May 24, 2001

Use Partial Budgets to Evaluate Prevented Planted Insurance

Nature’s clock is beyond the optimal planting time for most crops, and wet conditions in parts of eastern North Dakota may prevent producers from seeding a crop before the date that crop insurance coverage starts to decrease because of the risk of yield reductions, notes a North Dakota State University agricultural economist.

"After that date, farmers with insurance have two options to that particular crop," says Andrew Swenson a farm and family financial specialist with the NDSU Extension Service. "Plant the crop and accept the risk of lower yields and reduced crop insurance coverage. Or collect a prevented planting crop insurance indemnity payment and fallow the ground or grow a forage crop other than alfalfa or corn silage for feed."

The prevented planting date varies by crop and geographic location. For example, it was May 5 for canola in Hettinger County, and is June 5 for wheat in Grand Forks County.

Partial budgeting is probably the best tool to evaluate the two options, Swenson says. All costs and returns that have already occurred or will occur regardless of the choice can be ignored in this analysis. Examples are land rent, machinery overhead, crop insurance cost, any fertilizer or chemicals that have already been applied, and the government transition payment. Only consider the returns and costs that will now change because of the decision whether to plant.

For example, the prevented planting date was May 20 for corn in Traill County. Assuming an 84 bushel APH (actual production history), Crop Revenue Coverage crop insurance at the 70 percent coverage level and that prevented planting coverage was increased to 70 percent, the preventing planting payment would be $101 per acre (84 bu. X $2.46 x 70% x 70%). However, assuming the direct cost of fallowing is $20 per acre, the net positive would be $81 ($101 - $20) to compare with planting the crop.

If the crop is planted later, say on June 1, the expected yield may be down to 80 bushels and revenue probably would be $141 (80 bu. x $1.76 market loan rate). Assuming that costs for seed, fertilizer, chemical, harvesting, drying and field operations are $120 per acre, the net positive of planting, for comparison purposes, is $21 ($141 - $120).

Clearly the best decision in this example is for the producer to select prevented planting. There is a $60 advantage ($81 prevented planting - $21 for planting), plus there is less risk and it frees up operator labor and machinery that can be used for some other purpose.

However, in the same county, a producer with a similar APH but different insurance coverage and "sunk" costs may come to a different conclusion. If the insurance was Multi-peril Crop Insurance at the 65 percent coverage level and 60 percent prevented planting, the indemnity payment would be $66 (84 bu x $2 x 65% x 60%) for a net positive of $46 ($66 – $20 fallow costs) for prevented planting.

The income from planting the crop late is still estimated at $141, but if $40 worth of fertilizer and chemical has already been applied the "new" costs associated with the decision to plant would be reduced to $80 per acre, resulting in a net positive of $61 ($141-$80), for comparison purposes. Therefore, planting the crop is predicted to return $15 ($61 - $46) more than collecting prevented planting. The question is then whether $15 is worth the production risk and additional labor and time required to raise a crop.

"The prevented planting analysis will vary by crop, location and type of insurance that had been purchased," Swenson notes. "For example, at similar coverage levels, crop revenue coverage and revenue assurance policies will provide more favorable prevented planting payments for wheat, barley and corn, but Multi-peril Crop Insurance has a better price for oilseeds. Of course, if the prevented planting coverage had been bought up from the standard 60 percent to the 65 percent or 70 percent level, it will enhance the prevented planting option."

Another consideration is the possibility of federal crop loss disaster legislation for 2001, Swenson notes. In the past three years, legislation has provided additional payments that have been very beneficial to those who have received crop insurance payments. "In essence, the criteria for receiving payments has been production loss, not economic loss," he says.

For example, when the market price (or market loan rate if higher) is below the crop insurance price the absolute worst case scenario for a producer is a yield at the level where crop insurance would start payment (typically at 65 percent or 70 percent of normal yield). At this level the producer receives no crop insurance, which pays at a higher rate than the price for the grain which was produced, and all the producer’s costs are incurred. The producer would be better off at any yield higher or lower than that level.

"The recent disaster programs have provided payments to those who have already received insurance payments, such as prevented planting, but those in the worst case scenario received nothing," Swenson notes.

"If soil conditions do not allow seeding by the prevented planting date, each producer should analyze the prevented planting option and consult an insurance agent if unsure of whether the acreage qualifies, payment rates or other details," he says.

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Source: Andrew Swenson, (701) 231-7379, aswenson@ndsuext.nodak.edu
Editor: Tom Jirik, (701) 231-9629, tjirik@ndsuext.nodak.edu