Prevent Plant Is an Important Crop Insurance Issue
Published: Friday, May 13, 2022
The following is from Carl Zulauf, agricultural economist with Ohio State University, and Gary Schnitkey, Krista Swanson and Nick Paulson, agricultural economists with the University of Illinois.
Smaller than expected South American soybean production, the Ukrainian-Russian War, and little-to-no expected increase in U.S. principal crop acres in 2022 has created a tight supply-demand situation for grains and oilseeds for both the U.S. and world. Given the current situation, the prevent plant provision in crop insurance is a potentially important acreage issue.
Prevent plant is a provision in individual farm yield and revenue insurance contracts. Premiums for these contracts are subsidized by the U.S. government. Specifically, if an insured cause of loss, such as excessive moisture, delays planting to or after a date set by USDA's, Risk Management Agency a farmer has the decision to (1) plant the planned crop, (2) not plant a crop and take a prevent plant payment, or (3) take a partial prevent plant payment and plant a crop with restrictions.
This article focuses on the first two choices. Anecdotal evidence suggest they are the most common. They also are the starkest choices. Prevent plant is, in effect, a conditional land set aside decision for the farmer that is triggered when an insured cause of loss delays planting until a date set by RMA.
The initial prevent plant date varies by region and crop, but for many spring planted crops occurs from late May through late June.
Prevent plant has averaged 5.6 million acres per year since 2007, the first year electronic data are available from USDA. Given the role of weather, it is not surprising that the range is large: from 1.2 million acres in 2012 to 19.6 million acres in 2019. In USDA's March 2022 acreage report, U.S. farmers planned to plant 248.7 million acres to corn, cotton (both types), rice, sorghum, soybeans and wheat. These crops account for 99 percent of FSA prevent plant acres, with corn, wheat, and soybeans having individual shares of 44 percent, 24 percent, and 20 percent, respectively.
The top section of Table 1 is an estimate of the average prevent plant payment for 2022 Illinois corn and soybeans. They are $474 and $362 per acre, respectively, after subtracting $25 per acre for weed control on prevent plant acres.
The bottom section of Table 1 is an estimate of the market price needed to break even with the prevent plant payment. Share of expenses incurred prior to planting is an important consideration. Conceptually, RMA's prevent plant coverage factor equals this share.
Currently, RMA analysis has determined that 55 percent of corn and 60 percent of soybean expenses, including land, are incurred prior to planting. In other words, 45 percent of corn and 40 percent of soybean expenses, including land, are incurred during and after planting. The latter share of costs can be avoided by not planting but are incurred if the crop is planted.
Using RMA's shares and assuming expected yield is 16 percent lower for corn and 25 percent lower for soybeans than trend yield on the first prevent plant date, price would need to exceed $5.73 for corn and $15.16 for soybeans to provide a per acre return that exceeds the crop's net prevent plant payment plus the costs incurred during and after planting.
If market price on the first prevent plant date is close to current market prices and planting is delayed by an insured cause of loss, prevent plant would be a rationally competitive decision for soybeans but not corn.
A crop's prevent plant coverage factor is the same for all eligible acres of the crop. Prevent plant becomes more attractive if the share of expenses incurred prior to planting is lower than RMA's prevent plant coverage factor (in other words, more costs are incurred during and after planting). The reason is that these costs can be avoided by not planting.
When timely planting is more marginal and uncertain, it is managerially rational for farmers to minimize expenses incurred before planting even if prevent plant did not exist. It is thus not surprising that, since 2017, North and South Dakota account for 34 percent of U.S. corn and soybean prevent plant acres but only 11 percent of U.S. corn and soybean acres. In short, the share of expenses incurred during and after planting likely varies by area and, by extension, likely by farmer within an area.
Owned land that has no debt presents an interesting situation in this context. RMA treats 100 percent of land costs as incurred prior to planting, but land owned with no debt has no cash cost except real estate taxes and insurance. Farmers may assign a residual value to this land after the crop is marketed, thus treating land as an expense occurred after planting.
If land is assumed to be a cost incurred after planting, then the prevent plant coverage factors become 27 percent for corn and 22 percent for soybeans using data from RMA, November 2018. The breakeven prices become $7.46 for corn and $21.70 for soybeans.
This discussion illustrates the importance of the prevent plant coverage factor. It also suggests that farmers may be more willing to take prevent plant on owned than rented land.
For an insured unit, acres eligible for a crop's prevent plant payment are capped at the largest acres planted to the crop over the four preceding crop years minus acres planted to the crop in the current year. Corn and soybeans are often planted on an insured unit over a four-year period, including alternative year planting on the entire unit. It is thus not uncommon that planting of soybeans is competing with the higher corn prevent plant payment.
Given the data and assumptions in Table 1, soybean price would need to exceed $17.77 for a farmer to rationally prefer planting soybeans over taking the corn prevent plant payment. This price is 17 percent higher than the soybean price that competes with the soybean prevent plant payment.
At current market prices, prevent plant is clearly competitive for land intended to be planted to soybeans and eligible for a prevent plant payment from corn. It is not surprising that corn accounted for 73 percent of corn plus soybean prevent plant acres during the 2017-2021 crop years.
Under current prevent plant rules, no yield is recorded for a year if prevent plant is elected. In contrast, if a crop is planted, the farmer assumes the considerable risk that yield will be less than the APH yield. A lower yield can potentially impact APH for 10 years, the calculation window used for APH.
In their study of the impact of crop insurance on input use, Mieno, Walters, and Fulginiti showed conceptually, and found empirically that farmers manage crop insurance decisions to minimize reductions in future APH yields and thus crop insurance's future risk management value. To summarize, taking prevent plant avoids a potential 10-year cost of a lower APH if the crop is planted.
The preceding discussion focused on the design of prevent plant within crop insurance. A broader issue is whether prevent plant is appropriate public policy. Prevent plant makes production zero even though expected production is not zero.
Not having this potential production in a year of tight supply-demand is to potentially impose a significant economic burden via higher prices on consumers of grains and oilseeds, which includes retail consumers, livestock producers, and ethanol producers in the U.S. and across the globe. The poor are especially impacted.
The U.S. eliminated annual land set asides for commodity programs in the 1996 farm bill as the political process determined that their costs exceeded their benefits to U.S. society. The same public policy cost vs. benefit question exists for crop insurance's prevent plant provision.
Given the tight supply-demand situation for grains and oilseeds in 2022 and with prevent plant dates approaching and, in particular, occurring in late May in the northern U.S.; the time is now to discuss this question:
Is crop insurance's prevent plant provision appropriate public policy?
Analysis in this article finds significant economic incentive to take prevent plant if weather delays planting beyond the initial prevent plant date, especially for soybeans.
Expected production is not zero on the prevent plant date, but prevent plant makes it zero. While not all prevent plant acres would be planted if prevent plant did not exist, it is likely that some, maybe a lot, of prevent plant acres would be planted. Not having the potential production from land in prevent plant in a year of tight supply-demand is to potentially impose a notable economic burden on all consumers of grains and oilseeds, especially the poor. Should such an outcome occur, it could be considered a self-inflicted negative policy impact.
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