Relative to 2022 and 2023, 2024 is projected to be a low to negative margin year for many grain farmers in Illinois. Because of lower commodity prices, per acre guarantees offered by crop insurance will be lower in 2024 than in 2023. Lower guarantees, along with stubbornly high costs, leads to a dilemma for farmers. Producers may seek crop insurance coverage with lower premium costs as part of broader cost reducing efforts. However, strategies which reduce farmer-paid premium may in turn reduce insurance guarantees or other risk reduction aspects of their insurance coverage, thereby increasing risk exposure. We evaluate options, with a particular emphasis on coverage resulting in farmer-paid premium costs for corn between $23 and $35 per acre in central Illinois. Historically, most farmers have chosen insurance options with premium costs that fall in this range.

The 2024 Situation

Farmers face much lower margin and return prospects in 2024, with the average cash rent projected to result in negative returns to corn and soybean production across Illinois. A major contributor to these lower margins are lower commodity prices, which have also resulted in lower projected prices used to set crop insurance guarantees. The projected price for corn in 2024 is $4.66, down 21% from the $5.91 price in 2023. The projected price for soybeans in 2024 is $11.55, down 16% from the $13.76 price in 2023. These lower prices will result in lower premium costs for policies than the last few years, but also much lower guarantees (see farmdoc daily articles from February 13 and March 4, 2024 for further discussion).

While commodity prices have fallen, costs remain stubbornly high. According to farmdoc crop budgets for the high-productivity region of central Illinois, the average non-lands costs (without crop insurance premium expenses) are expected to be around $775 per acre. Average cash rent, our typical indicator for land costs, are expected to remain around $350 per acre for 2024, resulting in total costs of around $1,125 per acre for cash rent farmland ($775 + $350).

Crop insurance, even at high coverage levels will not cover those costs. Take, as an example, a farm with a trend-adjusted actual production history yield (TA-APH) of 225 bushels per acre. Minimum guarantees under Revenue Protection (RP) will be:

• 85%: 225 TA-APH yield x $4.66 x 85% coverage level = $891
• 80%: 225 TA-APH yield x $4.66 x 85% coverage level = $839
• 75%: 225 TA-APH yield x $4.66 x 85% coverage level = $786

Note that all those per acres guarantees are considerably below total costs. A farmer may be able to use crop insurance to cover non-land costs ($775). But if rented land represents a significant portion of the operation, or much debt remains on farmland, the land portion of costs will not be covered. Further note that the $4.66 projected price is based on future contracts. Cash prices received by farmers are typically below futures prices, with a usual basis being about $.30 per bushel. Hence, the RP guarantees based on futures contracts overstate true revenue coverage levels.

Insurance Options: Supplemental and Enhanced Coverage Option Given the high production costs and lower RP guarantees, producers may be interested in adding additional coverage in 2024. Within the subsidized Federal crop insurance program there exist supplemental area-based plans that could be used for this purpose. The Supplemental and Enhanced Coverage Options (SCO and ECO) provide county-based coverage that can cover a portion of the producer’s deductible when paired with an underlying individual plan.

Illustrated in Figure 1, SCO provides coverage from 86% down to the coverage level of the individual plan while ECO has options at the 90% and 95% coverage levels which both extend down to the 86% level. For both SCO and ECO, the coverage type (revenue, yield, harvest price etc.) mimics the underlying policy. Thus, SCO and ECO can be stacked with the producer’s individual plan to increase the total coverage level.

For the example corn farm, adding SCO to RP would increase the minimum guarantee to $901 per acre (0.86 x $4.66 x 225). ECO at 90% or 95% would increase the guarantee to $944 and $996 per acre, respectively. However, the additional coverage is based on county yields and insurance prices rather than farm yields, so the additional coverage and payments from the supplemental plans won’t always align with losses experienced at the farm level.

SCO was introduced in the 2014 Farm Bill and discussed in more detail in the farmdoc daily from February 27, 2014. ECO was introduced in 2021 and discussed in the farmdoc daily from November 24, 2020.

Coverage Combinations Using Revenue Protection

Table 1 reports premium estimates for coverage combinations using RP as the underlying individual plan. We focus on RP here as it is the most popular policy type for corn in general with the majority of acres covered under RP and in Illinois, in particular, producers tend to elect relatively high coverage for their RP plans (see farmdoc daily articles from January 29, 2019 and November 17, 2020).

Highlighted within Table 1 are options that have total premium cost estimates between $23 and $35 per acre, a rough range of premium levels that farmers have revealed they are willing to pay through time (see historic Revenue and Costs for Illinois Grain Crops) . The upper panel provides premium estimates for RP coverage levels from 70% up to 85% in the rows, and for different RP combinations using SCO and ECO across the columns, assuming enterprise units. The middle panel is organized in the same way but provides premium estimates assuming basic units. The bottom panel assumes optional units. Premiums are lowest for enterprise units due to higher subsidy rates and more risk diversification for that unit structure. Basic and optional units involve more risk based on their structure as well as lower subsidy rates, resulting in higher premium costs. The different unit rate structures are discussed in more detail in the farmdoc daily from June 12, 2023.

For enterprise units, the estimated premium for 85% RP coverage for the example farm is $23.98 per acre, providing a minimum revenue guarantee of $891 per acre. Lower RP coverage levels would reduce both the premium costs and revenue guarantee (see first column for ‘RP only’ in Table 1).

Adding SCO to RP (+SCO column) increases the producer’s total coverage level to 86%, but with county-based revenue coverage for the band from 86% down to the RP coverage level. Adding SCO to 85% RP only adds an additional 1% of county coverage and a total premium cost of $25.29 per acre. Again, reducing the RP coverage level and combining with SCO will lower total premium cost but also expands the size of the band covered by the county-based SCO policy.

Using RP 85% and adding SCO and ECO at 90% pushes the premium cost above $35 per acre, but lower RP coverage levels with SCO and ECO-90 result in total premium costs in the $25 to $27 range (see column labeled ‘+SCO+ECO-90’). Combining SCO, ECO-95, and RP pushes premium costs into the $40+ range per acre, regardless of the underlying RP coverage level (see column labeled ‘+SCO+ECO-95’). Removing SCO and using ECO alone with the underlying RP plan can also generate some premium costs in the target range but creates a coverage gap from 86% down to the RP plan’s coverage level. RP 85% plus ECO 90% has a premium cost of $34.58 per acre and leaves only the 1% band from 86% to 85% as a gap between the RP and ECO policies. Using ECO 95% with RP can result in premium costs in the $30-$35 per acre range if RP coverage is 75% or lower but leaves a more sizeable gap between RP and ECO coverage.

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