Crop prices for 2022 crop insurance products are $6.86 per bushel for corn and $13.81 for soybeans. These crop prices will generate few insurance payouts in 2023 in Illinois and much of the Midwest as reports indicate good yields. We provide break-even returns for 2023 as a percentage of guaranteed returns for income protection (RP) coverage levels. Crop prices and current futures contract levels suggest relatively high projected prices for 2023, reducing the downside risk of crop insurance coverage in 2023. Going forward, projected prices could fall by more than 20 %, leading to lower insurance coverage, such as happened between 2013 and 2015. We begin this discussion by providing background information on projected and harvest prices.
Context of projected prices and harvests
Projected and harvest prices are an integral part of the crop insurance provided by the federal government. These prices are used to set revenue guarantees and determine crop insurance payments. The most widely used crop insurance product for corn, soybeans, and wheat is Revenue Protection (RP), a revenue product whose coverage increases if the crop price is higher than the projected price. RP is used on over 90% of insured corn, soybean and wheat acres in Illinois (see daily farmdoc, November 17, 2020). Therefore, we focus on PR insurance in this article.
For RP, the revenue guarantee is
Level of coverage x guaranteed return x higher of projected price or harvest.
The guaranteed yield is usually the yield of actual production history (APH) adjusted for the trend. Limits are placed on the increase in the crop price such that the crop price cannot be more than twice the projected price. To illustrate the revenue guarantee, consider a coverage level of 85%, a guaranteed yield of 220 bushels per acre, a projected price of $5.90, and a harvest price of $6.86 (see Figure 1). The RP revenue guarantee is $1,283 per acre (0.85 x 220 x $6.86). Note that the higher harvest price of $6.86 is used in the calculation.
The income from the harvest is then equal to
crop price x actual yields
If the harvest income is less than the guarantee, a payment is made equal to the guarantee minus the harvest income. Take a yield of 210 bushels in the example above. Harvest income is $1,441 per acre (210 yield x harvest price of $6.86), above the guarantee of $1,281, resulting in no payout. When the crop price is above the projected price, payments will only occur if the yield falls below the coverage level multiplied by the guaranteed yield. In the example above, crop insurance payments will be made below 187 bushels per acre (coverage level of 0.85 x guaranteed yield of 220).
Projected prices and harvest prices are based on Chicago Mercantile Exchange (CME) commodity settlement prices. The Commodity Trade Pricing Provisions (CEPP) lists trade details and dates for determining projected and harvest prices. These provisions vary by crop and state (see here for corn and here for soybeans). In the following, we describe the provisions applicable to Illinois. The same provisions apply to 31 states for corn and 25 for soybeans, including all Midwestern states.
For corn, the December contract is used to set both forecast prices and harvest prices. The December 2022 contract is used for 2022, and the December 2023 contract will be used in 2023. The average of the settlement prices in February is used to set the projected price. At the end of February, a minimum income guarantee is known for RP, which is equal to the level of coverage multiplied by the returns of the guarantee multiplied by the projected price. The guarantee may increase if the price of the harvest is higher than the projected price. The average settlement price in October is used to set the crop price.
For soybeans, the November CME contract is used. The November 2022 contract is used for 2022, and the November 2023 contract will be used in 2023. The average of the settlement prices in February is used to set the projected price, which leads to a minimum revenue guarantee for RP. The average settlement price in October is used to set the crop price.
Forecast and harvest prices 2022
For 2022, the projected corn price is $5.90 per bushel and the crop price is $6.86 per bushel. The harvest price is higher than the projected price and the revenue guarantee will be reset using the higher harvest price. Therefore, RP insurance payouts will only occur when the actual return is less than the coverage level multiplied by the guaranteed return (see Table 1). In the example above with a guaranteed yield of 220 and a coverage level of 85%, insurance payments will trigger below 187 bushels per acre.
For 2022, the projected soybean price is $14.33 and the harvest price is $13.81. The harvest price is 96% of the projected price. We calculated the break-even point as a percentage of the collateral return (see Table 1). For a hedge level of 85%, the actual return must be less than 88% of the guaranteed return. If a farm has a guaranteed yield of 65 bushels per acre, the yield must fall below 57.2 bushels per acre before a crop insurance payment is triggered for soybeans at an 85% coverage level.
Reports indicate good yields across much of Illinois, suggesting limited payments for corn and soybeans. Drought conditions in Iowa and the Great Plains suggest larger payouts could occur in those parts of the country.
