As we have discussed in this blog before, the Obama administration is going forward with $6 billion in cuts to the crop insurance program.  This will end up slashing agent commissions that have been as high as 30% of premium.  Under the new plan, these commissions will now be capped at around 18% of premiums earned.

Insurance companies will also see their long-term return declining from an average of 17 percent to about 14.5 percent.  Of the $6 billion in savings, $4 billion of it will go toward reducing the federal deficit with the other $2 billion going to other USDA programs.

Anytime that you have an industry earning upwards of 17% on a long-term return and being subsidized by the government, we knew that cuts would be coming in this environment.   Also, as discussed in this blog, many of the counties that used to have crop insurance no longer have crop insurance.  It will be interesting to see how these cuts affect farmers going forward.  My guess is that it will not be favorable.

Alan Kluis of Sucessful Farming has a very good article on marketing and lock in in your crop insurance plans for the upcoming crop year.  In the article, he indicates you need to allocate your bushels between insured bushels (A bushels) and non-insured bushels (B bushels).  On the insured bushels, you need to meet with your crop insurance agent and figure out the best crop revenue insurance policy for your farming operation.  He indicates one of the benefits of these bushels is that it reduces your financial risk if you get a large portion of your crops sold ahead.  It allows you a “license to sell”.

The A bushels (the insured bushels) are the bushels that you can aggressively sell ahead by hedging since you have insured them.

The B bushels (the non-insured bushels) will be price protected with put options.  However, the key question is what price level.  The difference can be $15 per acre for corn and $10 per acre for soybeans.

Here are 7 questions that Alan says will help evaluate which policy is best for you:

1. What is the price guarantee that you can lock in when the average February price is computed on February 26, 2010.
2. How high is your actual production history (APH) versus your farms productivity.  The higher your APH the more revenue you can lock in.
3. What is the price level of the CRC guarantee compared to the actual price at the March 13th signup.  A higher market price on March 13th makes putting on more hedges a possible better alternative than buying higher percentage CRC policy.
4. Does your farm qualify for a lower cost enterprise discount?  This can be a huge cost savings or allow you to buy a higher guarantee.
5. What are your yield prospects for 2010.  If you still have your 2009 corn crop out in the field as you read this, it may make getting a bumper crop difficult.
6. Are you comfortable using hedges or hedge to arrive contracts to get the crop forward sold?  The most profitable farms that he had worked with in 2009 had their crop mostly sold ahead by summer.
7. Can you use puts to get price protection on your B bushels.

As he indicated “The most profitable farms I worked with this year had a lot of corn and soybeans sold ahead by mid summer.  They made money on the hedges, money on the corn puts, lost money on the soybean puts, but most important, they harvested a great crop and they had a lot of revenue locked in on every acre they grew.”

This is a great article to read and I look forward to reading Alan’s column every month.

Marcia Taylor with DTN/The Progressive Farmer had a great post recently on the elimination of crop insurance under the Group Risk Income Protection (GRIP) and Group Risk Program (GRP) in over 1,000 counties across the US.  The primary reason for eliminating these counties were due to not reporting at least 30 yield reports or 25% of the acres for the county.  The USDA requires at least this amount of data in order to provide the insurance coverage.

Also, of the 1,062 counties that lost these insurance programs, only 310 counties were actually buying these types of insurance policies.  It appears that most of the counties affected were located in the South, Great Plains and Eastern part of the US.  Most the Mid West corn belt was not affected.  The decision eliminates this coverage for corn, soybean, grain sorghum, cotton and peanut producers.

Farmers in Lawrence County, Alabama say their maximum insurance yield reduced from 135 bushels per acre to only 60.  This insurance can be expensive.  GRIP with a harvest-price option cost $90 per acre as mentioned in the article, however, the return has been as high as $415 in 2007 and $222 in 2008 per acre for this particular county.  Payouts were as high as $614 per acre in Baca County, Colorado in 2008 largely due to the steep decline in corn prices.

However, these farmers need to realize they need to report their yields and if they do a good job of this, then the coverage will be available again.  The trends over time have shown that this coverage returns about $1.78 for every $1.00 of premium. 

GRIP has offered some of these growers superior coverage levels.  This coverage is no longer available and it may cost the farmers substantial losses to their bottom line.

Crop insurance has been available to farmers for many years.  Until recent years most of this insurance was based upon Actual Production History (APH).  Insurance products based upon Crop Revenue Insurance (CRI) have been introduced to enhance and/or replace APH.

Marcia Taylor of DTN/Progressive farmer had a good blog on how one farmer in Ohio is utilizing Crop Revenue Insurance as part of his risk management strategy.   One interesting paragraph stated that on a nationwide basis, CRI is now insuring about $33 billion of potential corn losses versus $4.3 billion for APH.   If total corn production is 12 billion bushels at an average of $3.50 per bushel, approximately 89% of the total US corn production is covered by crop insurance.

There are many reasons for this.  I think the primary reason is that CRI allows the farmer to lock in a guaranteed revenue level per acre on a much more consistent and predicable basis than APH.  The Iowa State University has several Ag Decision Maker articles on how all of these programs work.

I think that all farmers should carefully review these available crop insurance options and work with your financial advisor, banker and insurance agent to determine which is best for you.  At a minimum , you should make sure to lock in your input costs .  Also, most bankers are going to require this to obtain an operating loan or renew one.

This time of year for most farmers is a period of down time. There may some crops that are planted, but dormant. Some farmers spend time maintaining their equipment for the new year.

I think this time is what I call “Go Time.” This is the time to:

• Prepare and review your operating budget for the new year. Some farmers treat this as a necessary evil for strictly for the bankers to give them a loan. I believe this is the road map that you need to have a successful year for the new crop year. By properly budgeting your production, revenues and expenses, you have a several clues where to change crop mix, cut expenses, or obtain adequate capital.
• Partner up with your banker. A banker wants you to succeed as much or more than you do. If you succeed, his bank has a loan that gets paid off and he gets rewarded by his peers and bosses. I believe the lender relationship should be a partnership. As a partner, you need to communicate your problems sooner than your successes. A good banker is always interested in helping you solve yours problems. This is the time to spend energy and effort with your banker.
• Review your retirement plans. Check the allocations to make sure the returns are what your expected for the year. Update your retirement projections to reflect any changes to expected future income, changes in assets and changes in retirement age considerations.
• Check your insurance needs. This includes:
  • Health insurance – Look at a health savings account
  • Life insurance – Are you providing adequate funds for your spouse and children?
  • Crop insurance – Check out all available options and run the numbers
  • Liability insurance – Is your protection adequate?
• Review your estate plan. When was the last time you read your will or living trust. If more than two years, do it now!

There are many other things that can be done this time of year to make the new year a success. The key is to do them (you will still have time to take a trip where it is warm and play golf).