Crop Insurance and Crop Insurance and Processing Vegetables: Processing Vegetables:

Farmer Practices and Net Farmer Practices and Net ReturnsReturns

Paul D. MitchellPaul D. Mitchell

Ag and Applied Economics, UW-MadisonAg and Applied Economics, UW-Madison

608.265.6514608.265.6514 pdmitchell@wisc.edupdmitchell@wisc.edu

Central WI Processing Crops MeetingCentral WI Processing Crops Meeting

Hancock, WIHancock, WI March 14, 2007, March 14, 2007,

Extension Web Page:Extension Web Page:

www.aae.wisc.edu/mitchell/www.aae.wisc.edu/mitchell/extension.htmextension.htm

Goal TodayGoal Today

Use easily available USDA-RMA data for Use easily available USDA-RMA data for processing crops to examineprocessing crops to examine Farmer Practices with crop insuranceFarmer Practices with crop insurance Performance in terms of Net ReturnsPerformance in terms of Net Returns

Make basic recommendations regarding Make basic recommendations regarding using crop insurance for processing using crop insurance for processing corpscorps

Crop Insurance in WICrop Insurance in WI USDA’s Risk Management Agency (RMA) USDA’s Risk Management Agency (RMA)

manages federal crop insurance programmanages federal crop insurance program RMA “endorses” policies: makes subsidies RMA “endorses” policies: makes subsidies

available for companies and farmersavailable for companies and farmers Without RMA endorsement/subsidy, few Without RMA endorsement/subsidy, few

crop insurance policies would be availablecrop insurance policies would be available Every company sells the same Every company sells the same federalfederal crop crop

insurance policies for the same priceinsurance policies for the same price What crops are insurable in WI?What crops are insurable in WI?

Crop Crop Policy Policy CropCrop PolicyPolicy

ApplesApples GYCGYC Green Green PeasPeas

GYCGYC

BarleyBarley APHAPH PotatoesPotatoes GYCGYC

CabbageCabbage GYCGYC Snap Snap BeansBeans

GYCGYC

CranberriesCranberries APHAPH Sweet Sweet CornCorn

APH, GRP, APH, GRP, GRIPGRIP

CornCorn APH, CRC, APH, CRC, GRP, GRIPGRP, GRIP

Hybrid Seed Hybrid Seed CornCorn

GRP, GRIP, GRP, GRIP, Dollar PlanDollar Plan

NurseryNursery Dollar PlanDollar Plan OatsOats APHAPH

Dry BeansDry Beans APHAPH MintMint APHAPH

Forage Forage ProductionProduction

APH, GRPAPH, GRP SoybeansSoybeans APH, CRC, APH, CRC, GRP, GRIPGRP, GRIP

Forage Forage SeedingSeeding

Dollar PlanDollar Plan TobaccoTobacco Guaranteed Guaranteed ProductionProduction

SorghumSorghum APH, CRCAPH, CRC WheatWheat APH CRCAPH CRC

How GYC Crop Insurance How GYC Crop Insurance WorksWorks

GYC (Grower Yield Coverage) = GYC (Grower Yield Coverage) = basically same as APH, but for basically same as APH, but for vegetable cropsvegetable crops

Choose % of your average yield (based Choose % of your average yield (based on your yield history) as your guaranteeon your yield history) as your guarantee

If your harvested yield falls below your If your harvested yield falls below your guarantee, trigger a paymentguarantee, trigger a payment

Many Rules: varieties, planting dates, Many Rules: varieties, planting dates, unit structure, double cropping, etc. unit structure, double cropping, etc.

