Crop insurance decisions are a big part of your risk management plan, and without a clear picture of how a policy can add value to your operation, it can be difficult to understand how different options, including Margin Protection coverage, can help protect your bottom line.
The following case studies demonstrate the outcomes of two real-life scenarios in which Margin Protection helped producers make confident and informed decisions and feel more in control of the uncontrollable.
Case Study 1:
Anticipating Price Increases in the Market
Farmer A | 2,900-acre Corn & Soybean Operation | Northwest Iowa
Farmer A predominantly raises commercial corn and some commercial soybeans on 2,900 acres across one county in northwest Iowa.
Producers in northwest Iowa experienced prolonged wet weather and excess moisture during the 2018 and 2019 crop seasons. Then, in 2020, rising input costs made it difficult to profitably raise a crop with midsummer local cash corn markets averaging $2.80-$3.00. These events set the stage for Farmer A to look closely at his production costs and consider utilizing Margin Protection to hedge his operation at profitable market levels.
Farmer A worked with his FCSAmerica crop insurance officer to analyze market trends, yield history, profitability, subsidies, county yield history, and RMA yields versus county expected yields. The analysis revealed RMA corn yields consistently lagged the expected county yield. This was an exceptionally rare finding that helped Farmer A make a decision on his corn acres that had been tracking below county yields.
Using Optimum, FCSAmerica’s proprietary crop insurance tool, Farmer A was also able to determine the optimal usage of his premium dollars and pinpoint his potential return on investment.
As a result, Farmer A purchased Margin Protection in the fall of 2020 for the 2021 crop year at the 95% coverage level, the maximum allowed, with a 120% protection factor on corn acres.
The policy was combined with Revenue Protection on corn as Enterprise Units at 80% coverage level, with $400 of hail and wind, and on soybeans as Optional Units at 80% coverage level, with $350 of hail.
For Farmer A, selecting Margin Protection coverage was all about protecting himself with regard to commodity prices and input prices. While Farmer A felt confident he could profitably grow a crop by closely monitoring expenses and factors in his control, Margin Protection was offered as an opportunity to reduce his risk if yields and prices were below expectations.
Farmer A tracked well alongside county-level data, except for a few years when hail damage occurred. That’s why he paired Margin Protection with a good hail policy.
In the end, there was no claim on either the Revenue Protection policy or the Margin Protection policy. In this scenario, Margin Protection was primarily used as a hedging tool on both input and commodity prices. “Ultimately, Margin Protection made me more confident with my grain marketing knowing I had 95% floor locked in.”
Case Study 2:
Protecting Profits, Improving Working Capital
Farmer B | 5,300-acre Corn & Soybean Operation | North Central South Dakota
Farmer B primarily grows a rotation of corn and soybeans, and some wheat on 5,300 acres across three counties in north central South Dakota.
Coming out of a wet cycle in the fall of 2020, producers in north central South Dakota were concerned. County yields for the area had been on a solid run and commodity prices were adequate, but with strong crop production, a decline in price was a plausible risk. And while input costs were reasonable, they were more likely to increase than decrease. The wet cycle and variable yields had impacted Farmer B’s working capital position. All together, these factors made Margin Protection an attractive risk management tool for locking in a price floor and providing coverage against rising input costs.
An evaluation of historical data proved valuable to Farmer B. Optimum, FCSAmerica’s proprietary crop insurance tool, compared Farmer B’s yields to county yields, analyzed scenarios and determined which coverage plan was likely to perform the best going forward. More than 20 years of data demonstrated that an area plan would provide coverage for the risks Farmer B was most concerned about.
Based on the analysis, Farmer B purchased Margin Protection in the fall of 2020 for the 2021 crop year on corn at the maximum 95% coverage level and 120% protection factor. This election was made on the crop and county for which Farmer B had the most planted acres, and therefore, the most risk.
The Margin Protection policy was purchased in conjunction with Revenue Protection, which was locked in at 75% for corn and beans.
Having a sound risk management plan provided Farmer B with peace of mind when it became apparent yields would be lower than expected. Input costs rose and the weather pattern turned from wet to dry rather abruptly, which tempered aggressive selling.
Farmer B elected Margin Protection on the crop and ground that, historically, tracked closely with the county average yield. Farmer B consistently outproduces the county, and this was the case again in 2021 by a significant margin.
Ultimately, Farmer B received a small indemnity under the Revenue Protection policy and a sizable indemnity under the Margin Protection policy. “With the way inputs went, fuel prices caught me by surprise, but with Margin Protection in place, I was able to improve my working capital.” Not only did the producer strengthen his financial position – his risk management plan put him in a position to step out and purchase real estate.
Backed by a team of highly trained specialists and exclusive crop insurance technology, FCSAmerica has the tools and resources to help you make confident and informed decisions whatever your risk management goals.
To start a conversation about adding Margin Protection to your operation, reach out to your Farm Credit Services of America insurance officer or complete the request form.