For those who farm row crops in most counties in the Midwest and upper Midwest, May 31 or June 5 is "decision day." Farmers must decide whether to plant row crops or take the prevented planting payment from their crop insurance policy.
University of Illinois agricultural economist and farm management specialist Gary Schnitkey has provided calculations to help farmers choose the option with the best net return. Farmers in southern Illinois, Ohio and Indiana, and the upper Midwest need to be cautious about the decision because prevented planting could have more return than planting corn.
"Corn planted at this point in time will likely have lower yields than normal. This makes taking the prevented planting looks like an attractive alternative," Schnitkey says. "And, in our calculations, taking the prevented planting payment on corn almost always looks better than planting soybeans. You have to get fairly high yields on soybeans in order to make it comparable."
Schnitkey developed scenarios that made calculations based on projected harvest prices for corn and soybeans alongside several crop insurance coverage levels.
One example used prices of $6.40 for harvest time price for corn and $13.30 for soybeans. In this scenario, the prevented planting payment net of cost with an 80% coverage level was $400 per acre. The net returns for planting corn came in at $375 per acre, with planting soybeans at $363 per acre. So, at the 80% coverage level, taking the prevented planting payment was $25 per acre higher than for planting corn. For soybeans, it was about $30 higher than planting.
"We used $6.40 for corn, but if corn prices go up, planting corn might have a better return. If the price of corn goes down, taking the prevented planting payment will be the better option," he adds.
Another factor affecting farmers is that many of them may have chosen lower crop insurance coverage levels than last year.
"Prevented planting payments go up with higher coverage levels, so at a 75% coverage level, 80% and 85% will have higher prevented planting payments. Making those calculations will be critical," he adds.
Farmers may also ask whether the nitrogen fertilizer which has already been applied to their fields can be included in the calculations. Schnitkey says it can't.
"When we compare the returns between prevented planting and planting, only the costs that have not yet been incurred can be included," he says. "If, for example, you have already applied nitrogen fertilizer, that cost is sunk so it doesn't matter whether we choose to take the prevented planting payment or plant corn. It's no longer a relevant consideration."
Schnitkey counters that this also means that if a farmer hasn't applied nitrogen fertilizer yet, it will make the Prevented Planting payment an even better option.
"If you are able to plant corn or field conditions are alright, you should plant corn," he concluded. "You can't decide now not to plant, up to the final planting date."
The Facts and Opinions report is available online at http://www.farmdocdaily.illinois.edu/2011/05/economics_of_prevented_plantin.html.