerning the importance of crop insurance for farmers and rural communities for now.  Assuming the purpose of changes to crop insurance is to save the government money, will proposed changes be effective in saving money?  (If you’re in a hurry, skip to bottom for answer.)

The cuts:

$40,000 cap on crop insurance subsidies.  I think the real winners here are lawyers & accountants.  Many of these larger farms are still family operations.  I would expect the creation of additional entities as crop insurance simply is not practical to purchase without the subsidy.  We may also see larger producers exit the program altogether while leveraging privately available marketing & crop insurance tools to mitigate risk.  Crop insurance has been a monumental success & has helped eliminate ad hoc disaster aid.  If the participation pool is drastically reduced, it is reasonable to expect the return of ad hoc disaster aid when mother nature is at her worst.  Remember, ad hoc disaster is 100% subsidized, not 60% subsidized.

$500,000 income restriction.  Whether farmers or investors, the people in this income class are often comfortable navigating complex regulations.  I would expect to once again see these producers circumvent these limitations through the creation of different entities, flex leases, etc.  Do not expect them to stand idly and pay and extra 60% for crop insurance.

Eliminate subsidy for harvest price option.  In Chase County, an irrigated farmer who purchases a 70% RP policy has a 130 bushel guarantee.  This policy will cost him $12.66 per acre.  The government subsidy is $18.21.  If the HPO was eliminated, that same 70% policy would cost the farmer $8.38 per acre while the government subsidy would drop to $12.07 per acre.  In other words, the government would reduce subsidy expenses by over 30%, right?  Not so fast...  Farmers who can not protect price, will likely look to protect more bushels.  If a producer decided he needed to max out yield coverage in order to safely forward contract corn while still maximizing subsidy dollars, he may elect an 85% Enterprise Unit.  An 85% Enterprise Unit without the harvest price option will guarantee the farmer 157 bushels per acre at a cost of $14.44.  The government subsidy?  $16.28.  The effective savings?  10%.

The Verdict:

These cuts will successfully save the government a little bit of money, but will not deliver promised results.  Expect unintended consequences on rural economies as producers and bankers must employ more conservative financial projections as they look to make the capital purchases main street relies on.  The proposed changes increase regulation and fail to provide any kind of meaningful reform for the American farmer & American taxpayer.

*Edit: The impact of these cuts will be regional.  Higher value crops and producers who currently purchase an 85% Enterprise Unit with heavy risk exposure to drought will feel the cuts much more than we will in SW Nebraska.

[riskmatters]

Replant / Late Plant / Prevented Plant

Mother Nature has once again halted planting & as the calendar nears month number six, farmers are faced with some decisions regarding 2017 planting.  Many of you are likely experiencing at least one, if not several of the following scenarios.

Replant - Most replant claims in this part of the country are isolated to a few acres that sit underwater too long. (UNL article on underwater corn here.)  To qualify for a replant payment, the lessor of 20 acres or 20% of the unit must be damaged.  Payment is based on the spring crop insurance price.  8 bushels for corn & 3 bushels for beans.  If your replant claim is less than 50 acres, a self-certified replant claim will make the process very simple.

Late Plant - Our final planting date for corn is May 25.  Crop insurance coverage is reduced 1% per day during the late plant period.  On irrigated ground, this reduction in guarantee can be a big deal.  (185 bu APH planted 5 days late would result in more than 6 bpa of lost coverage or about $24/acre.)  For dryland farmers, I’d trade the reduction in coverage for a full profile without blinking.  RMA’s final plant dates on dryland corn are a joke in the Western part of the state.  We see a lot of phenomenal corn planted June 1.

Prevented Plant - Prevented plant is more complex.  The basics.  20 acres or 20% of unit need to be prevented by insurable cause of loss.  Maximum acres eligible are acres planted during last 4 years.  No income can be earned on pp acres.  We have seen changes in coverage for the 2017 insurance year.  55% of guarantee for corn, 60% for other crops in this area.  (More info here.)

The devil is in the details.  Contact your agent if you are potentially faced with any of these scenarios.  Be proactive!

[riskmatters]

Dry Beans Reduce ARC Benefits

If you are considering edible beans in 2017, take a moment to consider the impact on your ARC-CO payments.  Why?  Acre-for-acre reduction in benefits.  In other words, any acres exceeding non-program commodity acres on each specific FSA farm number will eliminate any ARC payments on those acres.   Factor expected ARC payments into corn budgets and reduced ARC payments into dry bean budgets.  Also, consider planting beans on Farm Numbers with base acres assigned to non-program crops.  In many counties, 2017 ARC payments are expected to be negligible.  However, it is worth your consideration as we move forward. 

