Crop farmers are familiar with the risks and uncertainties that come with their profession. Weather conditions, market fluctuations, and other factors can greatly impact their profitability. Fortunately, there are insurance options available to help mitigate these risks. One such option is margin protection insurance.
Margin protection insurance is a type of crop insurance that provides revenue protection based on the difference between the projected margin and the actual margin for a covered commodity. The discovery period for margin protection insurance runs from August 15th to September 15th. This is earlier than the discovery period for most other crop insurance policies, which cover spring crops and occur in February. During the discovery period, price projections are made based on the average daily closing prices for new-crop contracts for the covered commodity.
As of September 13th, the projected price for margin protection insurance on 2024 corn is $5.09 per bushel, while it is $12.93 per bushel for soybeans. These price projections serve as a reference for farmers to assess their price outlook and make decisions about locking in multi-peril policies.
One of the major advantages of margin protection insurance is the ability to establish a floor on prices early on. This protection can help farmers ensure that their prices are above the cost of production, providing them with a level of financial security. Of course, the hope is that farmers never have to collect on the insurance, as that would indicate a bad crop year. However, having this safety net in place can provide peace of mind.
When considering margin protection insurance, farmers must also consider the coverage levels they want. Typically, Kansas farmers purchase revenue protection with 70% to 75% coverage. This level of coverage helps farmers repay operating notes and cover expenses in a bad crop year. However, higher coverage levels come at a higher cost. Premiums for high coverage options like margin protection, enhanced coverage, or supplemental coverage options can double or even triple compared to lower coverage levels. This “sticker shock” often deters farmers from considering these options.
Despite the higher premiums, an analysis by experts suggests that the program will pay out more in indemnities than what a farm pays in premiums over time. This means that farmers can come out ahead in the long run by opting for higher coverage options. However, it’s important to have a long-term perspective when evaluating the cost-effectiveness of these insurance options.
Comparing the cost of margin protection insurance to other hedging strategies, such as buying a put, reveals that margin protection is significantly cheaper. This affordability makes it an attractive choice for farmers looking to manage their risks effectively.
Crop insurance decisions used to be a “one-and-done kind of thing,” with farmers picking their insurance in the winter and living with that decision all year. However, today’s farmers have more at stake than ever before, and risk management should be a year-round consideration. Evaluating different insurance options, including margin protection, can help farmers make informed decisions and protect their profitability.
In conclusion, margin protection insurance offers crop farmers a valuable tool for managing risks and safeguarding their profits. By establishing a price floor and providing revenue protection, this insurance option provides a level of security and peace of mind. While higher coverage levels come with higher premiums, the potential for greater indemnities over time makes these options worth considering. Farmers should carefully evaluate their risk management strategies and consider margin protection insurance as part of their overall risk management plan.