Crop insurance guarantees for Revenue Protection will be well below total costs for corn and soybeans across the Midwest in 2016 unless harvest prices are dramatically above projected prices. Guarantees have decreased from 2012 through 2016, causing the difference between total costs and guarantee levels to increase over time. The difference between costs and guarantees will not shrink until a combination of higher prices or lower costs occurs. Revenue Protection (RP) is the most popular crop insurance product, being used to insure 76 percent of the acres planted to corn in 2015. RP is a revenue insurance whose guarantee will increase if the harvest price is above the projected price. The mathematical form of the guarantee is: max (projected price, harvest price) x guarantee yield x coverage level. The projected prices for corn and soybeans grown in the Midwest are set based on the average of settlement prices on the Chicago Mercantile Exchange during the month of February (December contract for corn, November contract for soybeans). Harvest price is again based on settlement prices of futures contracts. For corn and soybeans in the Midwest, averages during the month of October are used. In the above calculation, the price used in the calculation is capped at two times the projected price. Guarantee yield usually is the Trend Adjusted Actual Production History (TA-APH). When complete data exists, the TA-APH yield equals the previous 10 years of yields on that insurance unit, adjusted upward to account for trend. Coverage level is selected by the farmer. It ranges from 50 percent to 85 percent. In the following discussion, focus is given to the minimum revenue guarantee, without considering potential increases caused by a higher harvest price. The minimum revenue guarantee provides the farmer the crop insurance safety net for a year. As an example of calculating the minimum revenue guarantee, take the 2016 projected price of $3.86. For a 196 bushel per acre TA-APH yield and an 85% coverage level, the minimum revenue guarantee is $643 (196 guarantee yield x $3.86 projected price x .85 coverage level). The minimum revenue guarantee will depend on the level of the projected price. The projected price for corn averaged $2.48 per bushel between 2000 and 2006. Projected prices then increased, with the highest projected price of $6.01 occurring in 2011. Since 2011, the projected price has decreased each year. Projected prices were $5.68 in 2012, $5.65 in 2013, $4.62 in 2014, $4.15 in 2015, and $3.86 in 2016. Revenue guarantees over time In an example from Logan County, Ill., the guarantee yield increased from one year to the next in most years. For the 85 percent coverage level, the guarantee yield was 161 bushels per acre in 2001, increasing to 196 bushels per acre in 2015. The example also included total costs for producing corn on farmland that is cash rented. Total costs increased until 2013, and then have remained relatively stable. Revenue guarantees for 85 percent coverage levels exceed total costs in three years: 2007, 2009 and 2011. These years were unusual: Prices had risen while costs had not reached their highest levels, leaving guarantees above total costs. On an 85 percent coverage level product, the guarantee was $929 per acre in 2012. From this 2012 high, the guarantee decreased each year. If guarantees do not increase because of higher harvest prices, farmers will incur significant losses before crop insurance payments bring total revenue up to the guarantee level. In 2016, total costs on cash rent farmland are projected at $830 per acre. Average guarantees in Logan County are $452 per acre on a 65 percent coverage level and $642 per acre at an 85 percent coverage level. Before payments occur, the farmer would incur a loss of $188 at an 85 percent coverage level. Higher harvest prices could increase guarantees to the level of total costs. At an 85 percent coverage level, a harvest price above $4.98 per bushel would result in a guarantee equal to $830 per acre, the estimate of total costs in 2016. A $4.98 price is 29 percent higher than the $3.86 projected price. Since 1972, October settlement prices were more than 29 percent higher than projected prices in only two years: 1988 and 2012. In both years, severe droughts occurred in the Midwest. While a drought of that size is possible, chances are that a drought that size will not happen. A similar situation exists for soybeans. The 2016 projected price is $8.85 and the average guarantee yield in Logan County is 57 bushels per acre. Guarantees are $307 on a 65 percent coverage level revenue product and $431 per acre on an 85 percent coverage level product. Total costs for soybean production on cash rent farmland are projected at $629 per acre. Total costs exceed the 85 percent guarantee by $198 per acre. Source - iowafarmertoday.com