With corn and soybean prices insufficient to cover operating and land costs for 2009, the financial risk for many farmers will be a burden. Lenders are/will be pushing for a strong risk management program that may include crop insurance, a marketing plan, and the ACRE farm program and SURE disaster program. Rain or heat in the wrong week will be unwelcome in 2009 with such thin margins, and could result in a financial disaster.

What are your plans to disaster-proof yourself for 2009? There are a variety of tools to use and Kansas State University risk management specialist Art Barnaby has several recommendations to take advantage of changes in crop insurance programs and combining them with other risk management tools.

Barnaby’s first recommendation is for those using crop insurance to switch to enterprise units by crop, which is made possible with a pilot program the next three years. Your coverage is increased, but your premium is reduced. He says it increases the total dollars of revenue coverage and increases the free coverage from the SURE disaster program. But he still recommends hail insurance coverage, if you do not raise your coverage level. Also, the premium subsidy is being reduced on GRIP and he says farmers with GRIP policies should also switch to enterprise units. He believes the savings from the switch will provide more financial cushion than any ACRE or SURE payments. Barnaby says the downside to the fact it is a pilot program is that it could see subsidies reduced in future years, and you would need your records to return to optional units.

A second recommendation is to maintain eligibility for the SURE disaster program, which can be triggered by both price and yield. There is no sign-up but eligibility requires insurance or $250 per crop fees paid for all crops by March 15. Barnaby says the SURE coverage works best on a non-diversified farm, such as Great Plains wheat, or continuous corn, but not a corn and bean rotation. This gives the farm the same crop insurance characteristics as an enterprise unit with the same crop throughout the county.

A third recommendation from Barnaby is wait until May to take any action on switching to the ACRE farm program, which of course, is a permanent decision. Delaying your decision allows more information about the potential yield information. He says the decision to participate depends on if the ACRE “strike” price is higher than the expected 2009/2010 marketing year average price. Barnaby says, “ACRE is simply a “put option” on expected state revenue. A Chicago (CBOT) put is an option on expected price. ACRE works like the put so the odds increase for payment if ACRE is in the money. At signup (before June 1) one would have to assume average 2009 yield (state yields do not vary as much as farm yields) but one will know if there is a current “loss on price” at signup, i.e. if the ACRE is in the money.”

He says one would not want to enroll in ACRE for 2009 if ACRE is “out of the money” and a payment would not be expected. “If ACRE is in the money then odds of an ACRE payment increase but it does not guarantee it. In the money put options expire worthless too. If ACRE is “deep” in the money then one could buy call options and reduce the risk of no payment, i.e. one would either collect from the call or ACRE.”

Barnaby says the ACRE program makes a payment only if there is a state revenue loss, and if so, then the farm must also show a revenue loss below a benchmark to collect. He says there is only a small chance of any counter-cyclical payment or a loan deficiency payment on corn or soybeans, “Therefore the tradeoff is a potentially large ACRE payment in return for a 20% reduction in direct payments and a 30% reduction in the loan rate for the next 4 years.”

While farmers were lobbying hard for USDA to use the 2008/09 marketing year price for corn, which would raise the ACRE payment, Barnaby thinks the recent slide in corn prices may have neutralized the effort. And he says wheat looks like a better bet than corn for ACRE, but he wants to wait until June 1 for a verdict. Anyone signing up for ACRE will be committed to that program through the end of the Farm Bill in 2012, and may not return to the conventional program featuring direct and counter-cyclical payments, as well as a full loan rate.

Summary:
Risk management tactics for 2009 crops will depend on fine tuning of crop insurance and switching to enterprise units to take advantage of higher coverage at lower premium rates. Also, consider the ACRE program, but not sign up until as late as possible to get as much information about crop conditions and potential pricing.