NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665

February 18, 1999

NDSU Ag Economist: Producers Need to Check Details of CRC for Durum

Publicity surrounding the Crop Revenue Coverage (CRC) insurance for durum has, to many ears, been sounding to good to be true. In reality, the "revenue guarantee" drawing so much attention is one of the program's calculations and not an actual guarantee, says an agricultural economist at North Dakota State University.

"Total income from crop sales plus any CRC payments from yield and/or price shortfalls will seldom reach the revenue guarantee," says Andy Swenson, farm and family resource management specialist with the NDSU Extension Service.

To illustrate the CRC for durum, Swenson offers this example:

• Yield is represented by the actual production history (APH) and producers determine their coverage election level, which ranges from 50 percent to 85 percent in 5-percent increments. So, a 30-bushel APH and a 65-percent coverage equates to a 19.5-bushel-per-acre yield for calculating the revenue guarantee.
• Price is the greater of the base price or the harvest price (with an upper limit of the base price plus $2). The base price is either 95 percent or 100 percent (producer chooses) of February's average daily closing price on the Minneapolis Grain Exchange (MGE) for the September spring wheat futures contract—plus $1.15. The harvest price is either 95 or 100 percent of the average daily closing price for MGE top-milling cash durum in August. (For this example, Swenson assumes the average daily closing price for MGE September spring wheat futures in February is $3.60 and the average daily closing price for MGE cash durum in August is $3.70.)
• The CRC calculation for determining the revenue guarantee for durum becomes one of yield times price. In this example, the base price ($3.60 + $1.15 = $4.75) times the yield (19.5) equates to a revenue guarantee of $92.63 an acre.
• The CRC indemnity payment is the CRC revenue guarantee minus the harvest revenue. The harvest revenue is determined by taking the actual yield per acre—in this example 22 bushels—times the harvest price (with a lower limit of the base price minus $2). So, the harvest revenue (22 x $3.70) is $81.40, and the indemnity payment ($92.63 - $81.40) is $11.23.
• The total returns to producers then becomes the CRC indemnity payment plus the cash sale of durum and any loan deficiency payments. So, if the producer in this example sold his 22-bushel-per-acre crop for $2.80 a bushel, his total return (22 x $2.80 + $11.23) would be $72.83 an acre—or $19.80 less per acre than the revenue guarantee.

"As this example clearly shows, there is no guarantee the indemnity payment plus cash sales will equal the revenue guarantee," Swenson stresses. "The reason is because the harvest revenue is based on the cash price for top-milling durum at the Minneapolis Grain Exchange. This price is typically 70 cents to $1 higher than local cash prices, or more, depending on quality. Producers who didn't understand this point need to re-examine the economics of the insurance policy."

The main considerations for producers are the impact CRC insurance has on the income and risk of raising durum, in comparison to other crop alternatives, Swenson says. The CRC's main selling point is that it protects against both yield and price losses. But this additional risk management costs more in insurance premiums, and every dollar is important is today's tight farm economy.

Some farmers in the Red River Valley, typically not a durum producing area, may decide to grow durum because of the high CRC base price for durum and because producers without durum history can use their spring wheat APH to determine the CRC revenue guarantee for durum.

"Producers with high spring wheat APHs and no durum history have the best of both worlds," Swenson says. "They can use spring wheat APH for durum insurance coverage, but a poor durum yield in 1999 would not lower their spring wheat APH—it would be used to start a durum APH for the farm."

In addition, producers with multiple-year losses to scab or scab and vomitoxin are eligible for additional discounts—possibly around 30 percent—in addition to the crop insurance premium incentive discount of about 30 percent for "buy-up" coverage on crop insurance. Swenson says most producers in the Red River Valley should qualify for this additional discount, which would make high coverage levels of crop insurance much less expensive.

But even with these incentives, a substantial acreage shift from spring wheat to durum in the Red River Valley is unlikely because spring wheat is selling at a premium to durum for the first time in several years and because of the difficulty of growing quality durum, Swenson says.

And with average or better yields, spring wheat has an economic advantage over durum, as Swenson demonstrates using a hypothetical situation in which a farm has a spring wheat APH of 45 bushels, cash prices are $2.80 for durum and $3.30 for spring wheat at harvest, and using maximum CRC coverage and premium discounts available for each crop.

"Because of CRC, durum does project better revenue than spring wheat if yields are worse than average," Swenson says. "Also, the durum CRC performs particularly well if prices drop further. Therefore individuals who are risk averse or project a poor crop year or further deterioration of prices may choose durum."

The CRC program will probably not have much impact on durum acreage in the traditional durum producing areas of north central and northwestern North Dakota, Swenson says. At local cash prices of $2.80 and $3.10, respectively, for durum and spring wheat and with both crops insured at 85 percent CRC levels, spring wheat shows greater returns than durum if yields are average or better. Durum at the 65-percent CRC level and wheat at the 85-percent level have quite similar returns. However, in both cases durum will provide better returns if there is a short crop and also if prices drop lower than those used in the example.

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Source: Andy Swenson (701) 231-7379

Editor: Dean Hulse (701) 231-6136

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