Not covered todayNot covered today

GYC/APH Prices this yearGYC/APH Prices this year Corn APH: $3.50/buCorn APH: $3.50/bu Soybeans APH: $7.00/buSoybeans APH: $7.00/bu Sweet Corn APH: $60.00/tonSweet Corn APH: $60.00/ton Potatoes GYC: $5.95/cwtPotatoes GYC: $5.95/cwt Snap Beans GYC: $85.00Snap Beans GYC: $85.00 Green Peas GYC: Contract PriceGreen Peas GYC: Contract Price

What’s the Participation Rate?What’s the Participation Rate?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2001 2002 2003 2004 2005 2006

Year

% A

cres

Insu

red

Apples

Corn

Cranberries

Green Peas

Oats

Potatoes

Snap Beans

Soybeans

Sweet Corn

Wheat

0%

10%

20%

30%

40%

50%

60%

70%

80%

2000 2001 2002 2003 2004 2005 2006

Year

% A

cres

Insu

red

Corn

Green Peas

Potatoes

Snap Beans

Soybeans

Sweet Corn

Participation RateParticipation Rate For processing crops, general upward For processing crops, general upward

trend in insured acrestrend in insured acres Now around 60%, comparable to field Now around 60%, comparable to field

corncorn Exception: sweet corn much flatter, lags Exception: sweet corn much flatter, lags

general trend: 40-50% participationgeneral trend: 40-50% participation Main Point: Lots of farmers are buying Main Point: Lots of farmers are buying

insurance for their processing crops, and insurance for their processing crops, and more and more are doing somore and more are doing so

How are they using it? (their practices=?)How are they using it? (their practices=?) How does it affect their Net Returns?How does it affect their Net Returns?

RMA DataRMA Data

““Summary of Business” on line summary Summary of Business” on line summary of each insurance program/policy by crop of each insurance program/policy by crop and state for each yearand state for each year

Policies sold, acres, units, liabilities, total Policies sold, acres, units, liabilities, total premium, subsidy, indemnities, loss ratiopremium, subsidy, indemnities, loss ratio

Use these data for 2000-2006 (7 years) Use these data for 2000-2006 (7 years) to describe insurance practices and to describe insurance practices and experienceexperience

Cat vs. Buy Up CoverageCat vs. Buy Up Coverage

RMA sells Catastrophic (Cat) coverage RMA sells Catastrophic (Cat) coverage for $100/crop/county (Basically Free!)for $100/crop/county (Basically Free!)

Yield guarantee is 50% of your Yield guarantee is 50% of your average, price is 55% of max price average, price is 55% of max price electionelection

Buy Up: higher % of average yield Buy Up: higher % of average yield (50%-75%, even up to 85%) and higher (50%-75%, even up to 85%) and higher price election (up to 100% of max)price election (up to 100% of max)

Buy Up more popular, more expensiveBuy Up more popular, more expensive Cat very cheap, less popularCat very cheap, less popular

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2001 2002 2003 2004 2005 2006

Year

% P

olic

ies

in B

uy U

p

Green Peas

Potatoes

Snap Beans

Sweet Corn

0

5000

10000

15000

20000

25000

30000

35000

2000 2001 2002 2003 2004 2005 2006

Year

Insu

red

Acr

es (

Buy

Up)

Green Peas

Potatoes

Snap Beans

Sweet Corn

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2001 2002 2003 2004 2005 2006

Year

% In

sure

d A

cres

in B

uy U

p

Green Peas

Potatoes

Snap Beans

Sweet Corn

Average Buy Up over 2000-Average Buy Up over 2000-20062006

CropCrop AcresAcres % Acres% Acres % % PoliciesPolicies

Green PeasGreen Peas 16,35016,350 85%85% 89%89%

PotatoesPotatoes 20,95820,958 57%57% 55%55%

Snap Snap BeansBeans

23,30223,302 62%62% 71%71%

Sweet Sweet CornCorn

19,79619,796 57%57% 74%74%

Buy Up Coverage in 2006Buy Up Coverage in 2006

CropCrop AcresAcres % Acres% Acres % % PoliciesPolicies

Green PeasGreen Peas 16,45316,453 88%88% 96%96%

PotatoesPotatoes 29,18429,184 69%69% 66%66%

Snap Snap BeansBeans

31,51531,515 71%71% 80%80%

Sweet Sweet CornCorn

25,43525,435 71%71% 81%81%

Summary Buy Up vs. CatSummary Buy Up vs. Cat Most farmers use Buy Up coverageMost farmers use Buy Up coverage Use of Buy Up coverage is increasingUse of Buy Up coverage is increasing % Acres vs % Policies shows more % Acres vs % Policies shows more

smaller farmers use Buy Up, but not smaller farmers use Buy Up, but not by muchby much Exception: Potatoes is reverseException: Potatoes is reverse

