Just like how our equipment has grown in size and complexity in the last 20 years, so has the risk farmers take each year planting a crop. Crop insurance continues to be the number one method used to mitigate the financial risks involved with growing a crop, and this year Margin Protection deserves a closer look.
Introduced in Michigan and Wisconsin in 2018, Margin Protection is an area-based insurance plan for corn and soybeans that provides coverage against an unexpected decrease in operating margin (revenue less input costs), caused by reduced county yields, reduced commodity prices, increased prices of certain inputs, or any combo of these. Coverage is available from 95% to 70% in 5% increments. It is important to remember that Margin Protection is an area-based insurance product. This means an individual’s actual performance in the 2022 crop year will not be a determining factor in how an indemnity is calculated.
Margin Protection selection is different than you might expect - the sign up period for the 2022 corn and soybean crop is currently underway with a sign up deadline of September 30. 2021
So Why Should Producers be Looking at Margin Protection for 2022?
2022 Corn and soybean market prices are now at a price that allows most producers to operate at a profit. These prices could go up, but they also could go down. Margin Protection is unique in that it allows you to set a price for corn and soybeans now.
It’s important to note that Margin Protection is normally bought in tandem with the more popular and well-known Revenue Protection product. A premium credit is even applied lessening the cost of Margin Protection when a Revenue Protection policy is purchased in tandem. Revenue Protection will gather prices for 2022 crop in February of 2022. If the price continues to go up, a producer’s Revenue Protection policy could secure that higher price in February. If prices go down, a producer may have established a much higher amount of coverage per acre than their perspective Revenue Protection policy would afford them.
So How Does Margin Protection Work?
The United States Department of Agricultures Risk Management Agency (RMA) is the governing arm of crop insurance. RMA has determined the average expected yield for each county for the 2022 crop year. This bushel per acre average is multiplied by the 2022 projected price for the applicable crop creating an expected revenue. The projected price is determined by collecting the closing trading price of 2022 futures from August 15 to September 14 (December futures for corn and November futures for soybeans) and averaging them out. RMA then subtracts both fluctuating costs (diesel, interest, urea, potash ect.) and fixed input costs (depreciation, labor, ect.) creating a margin. The fluctuating costs are given a projected price just like grain with the same time period being used for most.
Come harvest, the price of grain is established again, referred to as the harvest price, along with the actual county average yield. The fluctuating costs are also gathered again but with the harvest price discovery period being from April 1 to April 30, 2022 for most fluctuating inputs. If the harvest margin is less than the expected margin minus deductible, an indemnity is due.
This can be simplified with the following:
Expected Margin (expected yield x projected price - input costs) times coverage level = Trigger Margin
Harvest Margin (actual county average yield x harvest price – actual average input costs).
Trigger Margin – Harvest Margin = any applicable indemnity
Should you Purchase Margin Protection for the 2022 Corn and Soybean Crop?
It can be difficult to determine if Margin Protection is right for you; it requires an individual look at each operation. GreenStone’s new Optimum quoting software can greatly help producers evaluate the options and answer this question by looking at how this product would have performed historically for their operation, as well as offering the ability to perform “what if” scenarios, and profit and loss matrixes.
Be sure to contact your local GreenStone crop insurance specialist to see how Margin Protection would fit your individual farm and learn about the risk mitigation benefits it offers.