To clarify with an example:

Farm 1234 has 520 base acres and planted 260 acres to dry beans from 2009-2012.  He has 455 corn acres and 65 acres of dry beans.

Farm 5678 has 520 base acres and all acres were planted to corn from 2009-2012.  520 corn acres.

In 2015, all acres are planted to corn on these two farms.  The farmer is paid based upon the 455 corn acres in Farm 1234 and Farm 5678's 520 corn acres.  No payment is made on dry bean acres.

In 2016, all of Farm 1234 is planted to corn.  390 acres are planted to corn on Farm 5678 while the remaining 130 acres is planted to dry beans.  Farm 1234 receives a payment on its 455 corn acres.  Farm 5678's payment is reduced by the 130 acres planted to dry beans, leaving 390 payment acres of corn.

Page 19 of Farm Bill

(e) EFFECT OF PLANTING FRUITS AND VEGETABLES.—(1) REDUCTION REQUIRED.—In the manner provided in this subsection, payment acres on a farm shall be reduced in any crop year in which fruits, vegetables (other than mung beans and pulse crops), or wild rice have been planted on base acres on a farm.

[riskmatters]

Possibility of Profitability?

Today, profitability in agriculture seems less likely than a Trump presidency.

-Redacted 11/8/16-

Today, a profitable ag economy seems impossible in the immediate future and very unlikely in the near future.  

What should farmers do aside from reducing costs? (Article here in case you didn’t realize that reduced costs improve profitability.)

Here is the problem.  It’s going to be really hard to farm without fertilizer, seed, fuel, equipment, and land.  While it is important to carefully manage these expenses, there is only so much a producer can do.  Below are a couple of items to consider as you make seed and crop insurance purchases.

What are my recommendations as a seed dealer?

Consistency is king.  High risk, high reward hybrids may leave you with subpar yields and some free seed.  That’s not going to cut it.

Stick with what works.  While it is important to get new hybrids on your farm, most acres need to be planted to solid agronomic products with good yield potential.  

If it sounds too good to be true?  It probably is.  The seed that is $75/unit cheaper with limited trait packages is priced that way for a reason.  Ask questions about trait packages, view plot data, involve your agronomist.

What are my recommendations as a crop insurance agent?

Know your risk.  Different products and coverage levels carry different risk exposures.  Stress test your financial ratios against different products and yield scenarios to make sure your crop insurance products match your risk tolerance.

All crop insurance is not created equal.  While MPCI rates are identical, hail rates are not.  In 2015, we saw differences greater than $10 per $100 of coverage.  For a producer purchasing $300 of hail per acre on 2,000 acres, this is a $60,000 difference in premium for the same product!

Take a deep breath.  Evaluate your loss ratios to see if your current plan has been effective in managing premium, coverage, and deductible.  If it has, consider small modifications to this plan.  If it hasn’t...  Call me?

[riskmatters]

Will I Trigger?

As the harvest price for spring crops will be set on 10/31, it is important for producers to know where potential revenue losses might exist and take due diligence during harvest to properly account for all bushels as federal crop insurance losses require accounting for all production.  Will you trigger a loss on any units this year?  

Corn

Spring Price $3.86

Fall Price on 10/26 $3.48

Harvest Price is 90% of Spring Price

To quickly estimate your yield trigger, add 10% to your coverage level and multiply it by your proven yield.

For example, 75% MPCI coverage level with 190 bushel proven yield would be calculated as:

(75%+10%) x 190 = 161.5 bushels per acre.

Will you trigger?

Probably not.  In all likelihood, we will only see federal crop losses on irrigated units that have been hailed on or dry land units that didn’t catch enough rain.

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Now let’s second guess ourselves.  What if we would have purchased an 85% enterprise unit policy?  Would that policy have triggered?  Using the same numbers as in the previous example, let’s evaluate.

(85%+10%) x 190 = 180.5 bushels per acre.

Once again, this loss would only trigger in situations where drought or hail has caused a previous loss.

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Have a safe and productive harvest!

Disclosure:  Estimate is exactly that.  This is a really simple way to get a feel for what your guarantees are and is simpler than 190*.75*3.86/3.48 and then adjusting yields based on moisture...  If yields are going to approach loss triggers, communicate with your crop insurance agent and adjuster!

