Georgia farmers are currently dealing with severe drought conditions which have hampered yield prospects particularly in non-irrigated situations. For some farmers, planting was delayed due to lack of soil moisture at planting time. Stands are skippy and plant height and width is highly variable in many fields. Recent rains have caused late seedlings emergence and management will be difficult. Some fields or areas of fields have been replanted.

Most cotton and peanut acreage in the state is insured against drought with crop insurance. Most acreage is insured with "buy-up" coverage at the 65% or 75% level and most are APH (Actual Production History) policies. The final planting dates for full insurance coverage were May 25^th for peanuts and May 31^st for cotton. After these dates, growers had 25 days (until June 20^th for peanuts and June 25^th for cotton) to plant at reduced coverage of 1% per day.
 
 

Growers can start a claim by requesting an appraisal anytime they feel there is a covered loss.

For cotton, crop insurance loss adjusters have only 2 methods for appraising the yield potential of a crop in the field. These are the "stand reduction" method and the "boll count" method. For peanuts, the 2 methods are "stand reduction" and "pod count". The stand reduction method is used after the 25-day delayed planting period has expired. This method involves measuring the average amount (row feet) of skips in representative samples of the field. The "percent stand" is multiplied by the APH is arrive at the "appraised production". For example, if there were an average of 60 feet of skips per 100 feet of row sampled, this would be a 40% stand. If the APH was 600 lbs per acre for cotton, the appraised production would be 240 lbs per acre (600 x .40).

The appraised production is subtracted from the amount of insurance coverage to arrive at the loss for payment. For example, if the APH yield was 600 and the amount insured was 75%, the insured yield is 450 lbs (600 x .75). If appraised production is 240 lbs and the farmer decides to abandon the crop, the farmer will be paid for only 210 lbs (450 - 240).
 

With the planting and delayed planting deadlines now passed and poor growing conditions continuing, farmers must now decide how to economically cope with the situation and manage the crop. This decision is particularly crucial in the case of cotton because farmers could save on several fees if they decide to abandon the crop. Technology fees on Bt and RR cotton will not be required if the crop is abandoned by July 15^th or within 60 days after planting, whichever is the latest. Boll weevil eradication fees will not be required if the crop is abandoned by August 1^st.

Farmers with anticipated losses have the following options at this juncture:

• Get a stand count or stand reduction appraisal. Depending on the appraised yield, the grower can then (a) abandon the crop or (b) continue to grow the crop out to completion and harvest.

 
• If deciding to abandon the crop, the grower may elect to leave a representative strip which must be managed and harvested. This can work as an advantage or disadvantage. If the grower feels the potential loss is much greater than the stand count method indicates, leaving a strip would be less costly than growing out the entire field and the insurance indemnity will be greater. A risk and disadvantage of leaving a strip is that if the strip does better than expected, insurance indemnity will be reduced or perhaps even eliminated and there would be no crop income either.

 
• If the decision is made to continue on with the crop and yield prospects decline or do not improve, the farmer can still request a boll count (cotton) or pod count (peanuts) and get another appraisal and make another decision at that juncture. Loss adjusters cannot release a crop on the boll count method until after September 15^th, however.

In making this decision, the only costs that are relevant are those that will be incurred from that point on if the crop is grown out. Any costs already incurred are irrelevant because they must be paid regardless of the decision. These expenses may be called "sunken" costs. If the crop is abandoned, the sole source of income will be crop insurance indemnity. If the crop is grown out, sources of income will be crop sales plus indemnity if final yield is less than the insured yield and the relevant costs to consider are only those of completing the production and marketing of the crop.

Considering risk, the farmer must decide which course of action gives the highest return to "sunken" costs - the indemnity from abandoning the crop or the net return from grow out.
 

This analysis is conducted for a range of cotton prices from 55 to 70 cents per pound, at 2 APH (Actual Production History) levels-- 500 lbs/ac and 650 lbs/ac, and at 2 levels of insurance coverage-- 65% and 75%. The cotton price is the total of both market price and any LDP or POP payment. A net (after cottonseed) ginning, warehouse, and marketing cost of 5 cents per pound is deducted from this price and a cost of $135 per acre is assumed for carrying the crop through to completion. This cost would be saved if the crop were abandoned or incurred if the crop is grown out. These costs include side-dress nitrogen, a major portion of post emergence herbicides, insecticides and application cost, technology and BWEP fees, defoliation, most scouting, remaining pre-harvest fuel and some repair costs, harvest fuel and repairs, and interest. If cotton is custom picked, cost may be higher than assumed. If the farmer is further along in production of the crop or remaining costs significantly less than the amount assumed, it would make abandonment less feasible. If remaining costs are significantly higher, it would make abandonment more feasible.
 

