For most of Oklahoma and Texas, the deadline for purchasing 2013 wheat crop insurance is October 1. Insurance coverage choices include Yield Protection, Revenue Protection, and Revenue Protection with Harvest Price Exclusion. Producers should work with their crop insurance agents to determine which coverage and how much coverage works best for them.
Several criteria should be used to make the purchase decision. In my opinion, being able to sleep at nights is the most important one. Simply put, “if not having crop insurance will keep you awake at night any time during the production year, buy insurance.” The reasoning behind this reasoning is that if you lose sleep, you will not be fully alert, and the odds are increased that you might do something stupid that will cost you more than whatever the insurance would have cost.
Other criteria include the odds of a payoff, the amount of financial risk you can afford, and whether or not you need to include crop insurance in your marketing plan. Factors affecting the odds of a payoff include the policy options, current soil and weather conditions, forecasted weather, and, if you purchase Revenue Protection, the current price of the Kansas City Board of Trade July 2013 wheat contract price.
Most of the U.S. winter wheat area is classified as under either severe or extreme drought conditions. Lack of moisture in both the top- and sub-soil increases the odds that crop insurance will pay off in 2013.
For Oklahoma and the Texas Panhandle, the 90-day NOAA (National Oceanic and Atmospheric Administration) forecast is for drought conditions to persist. The 90-day forecast is for normal precipitation. Above average precipitation is needed to break the drought.
The 90-day forecast is also for above average temperatures. Above average temperatures often involve above average winds. Drought conditions and the 90-day temperature and moisture forecast both increase the odds of a crop insurance payoff. (These forecasts apply to most of the winter wheat area.)
Two questions to consider: Will your current financial position allow you to self-insure; how much will a revenue loss affect your financial position?
Another step is to determine price risk. Yield protection policies only pay off for reduced revenue due to low yields. Both Revenue Protection policies pay off for losses due to yield and/or price.
At this writing, the guaranteed insured price is about $8.70 (hard red winter wheat). Historically, this number is at the top of the price range. The guaranteed prices were $8.62 for 2012, $7.14 for 2011, $5.62 for 2010 and $8.77 for 2009. Since the insured price is based on the average of the KCBT July 2013 wheat contract price during the time period August 15 through September 14, a 50/50 chance exists for the actual harvest price to be above the insured price (or below the insured price).
Because prices normally decline when yields go up, and prices normally increase when yields go down, and a payoff is normally triggered by relatively low yields, revenue policies (yield and price) normally pay off more than yield alone policies. That statement is a long sentence that basically says: If you’re going to buy crop insurance, consider the Revenue Protection policy.
If wheat will be forward contracted for harvest delivery, buying crop revenue coverage becomes more important. The revenue policy will help meet the forward contract obligation if enough wheat is not harvested to meet the contract.
The need to buy crop insurance varies from farm to farm and from producer to producer. Financial position and stress levels may be the most important criteria in the decision. When a decision maker is losing sleep, the ability to make good decisions is reduced.
If crop insurance will reduce the perceived risk and help you sleep, buy it.