Crop insurance continues to be the number one method used to mitigate the financial risks involved with growing a crop, and this year Margin Protection and the Enhanced Coverage Option deserve a closer look.
Both programs are quality tools to reduce financial risk on the farm as 95% coverage is available with higher subsidy percentage than other alternatives. Let’s compare and contrast the programs.
Margin Protection is an area-based insurance plan for corn and soybeans that provides coverage against an unexpected decrease in operating margin (revenue less input costs), caused by reduced county yields, reduced commodity prices, increased prices of certain inputs, or any combo of these. Coverage is available up to 95%. It is important to remember that Margin Protection is an area-based insurance product. This means an individual’s actual performance in the 2023 crop year will not be a determining factor in how an indemnity is calculated.
Enhanced Coverage Option (ECO) is also an area-based insurance plan for corn, soybeans and wheat producers that provides coverage against an unexpected decrease in county revenue. Losses are caused from lower revenue from reduced county yields and/or reduced commodity prices. This area-based supplemental shallow-loss coverage shields loss from 86% up to 90% or 95%.
Both programs offer up to 95% protection. Margin Protection covers from 95% (the coverage you select) the entire way to down to $0, if both the Margin Protection and underlying policy have a claim then the Margin Protection policies claim is reduced. For ECO the protection is from 95% down to 86% and a producer could be paid for the full amount from 95% to 86% and it does not impact the underlying policy claim.
Do I need to purchase an underlying policy?
For Margin Protection an underlying policy is not required, however most producers still purchase their normal Revenue Protection policy. For ECO an underlying policy is required for which most producers purchase Revenue Protection. A producer could also purchase yield protection, but then the ECO policy is focused on county yield.
A producer can select Margin Protection with the Harvest Price Option or without. ECO matches the underlying policy, for most producers that is Revenue Protection, which includes the harvest price option.
Timeline to sign up
Margin Protection selection is different than you might expect - the sign up period for the 2024 corn and soybean crop is currently underway with a sign up deadline of September 30, 2023.
Enhanced Coverage Option sign up deadline for corn and soybeans is March 15, 2024, while the wheat deadline is September 30, 2023.
Since you can only pick one program, here are a few considerations to think about when deciding to purchase Margin Protection vs. waiting for ECO.
• Does the current Margin Protection guarantee provide you with the floor you need for 2024?
• Do you think prices could fall between now and February? Is so, Margin Protection would provide more protection.
• Do you think prices will rise higher going into February? If so, waiting for ECO and deciding then could be the better alternative.
How are guarantees set up?
Margin Protection Liability is county based with the producer selecting the “protection factor” to choose if they are a better producer than the county average or lower than county average. The producers can choose from 1.2 to .8 protection factor. If a producer selects 1.2 then they would receive $1.20 for every $1.00 the county has a loss.
ECO is triggered with a loss in the county, but the liability/guarantee is established based on a producer’s Actual Production History (APH). If a producer has a higher APH, then they have a higher liability.
So Why Should Producers be Looking at Margin Protection for 2024?
2024 Corn and soybean market prices are now at a price that allows most producers to operate at a profit. These prices could go up, but they also could go down. Margin Protection is unique in that it allows you to set a price for corn and soybeans now.
It’s important to note that Margin Protection is normally bought in tande
m with the more popular and well-known Revenue Protection product. A premium credit is even applied lessening the cost of Margin Protection when a Revenue Protection policy is purchased in tandem. Revenue Protection will gather prices for 2024 crop in February of 2024. If the price continues to go up, a producer’s Revenue Protection policy could secure that higher price in February. If prices go down, a producer may have established a muchhigher amount of coverage per acre than their respective Revenue Protection policy would afford them.
So How Does Margin Protection Work?
The United States Department of Agricultures Risk Management Agency (RMA) is the governing arm of crop insurance. RMA has determined the average expected yield for each county for the 2024 crop year. This bushel per acre average is multiplied by the 2024 projected price for the applicable crop creating an expected revenue. The projected price is determined by collecting the closing trading price of 2024 futures from August 15 to September 14 (December futures for corn and November futures for soybeans) and averaging them out. RMA then subtracts both fluctuating costs (diesel, interest, urea, potash, etc.) and fixed input costs (depreciation, labor, etc.) creating a margin. The fluctuating costs are given a projected price just like grain with the same time period being used for most.
Come harvest, the price of grain is established again, referred to as the harvest price, along with the actual county average yield. The fluctuating costs are also gathered again but with the harvest price discovery period being from April 1 to April 30, 2022 for most fluctuating inputs. If the harvest margin is less than the expected margin minus deductible, an indemnity is due.
This can be simplified with the following:
Margin Protection- Expected Margin (expected yield x projected price - input costs) x coverage level = Trigger Margin
Harvest Margin- (actual county average yield x harvest price – actual average input costs).
Trigger Margin- Harvest Margin = any applicable indemnity
Should you Purchase Margin Protection for the 2024 Corn and Soybean Crop?
GreenStone’s Optimum quoting software can greatly help producers evaluate the options and answer this question by looking at how this product would have performed historically for their operation, as well as offering the ability to perform “what if” scenarios, and profit and loss matrixes.
Be sure to contact your local GreenStone crop insurance specialist to see how Margin Protection would fit your individual farm.
If you want more certainty for 2024, consider purchasing one of these insurances which gives you up to 95% coverage.
To view the article in the online 2023 Summer Partners Magazine, click here.