Threshold Yield

Table 1 shows the estimated "Threshold Yield" for non-irrigated cotton at both a 500 lb and 650 lb APH and at various prices for cotton. The "Threshold Yield" is the yield (appraised or realized) where crop insurance indemnity from abandonment would equal the net return from grow out. If the adjuster's appraised yield is less than the Threshold Yield, it would be more economical to abandon the crop. If the adjusters's appraised yield is more than the Threshold Yield, it would be more economical to carry the crop through to harvest. As Table 1 shows, the Threshold Yield is 208 to 270 lbs per acre or a Stand of 32 to 54% depending on the crop insurance APH. The Threshold Yield declines as the market price of cotton increases.

Implications of APH and Using the Stand Reduction Method

The stand reduction or stand count method does not consider differences in plant height, maturity, and harvest yield potential. Basically, if it's up and green, it's counted. Recent rains have caused plants to emerge that were thought lost. So stand count has improved. This means it is very likely that the stand count method will result in a yield appraisal that is higher than the farmer may consider possible.

On the other hand, yield appraisal is based on the farm's APH. Because of recent multiple poor years, the APH may not be representative of the farm's true average yield potential. This means that for a given stand count, the yield potential may actually be higher than the yield appraisal indicates.

Both of the above factors point to the likelihood that many farmers may find it feasible and necessary to carry the crop through to completion.
 

Net Returns From Grow Out Are "Flat"

Tables 2 and 3 compare the Net Return To Sunken Costs from abandonment or grow out. Table 2 is for a 500 lb APH and Table 3 is for a 650 lb APH. A cotton price (including POP or LDP) of 60 cents is assumed. While this price level is lower (hopefully) than most growers will average from the 2000 crop, given weather stress the likelihood for quality deductions is great thus 60 cents may be a reasonable price from which to make a decision. Net Return from abandonment is based on the adjuster's appraised yield. Net Return from grow out is based on estimated or expected actual yield.

For example, if the appraised yield is 300 lbs (a 60% stand), the crop insurance indemnity at 75% coverage would be $47 per acre (Table 2). If growing the crop out instead and the final yield was also 300 pounds, net returns would be $77 per acre. If the appraised yield is 400 lbs (an 80% stand) and the coverage is 75% with a 650 lb APH, the crop insurance indemnity would be $54 per acre but the net return from grow out would be $139 per acre at 400 lbs (Table 3).
 
 

Notice that net returns from grow out do not change dramatically unless the final yield is above the crop insurance level of coverage. This reflects the safety net provided by crop insurance.

A factor that growers should also consider in their decision to abandon or not is risk. This can be done by comparing the "Abandon" and "Grow Out" columns in Tables 2 and 3, looking at the difference in net returns at various yield levels, and then considering the price, yield, and cost uncertainties with grow out. Is the difference in net returns worth the additional risk of growing the crop to completion. For example, suppose the adjusters appraised yield is 250 lbs per acre (Table 2). At 65% coverage, the farmer can receive a risk-free indemnity of $47 per acre. Higher net returns could be achieved by completing production of the crop if the final or actual yield is 350 lbs or more or if less than 250 lbs.
 
 

For stand counts 40% and less, the decision likely favors abandonment. In some instances, however, stand counts and appraised yield will be high. For stand counts of 60% and higher, the stand count approaches the level of insurance coverage (65% or 75%) for most growers and the difference in net return between abandonment and grow clearly justifies continuing with production.
 

Should Farmers Leave A Strip?

The farmer will be allowed to abandon the crop (the field will be "released") only if there is a yield loss, i.e. if the adjuster's appraised yield is below the farmers level of coverage. The adjuster may require the farmer to leave a strip or the farmer may leave a strip if he/she feels that yield potential is not as high as the stand count method indicates. This is risky... but may be warranted in some situations. This analysis does not consider the cost of maintaining a strip. This would need to be deducted from the crop insurance indemnity received if the crop is abandoned and if there is a covered loss. The farmer must be very confident that the appraised yield from the stand count method is too high.

Suppose, for example, a farmer with a 500 lb APH was given a stand count of 70% and an appraised yield of 350 lbs (Table 2). At 75% coverage, the crop insurance indemnity would be only $16. If instead the crop is grown out, net return would be $73 or more depending on the final yield. If the farmer decides to leave a strip and abandon the crop, the yield from the strip would have to drop to 250 pounds or less to make the indemnity equal to the net returns given up.
 