When purchasing RP, some farmers also purchased the Supplemental Coverage Option (SCO) and Enhanced Coverage Option (ECO), supplements to RP and other individual agricultural products. SCO and ECO provide county coverage from the underlying product coverage level up to 86% (SCO) and 90% or 95% (ECO). Given an underlying RP product, the ECO at the 95% coverage level will trigger soybean payouts when the county’s actual yield is 98% of the county’s expected yield. For soybeans, county yields at the 90% coverage level will need to be less than 93% of the county’s expected yield. Given an underlying RP product, ECO at the 95% coverage level will make payments for corn when county yields fall below 95% of expected yields. For corn, the trigger is 90% of the expected yield for the 90% coverage level.
Payouts on ECO and SCO won’t be known until June 2023, when county returns are released by the Risk Management Agency. SCO and ECO payments are likely in some counties where yields are lower, especially for soybeans.
Recent history of projected prices and harvests
Table 2 shows projected prices and harvest prices for corn and soybeans since 2013. Note that projected prices were relatively low from 2015 to 2020 when projected prices averaged $3.97 for corn and $9 $.61 for soybeans. Since 2020, prices have increased, which has led to higher expected prices and harvests. For example, the projected prices for corn were $4.58 for 2021 and $5.90 for 2022, compared to the average of $3.97 from 2014 to 2020. For soybeans, the projected prices were 11, $87 in 2021 and $14.33 in 2022, compared to the average of $9.61 from 2015 to 2020.
Crop insurance products provide excellent intra-annual revenue protection. Declines in crop prices due to adverse supply and demand conditions can generate RP crop insurance payments. Similarly, RP offers protection against low returns.
RP provides much less coverage when prices drop over the years. Future contracts reflect market conditions, changing rapidly with changes in supply and demand. Going forward, projected prices will drop, leading to lower crop insurance coverage. Let’s take 2013 to 2015 as an example. The projected price in 2015 was $4.15 a bushel, down 26.5% from the $5.65 level in 2013 (see Chart 2). Without changes to the level of coverage or the guaranteed yield, the crop insurance guarantee per acre would drop by 26.5%. A 26.5% decline from the projected price of $5.90 in 2022 would result in a projected price of $4.44. For the example above, this drop would cause the minimum revenue guarantee to drop from $1,103 per acre (0.85 x 220 x $5.90) to $810 per acre.
For soybeans, the forecast price for 2015 was $9.74 per bushel, 24.3% lower than the projected price of $12.87 in 2013. An individual with a hedge level of 85%, a yield guaranteed price of 65 bushels and a projected price of $14.33 has a guarantee of $791 in 2022. A 24.3% drop in the projected price results in a projected price of $10.84 and a guarantee of $599 l ‘acre.
These reductions in guarantees would put farmers at much greater risk. Most farmers already take RP at a high coverage level, so coverage levels could not be increased. Given the steep increase in cost per acre, the risk would be higher.
Projected prices 2023
Nevertheless, the prices forecast for 2023 are likely to be relatively high. The 2022 crop prices provide reasonable indications of the projected prices for 2023. We established relationships that explained next year’s projected price based on the previous year’s crop price. From 1973 to 2022, linear relationships explained 78% of the variability for corn and 84% for soybeans.
For corn, the 2022 crop price suggests a crop price of $6.30 (0.79 + 0.80 x $6.85 crop price). Given the fitted regression, 50% of the time the projected price for 2023 will be between $5.88 and $6.53. Additionally, current December 2023 corn contract prices are close to $6.20, which is in line with the projection of the adjusted historical model.
For soybeans, the 2022 crop price suggests a projected price of $13.56 for 2023 (0.63 + 0.94 x $13.80 of the crop price). Given the adjusted relationship, 50% of the time the predicted price for 2023 will be between $11.72 and $15.40. Currently, the November 2023 soybean contract is close to $13.70, which matches the projection of the adjusted historical model.
Crop prices in 2023 are $6.85 per bushel for corn and $13.80 per bushel for soybeans. These prices will likely generate limited crop insurance payments in 2023 in Illinois. However, larger payouts could take place outside of Illinois, particularly in the western Corn Belt and the Great Plains.
Overall, the outlook is for high projected prices in 2023: above $6.00 a bushel for corn and close to $13 a bushel for soybeans. Prices at these levels would provide significant risk protection for farmers and avoid the drop in projected prices that occurred between 2013 and 2015.
Nevertheless, there are risks regarding projected price levels in 2023. World events could lead to price changes even before the February period in which commercial insurance prices are determined.
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