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June 3, 2004 Use Partial Budgets to Evaluate Prevented Planted Insurance Nature’s clock is beyond the optimal planting time, and wet conditions in northern 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 on a particular crop," says Andrew Swenson, 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. However, if a farmer elects to grow a forage crop on prevented planting land, the prevented planting indemnity payment will be reduced by 65 percent and the new APH (average production history) will be reduced because the assigned yield for 2004 will be 60 percent of current APH.” The prevented planting date varies by crop and geographic location. For canola it varies from May 10 in the southwest to May 25 in the northeast part of the state. It is June 5 for wheat, durum and barley for the northern one-third of the state. Partial budgeting is probably the best tool to evaluate the two options, Swenson says. “All costs and returns that have 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 direct payment. Only consider the returns and costs that will now occur because of the decision whether to plant.” For example, the preventing planting payment for wheat would be $59 per acre, assuming a 30 bushel APH wheat yield, Crop Revenue Coverage insurance at the 70 percent coverage level and that prevented planting coverage was increased to 70 percent (30 bushels by $4.00 by 70 percent by 70 percent). However, assuming the direct costs of fallowing is $20 per acre, the net benefit would be $39 ($59 - $20) compared to planting the wheat crop. If the wheat crop is planted late, say on June 10, the expected yield may be down to 25 bushels and revenue probably would be about $94 (25 bushels by $3.75 price estimate). Assuming that costs for seed, fertilizer, chemical and other costs associated with operations from seeding through harvest are $60 per acre, the net benefit of planting, for comparison purposes, is $34 ($94 - $60). “The best decision in this example is for the producer to select prevented planting,” Swenson says. “There is a $5 advantage ($39 prevented planting - $34 for planting), there is less risk, the APH of 30 would be preserved for next year and it frees up operator labor and machinery that might be used for some other purpose.” Although prevented planting may be the best decision, it is not necessarily profitable. To be profitable, the $39 plus the direct government payment would have to exceed all “sunk” costs such as land, machinery ownership costs and any direct costs previously incurred in preparation for planting the crop. However, a wheat producer with the same 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 $39 (30 bushels by $3.35 by 65 percent by 60 percent) for a net positive of $19 ($39 – $20 fallow costs) for prevented planting. The income from planting the crop late is still estimated at $94, but if $15 worth of fertilizer has already been applied the "new" costs associated with the decision to plant would only be $45 per acre, resulting in a net positive of $49 ($94-$45), for comparison purposes. Therefore, planting the crop is predicted to return $30 ($49 - $19) more than collecting prevented planting. "The prevented planting analysis will vary by crop, type of insurance that has been purchased, projected crop yields and prices, costs of fallow, and costs of producing, handling and marketing a crop from the time the decision is made to forego prevented planting." Swenson says. "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." ### Source:
Andrew Swenson, (701) 231-7379, aswenson@ndsuext.nodak.edu |
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North Dakota State University |
