When you buy a bigger pickup truck, your insurance premium is going to be more, since the new truck has a larger pricetag. When you buy a larger combine, your insurance will increase to compensate for the increased value if the insurance company has to cover a loss. Maybe you have not yet factored in grain prices with your crop insurance premium, but when you do, it should come as no surprise that your crop insurance will cost more in 2007, because you are insuring a crop which has a much higher value. How much more will it cost? The farm gate can give you a pretty fair estimate.

When you moved from Multi-Peril Crop Insurance to Crop Revenue Coverage (CRC) or Revenue Assurance (RA) several years ago, your premium went up because you were moving from a bushel replacement policy to a revenue policy and since it was new, you were not surprised the cost was higher. This year there really won’t be any new types of insurance, but your cost is going up, all because the value of the crop is up. University of Illinois ag economist Gary Schnitkey provides a clear view of crop insurance issues in his January 19 Farm Management newsletter. He says the issue is a double edged sword, since your insurance will be coving a higher valued crop, but the premiums will be higher.

The calculation of what your coverage is going to be begins with fall delivery contracts at the Chicago Board of Trade. For 2006 that was $2.59 for corn and $6.18 for beans. The 2007 prices will be determined during the month of February, but may likely be more than $1 higher for each commodity. That February average of closing prices provides the minimum guarantee for CRC or the harvest price option for RA. If the fall price exceeds that, the fall price will determine your indemnity.

Schnitkey says with current CBOT prices, and at a 65% coverage level, your per acre guarantee will be $121 higher this year than last. At an 85% coverage level, current prices are giving you $158 more per acre. But to earn those indemnity amounts, your premium cost will go up, in part because of the higher base prices. The other part is the increased risk for a decline in prices. That is based on the grain options market, and with increased price levels and increased volatility in the market, there is the other reason for higher premium costs.

Schnitkey’s premium calculations for a Central Illinois farm with a 160 bushel APH yield indicates that a 65% CRC coverage in 2006 which cost $3.92 would rise to $5.51. But an 85% coverage level in 2006 with a $18.78 premium would cost $26.37 per acre this year. Those price volatility factors increase insurance premiums between $.50 and $3.00 per acre depending on coverage level.

While you might think the premium costs are high, keep in mind that the calculations are using CBOT futures prices, and they are probably more than what you are getting as a cash price at your local elevator. In essence, you are being guaranteed a higher price than you will be realizing on your settlement sheet. Subtract your local basis from the guaranteed price to get a good indication of the added value the crop insurance policy is giving you. Schnitkey says in recent years, cash guarantees have rarely exceeded $300 at any coverage level, but this year many will exceed $400.

If you typically use RA insurance or have relied on Group Risk Income Protection (GRIP), your premiums may increase more than CRC premiums, and be more than 60% higher than your 2006 premiums. For RA policies with the harvest price option, Schnitkey says premiums will increase 63 to 68% over 2006. GRIP policies with the harvest price option will be 62 to 82% more than 2006.

Summary:
Your crop budget for 2007 should plan for increased premium expense for crop insurance, since there are higher crop prices to insure, as well as increased price volatility that insurance has to protect. In most years, 85% coverage had to be selected to insure a crop somewhere near a break-even level. However with commodity prices well above breakeven levels, most levels of insurance will be able to guarantee profitability.