Is Margin Protection Right for Your Crop Insurance?
The beginning prices for 2020 futures for corn, soybeans and even spring wheat are looking good—especially compared to current prices. With the ever-present possibility of rising input costs, and the possibility of increased acres impacting the market as well, wouldn’t it be great if there were a way to protect your margins?
Within the FBN insurance portfolio, farmers have the opportunity to purchase Margin Protection (MP). MP gives producers the opportunity to lock in a 2020 margin guarantee not tied to actual grain sales or input purchases.
This product protects your expected operating margin—the difference between your expected revenue and expected costs. In certain areas, it is available for corn, soybeans, spring wheat and rice.
MP is a great choice for farmers whose yields are consistently in line with county yields, and who would like a county-based policy without having to give up their preventive plant or replant coverage. Since MP is well subsidized at the highest levels of coverage, it is also a good choice for those who are interested in 95 percent coverage level.
Each year the number of MP policies written increases, as producers see the benefits of higher coverage levels. We anticipate some large indemnities to be paid in 2019 due to both yield losses and price decreases.
Understanding the Mechanics
With MP, the crop yields are based on county data, crop prices are based on futures markets and input costs are based on regional prices. The policy also takes into account a variety of factors, including changes in crop prices, reductions of yields and changes in the prices of inputs used to grow the crop. MP uses the same harvest prices as Revenue Protection (RP), but bases its 2020 expected county yields on historical RMA data for the county. In the past, this was based on NASS data. Coverage levels can range from 70-95 percent.
Farmers also have the option to choose between MP and MP with the Harvest Price Option (HPO). The HPO provides protection on loss at the higher of the price projected before planting or the price at harvest. Farmers can also choose to buy a base policy—such as Revenue Protection or Yield Protection—and get a credit on the MP premium, allowing them to receive protection from the greater of losses.
By the sales closing date, you make the decision of whether to choose MP or MP with HPO. You also have to select your coverage Level and Protection Factor. It is also important to note that the MP policy and base policy must be written (or transferred) with the same company at the time the MP policy is purchased.
So What Are the Expected Costs?
MP doesn’t measure growers’ actual costs. Assumptions are made based on regional agronomic conditions to establish the quantity of key inputs. These are based on the Expected County Yield and the volume of an input needed to grow a bushel.
So what are your expected costs? These can include variable costs, such as fuel, nitrogen, phosphorus, potassium and interest; alongside fixed costs, such as seed, machinery and other operating costs.
Let’s Do Some Math
Here’s an example of how this works:
Restrictions on Margin Protection
There are some restrictions on MP. It cannot be coupled with catastrophic (CAT) or other area-based coverage, and MP acres cannot be high risk acres excluded from a CAT policy. MP also cannot be used on acres covered by a High Risk Alternate Coverage (HRACE) base policy.
Also, there is no Prevented Planting or Replanting coverage with MP, but it can be supplemented through another base policy that includes it.
It is also important to note that payments are made in the spring of the following year after county yields are released, so cash flow would need to be managed to account for this. However, adding an RP base policy would allow for that part of an overall indemnity to be paid once the individual loss is calculated.
Sales Deadline for Margin Protection
Margin Protection for 2020 crop year must be purchased by 9/30/19 for corn, soybeans and spring wheat. Check with your agent for area-specific dates and details for rice.
Want to know more? Check out this 30-minute Margin Protection webinar to better determine if MP is the right option for your farm operation.
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We are an Equal Opportunity Provider. FBN Crop Insurance services are offered by FBN Insurance LLC (dba FBN Insurance Solution Services LLC in Texas, and FBN Insurance Solutions LLC in California and Michigan) and are only available where FBN Insurance LLC is licensed. FBN membership is not required to purchase through FBN Insurance LLC, but certain features are only available to FBN members. FBN Crop Insurance is currently offered in the following states: AL, AR, AZ, CA, CO, FL, GA, IA, ID, IL, IN, KS, KY, LA, MI, MN, MO, MS, MT, NC, ND, NE, NM, NV, NY, OH, OK, OR, PA, SC, SD, TN, TX, UT, VA, WA, WI, WV, WY.
The purpose of the following material is to promote awareness of risk management concepts and to highlight risk management products, features, benefits and availability. This presentation does not provide full details of policy provisions or approved procedures. Producers should consult with a local agent for specific details and program requirements.