Managing the uncertainty of ’23 crop margins

Growers are already making plans for the ’23 crop as they purchase fall fertilizer and book fuel needs. The University of Illinois recently released an early estimate for ’23 crop costs versus those of the ’22 crop. Non-land costs are expected to increase 9% for corn and 6% for soybeans, respectively. Most ag economists expect inflationary pressures and geopolitical issues to continue that could result in extreme crop margin volatility. 

“Growers should focus now on estimating their ‘23 crop margins and put together an early look at their own budgets. Also, consider a risk management tool called Margin Protection (MP) crop insurance,” says Steve Johnson, retired Iowa State University Extension farm management specialist.

• READ MORE: Consider margin protection for your 2023 crops

MP for the ’23 crop provides coverage against an unexpected decrease in operating margin (revenue minus select variable input costs). It is area-based plan, using both expected and final county yields along with nationally indexed variable costs. An indemnity payment may be made when the harvest margin falls below the trigger margin due to a decrease in revenue and/or an increase in those input costs.

Here are some details of the program:

• Available for spring planted commodity crops (corn, soybeans, and spring wheat) in 22 different states.
• It can be purchased by itself, but is usually added to a Yield Protection (YP) or Revenue Protection (RP) base policy.
• An MP indemnity may be paid when final county yields are available on June 16, or roughly 6 months after crop is harvested.
• Insured must purchase MP coverage for the ’23 crop from their crop insurance agent by Sept. 30.

“The discovery period (mid-August to mid-September) is for both the projected price and those select variable costs,” Johnson says. “MP coverage is focused on the ‘23 spring planted crops and uses those futures price averages for ’23 December corn and ’23 November soybean futures prices. So, if you're thinking that these variable costs are going to increase, or futures prices and/or county yields will decline, then MP should create even more interest.”

Johnson says this add-on shallow loss product is a good fit for farmers whose farm yields track with the county average yields, and they typically buy 80% to 85% RP coverage as a base policy annually before March 15th.

MP can be bought at up to the 95% coverage level. Since it uses county yield averages, growers should focus on purchasing the higher levels of coverage to have the most benefit for the policy triggering an indemnity should a margin shortfall occur. The product is subsidized by the federal government in a range of 44% to 59%, depending on the leverage of coverage elected. 

“I think MP could work well again this next year as we’re already at high new crop futures prices and the input costs are not expected to decline. Remember, spring projected prices for both RP and YP products are not determined until the month of February,” he says.

Growers should pay attention to the futures closes for ’23 December corn and ’23 November soybean contracts starting in mid-August. They should begin to discuss with their crop insurance agent the potential benefits of MP coverage and if it is a good fit for their operation. Don’t forget the Sept. 30 deadline to make your purchase decision as actual MP premiums will not be known until after the discovery period that ends in mid-September.