Green Peas almost all Buy up Green Peas almost all Buy up 96% policies in 200696% policies in 2006

Potatoes lowest use of Buy UpPotatoes lowest use of Buy Up 66% policies in 200666% policies in 2006

Unit StructureUnit Structure

Must define the insured unit of landMust define the insured unit of land Yield guarantee is at the unit levelYield guarantee is at the unit level Yield from the whole unit must fall below Yield from the whole unit must fall below

your guarantee to trigger an indemnityyour guarantee to trigger an indemnity Basic Unit: all acres of crop in one unitBasic Unit: all acres of crop in one unit Optional Unit: break basic unit into smaller Optional Unit: break basic unit into smaller

fields, following RMA rulesfields, following RMA rules Use as many Optional Units as Use as many Optional Units as

possiblepossible

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2000 2001 2002 2003 2004 2005 2006

Year

Ave

rage

Num

ber

Uni

ts p

er P

olic

y

Green Peas

Potatoes

Snap Beans

Sweet Corn

Unit Structure SummaryUnit Structure Summary

Most farmers using Most farmers using Optional UnitsOptional Units

Unit Structure fairly Unit Structure fairly constant last 7 constant last 7 years, slight years, slight upward trend upward trend

Exception: Potatoes Exception: Potatoes went from 2 to 5 went from 2 to 5 units per policy units per policy

CropCrop

Average Average # #

Units/PolicUnits/Policyy

Green Green PeasPeas 1.401.40

PotatoesPotatoes 3.973.97

Snap Snap BeansBeans 2.032.03

Sweet Sweet CornCorn 1.761.76

Summary of Farmer Summary of Farmer PracticesPractices

Most farmers use crop insurance for their Most farmers use crop insurance for their processing vegetables and more are doing soprocessing vegetables and more are doing so

Most use Buy Up coverage or are switching Most use Buy Up coverage or are switching from Cat to Buy Up coveragefrom Cat to Buy Up coverage

Many farmers use Optional Units, especially Many farmers use Optional Units, especially for potatoes (snap beans to some extent)for potatoes (snap beans to some extent)

Most farmers keeping constant unit structure Most farmers keeping constant unit structure (not switching), except for potatoes(not switching), except for potatoes

Practices for potatoes are in transitionPractices for potatoes are in transition

Double CroppingDouble Cropping

RMA has a standing policy not to insure RMA has a standing policy not to insure second crop in a double crop rotationsecond crop in a double crop rotation

Corn planted following an early hay cutting Corn planted following an early hay cutting is not insurableis not insurable

Soybeans following early peas or snap Soybeans following early peas or snap beans are not insurablebeans are not insurable

Does this double crop restriction limit Does this double crop restriction limit buying crop insurance for processing buying crop insurance for processing crops?crops?

You tell me!You tell me!

What about Net Returns?What about Net Returns?

How does crop insurance affect How does crop insurance affect expected net returns?expected net returns?

Examine expected net returns effects Examine expected net returns effects using Loss Ratios derived from RMA using Loss Ratios derived from RMA datadata

Loss Ratio = Indemnities/PremiumLoss Ratio = Indemnities/Premium The issue is what premium to use: The issue is what premium to use:

total premium or farmer portion?total premium or farmer portion? RMA cares about program loss ratio, RMA cares about program loss ratio,

farmers care about farmer loss ratiofarmers care about farmer loss ratio

Loss RatioLoss Ratio Simple way to see how the insurance Simple way to see how the insurance

affects farmer net returnsaffects farmer net returns Do farmers on average make or lose Do farmers on average make or lose

money with the crops insurance?money with the crops insurance? Jumps around between years: high in Jumps around between years: high in

bad years, low in good yearsbad years, low in good years Note: RMA subsidizes premiums and Note: RMA subsidizes premiums and

program loss ratio includes that program loss ratio includes that subsidy as part of the total premium subsidy as part of the total premium collectedcollected

