Sept. 18, 2014

As Nebraska wheat growers gear up to put their 2015 crop in the ground, it's time to look at crop insurance options for the coming year.  The price discovery period for insurance on wheat just ended and the sales closing date is Sept. 30.

USDA's Risk Management Agency (RMA) uses market prices to determine the price component of the insurance coverage. The "price discovery" period for wheat in Nebraska runs from Aug. 15 to Sept. 14.  RMA calculates the average price over this period for the September 2015 hard red winter wheat contract on the Kansas City Board of Trade. RMA calls this average the "projected price" for the coming year's crop.

The projected price for 2015 wheat came in at $6.41/bushel.  Wheat prices have trended down for some months, and the $6.41 amount would be about 10% below last year's projected price of $7.11.  Price volatility for Revenue Protection (RP) coverage came in at 0.18, versus 0.20 a year ago. As a result, RP insurance premiums for the same level of coverage should be significantly cheaper than a year ago.  Producers who haven't added the Trend Adjustment component to their policy should also take a look at this feature, which allows upward adjustment to APH yields to reflect improved yields over time.

About 92% of last year's 1.35 million acres of wheat in Nebraska was covered by multiple peril crop insurance.  Crop insurance participation was already high before the 2012 drought but seemed even more attractive as the drought in wheat growing areas extended through much of 2013.  Producers' biggest response to the 2012-13 drought may have been to purchase higher levels of coverage, with the 75% level now the most popular one in the state. Revenue Protection (RP) is far and away the most popular form of coverage, with about 92% of insured wheat acres in Nebraska covered by this type of policy.

RP coverage protects against price declines as well as yield losses.  The "harvest price" for revenue coverage will be the average price during July 2015 for the September 2015 HRW wheat futures price.  A grower with a 75% RP policy, for example, could realize average yields but still collect from revenue insurance if prices fall by at least 25%.  This downside price protection is sometimes referred to as an implied put option, since it has a price floor effect somewhat similar to out-of-the-money put options.

Figure 1 shows the projected wheat price for the 2015 crop in Nebraska and these implicit price protection levels if yield came in at its Actual Production History average.  For example, growers with 75% RP coverage and yields at their APH average would receive an indemnity if the harvest price came in below $4.82/bushel.

Growers are also reminded that crop insurance is an important component of their risk management plan in light of the new revenue and price safety net programs set in place by the 2014 Farm Bill.  The revenue safety net program, called Agricultural Risk Coverage or ARC, only pays on losses in the range of 76%-86% of historic average revenue; larger losses must be protected against by crop insurance.  The price safety net program, called Price Loss Coverage or PLC, doesn't protect against yield losses.  Producers should also take a look at the new Supplemental Coverage Option (SCO) insurance available under the 2014 Farm Bill (see related CW article).

Growers face a sales closing date of September 30 to obtain insurance coverage on their 2015 crop.  Growers are encouraged to check with their crop insurance agents for all the details.