The drought in the hard red winter (HRW) wheat area may have producers “boxed into a corner.” Some producers think that they want one of two outcomes. The preferred outcome is favorable weather, high wheat yields, and a good price. The alternate outcome may be zero or nearly zero production and then collecting crop revenue insurance. In economist language, these are called “corner” or “extreme” solutions.
Some producers think that the unwanted outcome is somewhere in the middle of these two corners. In this case, wheat production would be less than average so that little or no insurance is collected, but production and price are not sufficient to cover costs.
An important facet of crop revenue insurance is that a minimum level of income is guaranteed. Evaluating crop insurance payoffs involves both yield and price. With crop revenue insurance, the guaranteed price for HRW wheat is $8.78. Guaranteed revenue is a function of the historical average production times $8.78 times the percentage insurance coverage purchased.
If the historical average yield is 32 bushels per acre and the percentage coverage purchased is 70 percent, guaranteed revenue would be $197 (32 bu. x $8.78 x 0.70) per acre. This price is the minimum per acre revenue a producer would receive.
Note that the revenue received will be calculated by using the KCBT July 2013 contract average June price, not the actual cash price received. Therefore, actual revenue could possibly be slightly different from the guaranteed revenue.
That cornered producers may be boxed-in pertains to production, but may not pertain to the crop revenue insurance. An insurance payment will be triggered if a combination of low yield and/or low price results in the calculated revenue being below the guaranteed revenue.
The box corner may be the additional costs required to produce a wheat crop. These costs may include applying nitrogen fertilizer; spraying for mites, aphids, or weeds; diseases; or any other input that is required to produce a wheat crop.
If the drought persists and yields are very low, little or no additional inputs may be needed. If adequate, timely, precipitation is received, additional inputs will be required to produce the optimal yield.
Assuming that the KCBT July contract average June price is $8.78 or higher, the possibility exists that with timely moisture and without the addition of needed inputs, yields could still be sufficiently high to not trigger an insurance payment. With an historical yield of 32 bushels per acre and 70 percent coverage, yield would only have be 22.4 (32 x .70) bushels per acre or higher to not trigger an insurance payment.
In the case of timely moisture, the proper use of inputs would probably more than cover the additional costs, and profitswould be increased.
No definitive or proven decision is available that will solve the drought dilemma of applying nitrogen and other inputs. One provision of crop insurance is that “best management practices” are required. Not applying needed inputs (best management practices) could result in the insurance company refusing to pay off even when yields are low.
From a management perspective ask yourself, “am I satisfied with $197 an acre?” If you are, then limit the amount of inputs while maintaining “best management practices.” If you minimize inputs, you may box yourself into the $197 corner.
If you prefer the opportunity to generate more than $197 per acre, then apply the inputs required to optimize production. You may end up with less, but between now and harvest, you will not be boxed into a corner.