Program Loss RatioProgram Loss Ratio

Loss Ratio = Indemnities/Loss Ratio = Indemnities/TotalTotal PremiumPremium

Loss Ratio > 1 means paid more Loss Ratio > 1 means paid more indemnities than premiums received indemnities than premiums received (program on average losing money)(program on average losing money)

Loss Ratio < 1 means received more Loss Ratio < 1 means received more premiums than indemnities paid premiums than indemnities paid (program on average making money)(program on average making money)

RMA goal to get a long term program RMA goal to get a long term program loss ratio that is around 1.0loss ratio that is around 1.0

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

2000 2001 2002 2003 2004 2005 2006

Year

Pro

gram

Los

s R

atio

Green Peas

Potatoes

Snap Beans

Sweet Corn

Corn

Soybeans

Wheat

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

2000 2001 2002 2003 2004 2005 2006

Year

Pro

gram

Los

s R

atio

Green Peas

Potatoes

Snap Beans

Sweet Corn

Average Program Loss Average Program Loss RatiosRatios

CropCropAverage Loss Average Loss

RatioRatio

Green PeasGreen Peas 0.480.48

PotatoesPotatoes 0.470.47

Snap BeansSnap Beans 0.490.49

Sweet CornSweet Corn 0.400.40

CornCorn 0.870.87

SoybeansSoybeans 1.491.49

WheatWheat 0.570.57

Program Loss Ratio Program Loss Ratio SummarySummary

Over the last Over the last 7 years7 years Grain crops had higher loss ratios than Grain crops had higher loss ratios than

processing vegetables (closer to 1.0)processing vegetables (closer to 1.0) Processing VegetablesProcessing Vegetables

On average, about twice as much total On average, about twice as much total premium collected as indemnities paidpremium collected as indemnities paid

Upward trendUpward trend (it’s getting better)(it’s getting better) RMA has room for improvement to get RMA has room for improvement to get

1.01.0

0.00

0.50

1.00

1.50

2.00

2.50

3.00

2000 2001 2002 2003 2004 2005 2006

Year

Pro

gram

Los

s R

ato

(Buy

Up)

Green Peas

Potatoes

Snap Beans

Sweet Corn

Buy Up Program Loss RatiosBuy Up Program Loss Ratios Higher on average than total program Higher on average than total program

loss ratio (better for farmers)loss ratio (better for farmers) RMA has internal premiums for Cat too lowRMA has internal premiums for Cat too low RMA has better (relatively lower) premiums RMA has better (relatively lower) premiums

for higher coverage levelsfor higher coverage levels Flat trend for Green Peas, Snap Beans, Flat trend for Green Peas, Snap Beans,

and Sweet Corn (0.65-0.81)and Sweet Corn (0.65-0.81) What’s going on with Potatoes?What’s going on with Potatoes?

String of better and better years?String of better and better years? Farmers with better land buying insurance?Farmers with better land buying insurance? Premiums increasing?Premiums increasing?

Farmer Loss RatioFarmer Loss Ratio Farmers do not pay all the premiumFarmers do not pay all the premium Farmer Loss Ratio = Farmer Loss Ratio =

Indemnities/Indemnities/Farmer PremiumsFarmer Premiums Loss Ratio > 1 means farmers paid more Loss Ratio > 1 means farmers paid more

indemnities than premiums received indemnities than premiums received (farmers on average making money)(farmers on average making money)

Loss Ratio < 1 means farmers received Loss Ratio < 1 means farmers received more premiums than indemnities paid more premiums than indemnities paid (farmers on average losing money)(farmers on average losing money)

