It’s a tough outlook for agriculture in 2016 and beyond, resulting in farmers exploring their options to cut costs and improve efficiencies to ride this wave of lower grain and milk prices. My experience has shown that all too often crop insurance is one of the first places farmers cut when margins tighten, either by reducing coverage levels or eliminating altogether. While tough times require farmers to sharpen their budgeting pencils, take caution in strategies that could greatly expose you to the potential of a larger loss and considerable risks.
So, where should you begin? If you haven’t already, now is the time to evaluate your 2016 crop budgets.
Calculate and know your cost of production, updating as input prices are locked in. Variable (seed, fertilizer, crop insurance) as well as fixed (rent, interest, depreciation, taxes) costs should always be included.
Take a close look at each of those costs. Ask yourself, can any of your costs be decreased? Are they all necessary? Can some be reduced with price shopping and negotiation?
At first glance, crop insurance seems to be an easy place to save some dollars and requires the least amount of effort to do so, especially if you have never or seldom collect. On the other hand, I encourage you to consider the role of crop insurance in farm profitability and its ability to keep you “in the game” for upcoming years. I would argue that the downside risk is certainly great enough to warrant keeping a policy. When it comes to crop insurance, the key is purchasing the right policy type (i.e. Revenue Protection, Yield Protection) and coverage level based on your input costs and your specific needs/goals.
- Cash grain farmers: Know your breakeven price. This will give you the confidence to forward market grain, reducing the likelihood of selling your crop for a loss. Crop insurance coupled with this information allows for more aggressive marketing if or when the price is right.
- Livestock/Dairy farmers: Remember that your crop inputs are a critical piece in your farm’s overall profitability, much like a cash grain farmer. Livestock and dairy farmers tend to focus on the animals and forget about the profit center in the crops. If there is excess grain that can be sold or if it is all fed, the end result and bottom line are what matter.
Michelle Austin is the director of insurance services at Badgerland Financial.