Hoping Those in the Midwest Had a Risk Management Plan
As I am sure most of you have heard, last weeks flooding hit a number of big corn and soybean producing states in the midwest pretty hard. In Iowa, 1.3 million acres of corn and 2 million acres of soy (20% of the state's crop) were completely destroyed according to an article in Reuters. The American Farm Bureau Federation has estimated that there has been $8 billion worth of crop damage in the midwest as a whole due to these rains.
All of this news has had me thinking a lot about the farmers out there and hoping that they all had some seriously good risk management plans in place. The thought of "how could anyone really be prepared for something like this?" did cross my mind, but after the Iowa flooding of 1993 and recent climate change reports suggesting that we should expect more extreme weather events in the future, perhaps there is no excuse for lack of preparedness.
It turns out that in 2007, 89% of both corn and soybean acreage in Iowa was covered by crop insurance. If those farmers had already planted their crops this year, they are probably calling up their insurance agents to file a claim. Depending on the level of coverage that they had though, they may only receive an indemnity payment worth half of what they would normally make. Though this is certainly better than nothing, one can only hope that there are other farm products not destroyed by the floods, or off-farm income to help offset the loss.
Some farmers who had not yet finished planting and have a prevented planting provision on their crop insurance now have to make the decision to try planting again in hopes that the bulk of the rains have stopped, or choose the prevented planting option. It is a choice between receiving 60% of their total insurance coverage liability (with prevented planting) and not planting the crop that year, or planting and having their insurance coverage reduced 1% for each day after the final planting date that the crop is planted. So as I understand this (and please someone correct me if I am wrong) if 60% x current coverage level > current coverage level - (1% x #days after final planting date) then if there is a good chance that a planted crop will get completely destroyed it makes the most sense for a farmer to take the prevented planting provision. How confusing. For further explanation click here.
For corn, the opportunity to plant again may have passed because at this point the ears may not mature before first frost. However, for soybeans there is still a possibility for planting and harvesting a crop. Jeff Caldwell, an Agriculture Online News and Features Editor talks with a farmer who says that with soybean prices being high it is appealling to try for planting. But who knows what the beginning of July will bring.
For more information on prevented planting provisions due to excess moisture or flood check out this presentation.