Buy Up only, no farmer premium for CatBuy Up only, no farmer premium for Cat

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

2000 2001 2002 2003 2004 2005 2006

Year

Farm

er L

oss

Rat

io (

Buy

Up)

Green Peas

Potatoes

Snap Beans

Sweet Corn

Average Farmer Loss Ratio (Buy Average Farmer Loss Ratio (Buy Up)Up)

CropCropAverage Loss Average Loss

RatioRatio

Green PeasGreen Peas 1.701.70

PotatoesPotatoes 2.722.72

Snap BeansSnap Beans 1.811.81

Sweet CornSweet Corn 1.531.53

Summary Farmer Loss RatioSummary Farmer Loss Ratio On average across WI over the last 7 yearsOn average across WI over the last 7 years, ,

farmers made money with crop insurance for farmers made money with crop insurance for processing vegetables with buy up coverageprocessing vegetables with buy up coverage

For every $1 paid in premium, they received For every $1 paid in premium, they received $1.53 to $1.81 in indemnities$1.53 to $1.81 in indemnities Explains increased participation ratesExplains increased participation rates

What’s going on with Potatoes?What’s going on with Potatoes? String of better and better years?String of better and better years? Farmers with better land buying insurance?Farmers with better land buying insurance? Premiums increasing?Premiums increasing?

Note: It’s a 7-Year State Note: It’s a 7-Year State Average, Average,

Not a GuaranteeNot a Guarantee This loss ratio analysis is the average This loss ratio analysis is the average

for all policies in Wisconsin by cropfor all policies in Wisconsin by crop Some years it will be higher, some Some years it will be higher, some

years lower, this the 7-year averageyears lower, this the 7-year average Some counties have low loss ratios and Some counties have low loss ratios and

some counties have high loss ratiossome counties have high loss ratios Data by county exist, but it’s a big fileData by county exist, but it’s a big file Some farmers have low loss ratios, Some farmers have low loss ratios,

some have high ones—each farmer is some have high ones—each farmer is differentdifferent

Probability of Receiving Probability of Receiving IndemnitiesIndemnities

Can use the RMA data to find out how Can use the RMA data to find out how many policies and how many units many policies and how many units received indemnitiesreceived indemnities

Rough empirical estimate of the Rough empirical estimate of the probability of receiving an indemnityprobability of receiving an indemnity

Can examine by Buy Up vs. Cat Can examine by Buy Up vs. Cat coveragecoverage

Again, it will be a state wide estimateAgain, it will be a state wide estimate

0%

10%

20%

30%

40%

50%

60%

2000 2001 2002 2003 2004 2005 2006

Year

% P

olic

ies

Inde

m >

0 (

Buy

Up)

Green Peas

Potatoes

Snap Beans

Sweet Corn

0%

5%

10%

15%

20%

25%

2000 2001 2002 2003 2004 2005 2006

Year

% P

olic

ies

Inde

m >

0 (

Cat

)

Green Peas

Potatoes

Snap Beans

Sweet Corn

Probability Pay IndemnityProbability Pay Indemnity

% Policies Pay% Policies Pay

CropCrop Buy UpBuy Up CatCat

Green PeasGreen Peas 27%27% 3%3%

PotatoesPotatoes 37%37% 5%5%

Snap BeansSnap Beans 33%33% 11%11%

Sweet CornSweet Corn 18%18% 3%3%

Summary of ProbabilitiesSummary of Probabilities

No real trend for cropsNo real trend for crops Potato buy up has a downward trendPotato buy up has a downward trend

Cat policies rarely pay: 3-5% (< 1 in 20)Cat policies rarely pay: 3-5% (< 1 in 20) Snap Beans = 11% (over 1 in 10)Snap Beans = 11% (over 1 in 10)

Buy Up policies pay 27%-37%Buy Up policies pay 27%-37%

Roughly range between 1 in 4 to 1 Roughly range between 1 in 4 to 1 in 3in 3 Sweet Corn = 18% (less then 1 in 5)Sweet Corn = 18% (less then 1 in 5)