Worst Case and Best Case Scenarios

Figures 1 and 2 represent perhaps 2 extremes in terms of all the possible situations on Georgia cotton farms at the present time. In Figure 1, we have "low APH, low coverage, and low price". The Threshold Yield is 270 pounds per acre or a stand count of 54%. If the appraised yield is 270 lbs per acre or less, the most economical decision is to abandon the crop. If the appraised yield is greater than 270 lbs, the most economical decision would be to continue with production.

In Figure 2, we have "high APH, high coverage, and high price". The Threshold Yield is 208 lbs per acre or a stand count of 32%. If the appraised yield is 208 lbs or less, the most economical decision is to abandon the crop. If the appraised yield is greater than 208 lbs, the most economical decision would be to continue with production. However, because of the high cotton price and high level of coverage, net returns from grow out may not be much higher than the indemnity from abandonment unless the final yield realized is above the level of coverage.

The decision of whether to abandon a field versus growing it out to harvest is a tough one to make early in the growing season. A partial budget analysis can help you see the economic implications of the decision. Partial budgeting calculates the changes in income and costs resulting from a change in the operation.

The situation under consideration is where a drought or weather related event has caused a poor stand of peanuts and a producer has the crop insured. Costs already incurred are considered "sunken" costs. Cash costs yet to be realized include weed, insect, fungus and nematode control. Harvest costs and interest on operating capital are also included as unrealized costs or cost savings from abandoning the crop. In a normal year, these costs might total around $200/acre according to the Cooperative Extension Service 2000 budget for South Georgia dryland peanuts. The following example uses $210 per acre for typical pest control and harvest costs 60 days or less after planting.

Other assumptions made in this example include: a 2500 lb. average yield and APH yield for crop insurance purposes, a $0.30/lb. price election, a $0.305/lb. quota price, and 65% coverage which is the most common level of insurance taken for dryland peanuts.

Identifying what costs and revenue will be changed is a major part of this exercise. The partial budget is set up using the following formula:

A. Decreased Costs C. Additional Costs

+ +

B. Additional Income D. Decreased Income

= =
 

• Alternate Plan Subtotal 2. Base Plan Subtotal

The decision to abandon the field would be considered if the Difference is positive. A negative Difference would indicate growing out the crop.

Table 4 is an example based on the assumptions given above. The example shows a negative difference if the yield is assessed at 30% of the APH yield, or 750 lbs. This is nearly a breakeven level indicated by the "threshold" yield of 689 lbs. Releasing the crop to insurance would result in a $262.50 indemnity payment, and adding $210 of saved costs gives a total of $472.50 under abandonment. Growing out the crop results in a $228.75 crop income and a $262.50 indemnity payment for a total of $491.25. The economic difference in abandoning the crop and growing it out is a negative $18.75 per acre, indicating growing out the crop.

Consideration, however, needs to be given as to the risks of growing out the crop with a yield potential of only 750 lbs. An actual yield above 750 lbs. would give a higher crop income but the insurance indemnity would also be adjusted accordingly. The net income from growing out the crop stays the same at $281.25 (491.25 - 210) until the actual yield is above the 65% yield guarantee of 1625 lbs. This is illustrated in Figure 4. An assessed yield below the threshold yield of 690 lbs should be a simple decision to take the indemnity payment and abandon the crop.

An actual yield above 1625 lbs., as indicated by the second vertical line in Figure 4, is needed to obtain a higher net return to "sunken costs." A yield assessment between 30% and 50% means a decision must be made based on the risks associated with growing out the crop. Should I minimize my costs and take the indemnity payment at 750 lbs. or should I grow the crop out with the hopes of making better than 1625 lbs?

The main factor besides weather that would change this scenario is the market price at harvest. If the market price goes up due to a production shortfall, then returns to growing out the crop are realized sooner in terms of the actual yield. Also, quality must be considered since it determines the final price received. Lower grades will have an offsetting affect to higher prices. Crop insurance pays on base grade quality, thus a situation could happen where an indemnity payment will result in a better return than a higher actual yield at low quality.
 
 

The threshold yield does not change unless the grow-out costs change. Figure 4 shows the relationship between grow-out costs and the threshold yield. For example purposes, three possible situations are highlighted. The example above is considered a normal level of grow-out costs. A low level of costs of $135/acre where minimal inputs are used to grow-out the crop would result in a 442 lb. threshold yield. A higher level of grow-out costs of $280/acre brought on by drought stress would result in a 918 lb. threshold yield. Either situation could be envisioned with the variability of conditions in South Georgia. The higher the threshold yield, the more likely the decision to abandon.

