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Released: May 11, 2001 Grazing Out Wheat Can Bring LDP, Crop Insurance Pitfalls MANHATTAN, Kan. – Pitfalls are ahead for winter wheat growers who decide to abandon this year’s weather-damaged crop, but don’t know the fine points of today’s government programs, warns Art Barnaby, economist at Kansas State University. "There are several things growers should do first, before they destroy a crop," he said. "At the very least, they should contact their county’s Farm Service Agency (FSA) office and crop insurance agent." New provisions in the farm loan program allow growers with reduced yields to claim any Loan Deficiency Payment (LDP) triggered by upcoming market prices – but only if they harvest their remaining wheat as grain, hay or silage. They can make that claim any time from when the wheat is harvested until it’s fed to livestock or sold. "For uninsured wheat, the FSA will determine the salvage yield," the economist said. "If the crop is insured, however, only the bushels that an insurance appraisal determines is the year’s yield will be eligible for an LDP." Growers planning to graze out wheat are bound by different rules, however. Barnaby provided this summary: * Insured, but failed wheat acreage that’s used for grazing is not eligible for a loan deficiency payment. Insured crops are eligible for an LDP only if harvested. * Undamaged crops are eligible for an LDP if grazed out. But, farmers can collect only after the earliest mechanical harvest date set by their county Farm Service Agency committee (through Aug. 31). So, they probably won’t know whether the year’s prices will merit an LDP payment until long after their wheat’s gone. "Still, to have any hope of getting a deficiency payment, growers must not destroy their wheat until they’re sure they have all documents needed to officially release the ground for replanting," Barnaby said.
For insured farmers, this includes an agreed-upon yield appraisal from their insurance agent. (See box at left) Crop insurance companies issue no checks until the entire premium for the entire policy is deducted. This applies for all claims under all insurance plans, Barnaby said. So, for farmers to benefit, early-loss settlements must exceed that premium. What a wheat yield appraisal means after that will depend on the type of insurance: * Multiple Peril Crop Insurance (MPCI) and Crop Revenue Coverage (CRC) policies issue a check for net losses within a few weeks. * MPCI – Pays at the rate of $2.80 (or other farmer-selected price election) per covered bushel for net losses. * CRC – Pays at the rate of $3.31 per covered bushel for net losses. If Kansas City July wheat futures prices rise or fall during June, growers also receive a second check, based on the difference of this "harvest" price. *No Revenue Assurance (RA) or Revenue Assurance with Harvest Price Option (RA-HPO) policy pays for net losses until after July 15. * RA – Has no minimum indemnity payment, so can’t pay for net losses before harvesttime. * RA-HPO – Bases its payment calculations on the July 1-14 average closing price for the Kansas City July wheat futures contract. "Because prices are falling, the RA probably will pay about the same as the RA-HPO this year," Barnaby said. "If they continue falling, farmers with the same coverage levels will get higher indemnity payments from RA, RA-HPO, and CRC than they will from an MPCI contract." If prices rise by harvesttime however, then CRC and RA-HPO policies will pay more. "But if futures prices exceed an average $3.31 during the first two weeks of July, a straight RA contract could pay even less than MPCI – unless, of course, the farmer’s appraised yield is zero," he said. RA-insured wheat growers could try to offset that risk, if they think rising prices are a possibility during times when widespread damage could easily become severe, the economist said. One approach would be to buy $3.40 September call options. "July options can’t really do the job, because they’ll expire before this year’s RA price measurement occurs," Barnaby said. "But, September wheat has been trading with close to a 10 cent premium over July wheat. So, a September call option’s $3.40 can hedge an RA contract’s $3.31. "Typically, if the July wheat contract’s price increases, September’s does, too. So, if prices do rise between now and mid-July, cashing in your September options should take an RA indemnity payment up to the level you’d expect, based on the figuring you do now with current July wheat futures prices." Barnaby is a K-State Research and Extension farm program specialist. He and marketing economist Bill Tierney maintain a Website for producers and others interested in current grain-related risk management information and analyses (www.agecon.ksu.edu/risk). -30- K-State Research and Extension is a short name for the Kansas State University Agricultural Experiment Station and Cooperative Extension Service, a program designed to generate and distribute useful knowledge for the well-being of Kansans. Supported by county, state, federal and private funds, the program has county Extension offices, experiment fields, area Extension offices and regional research centers statewide. Its headquarters is on the K-State campus, Manhattan. Story by: Art Barnaby is at 785-532-1518 |