Summary of Net Returns Summary of Net Returns EffectsEffects

Program loss ratios too low in WI for Program loss ratios too low in WI for processing crops (premiums too high)processing crops (premiums too high) Only 7 years, will be awhile before RMA Only 7 years, will be awhile before RMA

actsacts Farmer loss ratios over 1.0, so farmers Farmer loss ratios over 1.0, so farmers

on average making money with the on average making money with the insuranceinsurance For every $1 paid in premium, they For every $1 paid in premium, they

received $1.53 to $1.81 in indemnitiesreceived $1.53 to $1.81 in indemnities Potatoes are in transition or strange historyPotatoes are in transition or strange history

In any given year, 20% to 35% of Buy In any given year, 20% to 35% of Buy Up policies pay, 5-10% Cat policies payUp policies pay, 5-10% Cat policies pay

Conclusions: GYC (APH) Crop Conclusions: GYC (APH) Crop Insurance for VegetablesInsurance for Vegetables

Crop insurance, especially Buy Up coverage, Crop insurance, especially Buy Up coverage, likely valuable for many/most WI processing likely valuable for many/most WI processing vegetable farmersvegetable farmers

Consider at least Cat: $100/crop/countyConsider at least Cat: $100/crop/county Use as many Optional units as possibleUse as many Optional units as possible Insurance has risk management Insurance has risk management

benefitsbenefits, not just increase average net , not just increase average net returns, also reduces returns variability with returns, also reduces returns variability with yield flooryield floor

March 15March 15thth final day to purchase crop final day to purchase crop insuranceinsurance

Sweet Corn and GRP and Sweet Corn and GRP and GRIPGRIP

Can buy Corn GRP and GRIP for sweet Can buy Corn GRP and GRIP for sweet corn acres in WIcorn acres in WI

No comparable option for other cropsNo comparable option for other crops No Soybean GRP/GRIP for green peas No Soybean GRP/GRIP for green peas

or snap beansor snap beans New county by county analysis of corn New county by county analysis of corn

GRP for WI: few hard copies, plus web GRP for WI: few hard copies, plus web

www.aae.wisc.edu/mitchell/www.aae.wisc.edu/mitchell/extension.htmextension.htm

Is GRP a Good Deal?Is GRP a Good Deal? Color maps of expected net returns as Color maps of expected net returns as

bu/ac (multiply by RMA price)bu/ac (multiply by RMA price) Green is positive average net returnGreen is positive average net return Red negative average net returnRed negative average net return Actual bu/ac numbers on my web pageActual bu/ac numbers on my web page Again, no risk management benefit Again, no risk management benefit

included in the analysisincluded in the analysis Remember: March 15Remember: March 15thth final day to final day to

purchase crop insurancepurchase crop insurance

> 1 bu/ac 0 to 1 bu/ac –1 to 0 bu/ac –2 to –1 bu/ac < –2 bu/ac

Expected Returns (bu/ac) toGRP Harvested Acres Option

Corn

> 1 bu/ac 0 to 1 bu/ac –1 to 0 bu/ac –2 to –1 bu/ac < –2 bu/ac

Expected Returns (bu/ac) toGRP Planted Acres Option

Corn

> 1 bu/ac ½ to 1 bu/ac 0 to ½ bu/ac –½ to 0 bu/ac < –2 bu/ac No Data

Expected Returns (bu/ac)to GRP for Soybeans

Questions?Questions?

Paul D. MitchellPaul D. Mitchell

UW-Madison Ag & Applied EconomicsUW-Madison Ag & Applied Economics

Office: (608) 265-6514Office: (608) 265-6514

Cell: (608) 320-1162Cell: (608) 320-1162

Email: pdmitchell@wisc.eduEmail: pdmitchell@wisc.edu

Extension Web Page:Extension Web Page:

www.aae.wisc.edu/mitchell/extension.htmwww.aae.wisc.edu/mitchell/extension.htm