Summary
 

Georgia farmers are currently dealing with severe drought conditions which have hampered yield prospects particularly in non-irrigated situations. For some farmers, planting was delayed due to lack of soil moisture at planting time. Stands are skippy and plant height and width is highly variable in many fields. Recent rains have caused late seedlings emergence and management will be difficult. Some fields or areas of fields have been replanted. Growers can start a claim by requesting an appraisal anytime they feel there is a covered loss. For cotton, crop insurance loss adjusters have only 2 methods for appraising the yield potential of a crop in the field. These are the "stand reduction" method and the "boll count" method. For peanuts, the 2 methods are "stand reduction" and "pod count".

With the planting and delayed planting deadlines now passed and poor growing conditions continuing, farmers must now decide how to economically cope with the situation and manage the crop. This decision is particularly crucial in the case of cotton because farmers could save on several fees if they decide to abandon the crop. Technology fees on Bt and RR cotton will not be required if the crop is abandoned by July 15^th or within 60 days after planting, whichever is the latest. Boll weevil eradication fees will not be required if the crop is abandoned by August 1^st.

The "Threshold Yield" is the yield (appraised or realized) where crop insurance indemnity from abandonment would equal the net return from grow out. If the adjuster's appraised yield is less than the Threshold Yield, it would be more economical to abandon the crop. If the adjusters's appraised yield is more than the Threshold Yield, it would be more economical to carry the crop through to harvest. The Threshold Yield for non-irrigated cotton is 208 to 270 lbs per acre or a Stand of 32 to 54% depending on the crop insurance APH. The Threshold Yield declines as the market price of cotton increases.

The stand reduction or stand count method does not consider differences in plant height, maturity, and harvest yield potential. Basically, if it's up and green, it's counted. Recent rains have caused plants to emerge that were thought lost. So stand count has improved. This means it is very likely that the stand count method will result in a yield appraisal that is higher than the farmer may consider possible.

On the other hand, yield appraisal is based on the farm's APH. Because of recent multiple poor years, the APH may not be representative of the farm's true average yield potential. This means that for a given stand count, the yield potential may actually be higher than the yield appraisal indicates.

Both of the above factors point to the likelihood that many farmers may find it feasible and necessary to carry the crop through to completion. For stand counts 40% and less, the decision likely favors abandonment. In some instances, however, stand counts and appraised yield will be high. For stand counts of 60% and higher, the stand count approaches the level of insurance coverage (65% or 75%) for most growers and the difference in net return between abandonment and grow clearly justifies continuing with production.

The farmer will be allowed to abandon the crop (the field will be "released") only if there is a yield loss, i.e. if the adjuster's appraised yield is below the farmers level of coverage. The adjuster may require the farmer to leave a strip or the farmer may leave a strip if he/she feels that yield potential is not as high as the stand count method indicates. This is risky... but may be warranted in some situations. This analysis does not consider the cost of maintaining a strip. This would need to be deducted from the crop insurance indemnity received if the crop is abandoned and if there is a covered loss. The farmer must be very confident that the appraised yield from the stand count method is too high.

The peanut situation under consideration is where a drought or weather related event has caused a poor stand of peanuts and a producer has the crop insured. Costs already incurred are considered sunken costs. Cash costs yet to be realized include weed, insect, fungus and nematode control. Harvest costs and interest on operating capital are also included as unrealized costs or cost savings from abandoning the crop. In a normal year, these costs might total around $200/acre according to the Cooperative Extension Service 2000 budget for South Georgia dryland peanuts. As an example, use $210 per acre for typical pest control and harvest costs 60 days or less after planting. Other assumptions include: a 2500 lb. average yield and APH yield for crop insurance purposes, a $0.30/lb. price election, a $0.305/lb. quota price, and 65% coverage which is the most common level of insurance taken for dryland peanuts.

Given the above assumptions, a yield assessment less than 700 lbs. per acre would lead to the decision to abandon the crop and take the crop insurance indemnity, thus minimizing losses. A yield assessment between 30% and 50% percent is a tough call based upon the level of risk faced by the producer. What is the likelyhood the final yield will be above the insurance yield guarantee? Will quality be a problem? Will the market price change between now and harvest?

Will more inputs be needed than normal? The threshold yield only changes with a change in the grow-out costs or the market price. The higher the grow-out costs, the higher the threshold yield and thus the more likely the decision to abandon. Given these factors, the decision will vary for each individual but the closer the assessed yield to the threshold yield, the more likely the decision to abandon.

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