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Current Prices

[riskmatters]

ARC & PLC Payments

In the words of Donald Trump, ARC-CO payments are going to be ‘YUGE’!  Maintaining the true spirit of this election season, I will promise ‘YUGE’ payments and then glide over the fact that these payments will be sequestered by close to 7%, are only on 85% of base acres, carry $125,000 payment limits per person ($250,000 for a married couple) and will be drastically reduced in 2016.  (But wait, isn’t it 2016 now?  Yes, but ARC payments have a year drag.  The payments made this fall are for the 2015 crop year as the marketing year began in September of 2015 and ended in August of 2016. I’m expecting the 2016 payments to be half or less of 2015 payments.)

Moral of the story:  These payments are going to help producers keep things together, but don’t plug big ARC-CO payments into your 2017 cash flow.

Chase County Corn: $87.81 IR & NI

Hayes County Ir Corn: $95.75 IR, $31.21 NI

Perkins County Corn: $97.34 IR, $35.44 NI

Dundy County Corn: $93.10 IR, $23.57 NI

Phillips County (CO) Corn: $102.63 IR, $33.86 NI

Yuma County (CO) Corn: $95.22 IR & NI

What about PLC?  PLC triggered a $0.09/bushel loss.  However, if prices remain at current levels, PLC will trigger a much larger payment in 2016 as the guarantee is $3.70.

Links:

ARC/PLC Fact Sheet

ARC MYA Prices

PLC Prices

ARC Payment Map

For full worksheet with payments for all counties and all crops, contact me at 308.883.0803 or [email protected]

[riskmatters]

Crop Insurance in Crosshairs

Summary & Opinion: I don’t think it is likely that federal crop insurance will be eliminated or replaced at this time.  However, I do believe it is likely to see premium subsidy caps & reduced premium subsidies in the upcoming farm bill.  In other words, farmers will pay more for their crop insurance.

Link to Article 

In general, most farmers don’t give me the impression that Washington, D.C. has their back.  Lot’s of dirty looks and four letter words.  I understand why, but I’m going to ask farmer’s to engage with D.C. as the next Farm Bill approaches, because crop insurance will be directly targeted in the 2019 Farm Bill.  Below is a brief summary of potential changes to federal crop insurance as we know it.

1 - Status Quo: Farmer’s best option, but farmers will really have to make their voices heard.

2 - Free Crop Insurance Through FSA: Crop insurance critics (& FSA lobbyists) favor this option as it would eliminate private sector delivery, loss adjusters & leverage underutilized FSA employees (no additional operation costs).  This is free, but it would also be county based and for that reason, would perform more like the current farm bill.  In other words, it will provide no field level protection and will likely force producers to purchase much more hail insurance to protect their farm’s risk exposure.

3a - Eliminate Subsidy on Harvest Price Option: This protects producers from having to replace forward contracted bushels at higher prices in fall should prices increase & producers experience a federal crop insurance loss.  Federal crop insurance only covers about half of expected production, so the value of the Harvest Price Option only kicks in when farmers have large losses.

3b - Cap Subsidy Dollars a Producer Can Receive: Much like the ARC program has a $125,000 payment cap per person, crop insurance could employ similar methodology to cap premium subsidies.  

3c - Reduce RMA Share of Cost:  Pretty simple, if premium subsidy is 55%, cut it to 45% and move forward with program.

4 - Eliminate Federal Crop Insurance & Move to Free Market:  Private insurance would be simple for producers to navigate as much regulation would be removed.  However, a 75% policy would likely jump from $17/acre to $38/acre.  Ouch!

[riskmatters]

Monsanto Accepts Bayer Offer

$128/share or $66 billion deal creates largest seed/crop protection/trait company in industry.

I'm expecting a lot of noise followed by a lot of business as usual.  Why?  Big, complex companies that compliment one another more than they compete.  There will be some consolidation to be sure, but the stakes are high and any big changes will likely be years down the road.

[riskmatters]

Mergers Galore

Last week, the DOJ blocked the John Deere / Precision Planting merger.  The two companies own 86% of high-speed planting sales.  (More details here.)

ChemChina has finalized a $12.7 billion loan to purchase Syngenta.  This move will help ChemChina access Syngenta’s intellectual property and potentially faciliate biotech crop adoption in emerging markets. (WSJ Article) (More about ChemChina).  This deal feels like its about access.  For ChemChina, access to Syngenta’s intellectual property and for Syngenta, access to new and emerging markets.  Syngenta’s seed market share is small and I wouldn’t expect this deal to bring big changes for the better or worse.

Dow-Dupont merger is on hold due to EU antitrust regulators requesting additional information, but for now we can assume that they will be able to navigate regulatory waters and get a deal done.  Dow has the chemical footprint and Dupont has the seed footprint, so this deal makes sense for both companies.  Expect consolidation within their seed brands over the next several years.  Based on the size and complexity of this merger, I’m guessing any big changes are years down the road.

