Crop insurance prices out of line with markets

Market prices have declined on some commodities, making the insured price from crop insurance look generous by comparison. This has ramifications for producers who may be hit with low yields this fall.

The great debate about the size of the prairie crop will intensify in the weeks ahead. While crop potential is good in many regions, areas of significant dryness exist in each of the three provinces, meaning crop insurance may come into play for some producers.

In Manitoba, the Interlake region has been suffering. In Saskatchewan, there are pockets with poor crops throughout west-central and southwestern regions. In Alberta, some southern areas have suffered from lack of moisture.

It’s all highly variable, depending on where thunderstorms travelled, when crops were seeded and the moisture holding capability of the soil. However, many fields would appear to be borderline crop insurance claims.

On commodities where market prices have declined relative to crop insurance values, the worst situation for a grower is to have a crop yield that’s roughly equal to the yield guarantee. Consider the following example.

The price under Saskatchewan Crop Insurance for No. 2 large green lentils was set at 28 cents a pound. That price was based on market expectations early in the calendar year. However, the market price for fall delivery has declined to about 22 cents a lb.

If your 80 percent yield guarantee on large green lentils is 1,200 pounds per acre, your insurance coverage at 28 cents a lb. is $336 an acre.

If you grow a crop that’s 1,200 pounds an acre, matching your yield guarantee, you won’t be in a claim position. If the market price stays at 22 cents a lb., your revenue will be $264 an acre. A producer with a yield claim will end up in a much better position because crop insurance will pay out at a higher price per pound.

In this example, a complete crop failure is worth $72 an acre more than growing 1,200 pounds. It’s one of the perverse aspects of how crop insurance programs work. It’s also something to keep in mind when running financial scenarios. It’s inaccurate to assume that you can do no worse financially than your crop insurance coverage if market prices drop.

Other crops are in the same boat. The Saskatchewan Crop Insurance price for red lentils is 18 cents a lb. while new crop price indications have now dropped to around 15 cents.

New crop mustard prices have dropped several cents a pound below crop insurance levels. The biggest discrepancy is with large kabuli chickpeas, which are 42 cents a lb. under crop insurance while market indications have declined to around 31 cents.

On most other crops, crop insurance values appear to be in the same ballpark and often a bit lower than new crop market prices, but of course market prices keep changing with all the factors at play.

Saskatchewan Crop Insurance values per bushel are $3.37 for barley, $10.55 for canola, $6.30 for field peas, $11.68 for flax, $5.58 for hard red spring wheat, $2.39 for oats and $10.21 for soybeans.

Like any other insurance, we should buy crop insurance hoping to never collect. However, it’s important to analyze coverage levels and realize that crop insurance is production insurance, not price insurance.

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