Bayer is looking to purchase Monsanto and recently raised it’s bid to $127.60 per share from $125 (WSJ Link).  Once again, this move makes sense for both companies as Bayer's strength lies in chemicals and Monsanto’s strength is the seed business.  Once again, I expect continued consolidation within these companies’ brands during the next few years.

BASF was once rumored to be in line to purchase Monsanto, but now appears content to stand on the sidelines and wait for business segments that become available due to anti-trust requirements from the above mergers.  (Article from AgWeb)  It’s hard to believe BASF will sit on their hands in this environment.

Time will tell if these mergers bring the greatest value to producers or shareholders.  It will also be interesting to see how smaller, privately owned brands compete.  Will they leave their business model as it is or pursue their own mergers (BASF?) to combat the massive R&D resources held by what looks to be the big 3.

(Diagram outlining seed brands and ownership from MSU)

[riskmatters]

Dirt

**Disclosure: I’m not an economist, appraiser, real estate agent, big time investor or super smart crystal ball reader.  I’m interested in land values as they impact my customers’ cash flow, balance sheet and risk management needs.  I’m also interested as land values and rents impact my cash flow, balance sheet and risk management needs...

These numbers are pulled from the University of Nebraska Real Estate Report using numbers for Southwest Nebraska.  As real estate values are localized to a field level, consider these numbers generalizations.  Numbers date back to 1981.

What are we looking at?

-The relationship of rent to the value of land is at a 30 year low.  This makes some sense due to low interest rates which result in low borrowing costs as well as low competitive returns on secure investments at the bank. (Savings accounts, CDs, etc.)

-The amount of rent paid relative to gross farm revenue dipped during the boom from 2006 - 2012.  The correction is in full swing.  Something has to give.  We either need a recovery in commodity prices, 400 bushel corn or an adjustment in land values and rents.

So....  

Using 30 year averages and assuming $3.50 corn, irrigated cropland in Southwest Nebraska needs to dip 55%.  This does not reflect interest rates that are at all time lows so I don’t expect a 55% dip in land prices.  20%? 30%?  Absolutely.

Rent has to dip as well.   Land owners are going to balk as taxes in 2015 are 180% higher than 2008.  However, while rent to revenue ratios are not historically ugly, they don’t reflect increased production costs including fertilizer, equipment, chemical, seed, etc.  Something has to give.  If it’s not production costs, it will be rent.

[riskmatters]

Rather than relying on the current antagonistic framing of the opposition as either an ethically clueless science or an irrational mob, perhaps trusted and independent third parties can provide transparent, agnostic, and even-handed assessments for each GMO. These proposed assessments would include expanded pre-market evaluations and substantial post-market surveillance as is typical in the pharmaceutical industry, to determine, among other things, any unintended changes in nutrients, toxins, and allergens within the GMO foods. These third parties should also acknowledge and take into account any valid ethical and social concerns that already drive much of our GMO policies. It’s also important to realize that the technologies and their effects are in constant flux, and assessments and surveillance must take into account the continued evolution of the field.

[riskmatters]

Cow Fart Crisis

Okay, it’s not just cow farts.  Cow Fart & Burp Crisis.  Is the future grass fed, methane backpack carrying, omega 3 supplemented cattle?

Bloomberg Article

[riskmatters]

LDP Updates

Daily LDP Rates Here

More Information on LDP from K-State’s Art Barnaby.

[riskmatters]

Updated ARC Payments

Remember, ARC payments are on 85% of base acres.  Planted acres are irrelevant.  ARC payments are also dependent on county yields.  This is probably most important for dry land as there is greater yield variability.  For example, I would not expect a payment on non irrigated wheat in Chase County.  The trigger yield for an ARC payment is 51.6 bushel per acre wheat.  Aside from a small number of acres that were hailed out, most yields were a lot closer to 80 bushels per acre than 50.)

Bottom line - excluding some non irrigated acres, large ARC payments can be expected on all crops not named grain sorghum.

Corn

Wheat

Soybeans

Sorghum

If you are interested in seeing historical yield data from NASS, email me with crops and counties of interest.  I will forward a spreadsheet with relevant data.  [email protected]

NASS Statistics

[riskmatters]

Revenue Loss in 2016?

The silver lining for the 2016 wheat crop has been found in some tremendous yields.  However, we are still working on getting some revenue claims paid out due to lower prices.  See the example below.  As a basic rule of thumb, those of you with 75% coverage will trigger a loss just below your APH.