Extension and Outreach/Department of Economics Crop Insurance 2013 National Agricultural Credit...
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Transcript of Extension and Outreach/Department of Economics Crop Insurance 2013 National Agricultural Credit...
Extension and Outreach/Department of Economics
Crop Insurance2013 National Agricultural Credit Conference
San Diego, CaliforniaApr. 17, 2013
Chad HartAssociate Professor/Crop Markets Specialist
Extension and Outreach/Department of Economics
Crop InsuranceOne of many risk management
strategies
Traditionally set up to protect farmers in times of low crop yields
Now offers coverage for low prices
Available on over 100 commodities
Extension and Outreach/Department of Economics
Why Crops Fail
44%
4%22%
3%
6%
8%
13% DroughtHeatExcess MoistureCold Wet WeatherFreezeHailOther
Extension and Outreach/Department of Economics
Federal Crop InsuranceFederal Crop Insurance Corporation – 1938
Government’s initial move in crop insurance
Federal Crop Insurance Act of 1980 Premium subsidies
Federal Crop Insurance Reform Act of 1994 Catastrophic coverage and higher subsidies
Agricultural Risk Protection Act of 2000The 2008 Farm Bill
Extension and Outreach/Department of Economics
Federal Crop Insurance:A Public/Private Partnership
The Federal Government works with private insurance companies to offer crop insurance.
Since 1998, all federal crop insurance products are sold and serviced by private companies.
The Federal Government sets and/or approves premium rates and insurance terms.
Both entities share risks and returns from crop insurance.
Extension and Outreach/Department of Economics
Federal Crop Insurance
Extension and Outreach/Department of Economics
Product InnovationAgricultural insurance products developed by private companies, reviewed and approved by FCIC
Examples: Crop Revenue Coverage (CRC) Revenue Assurance (RA) Income Protection (IP) Group Risk Income Protection (GRIP) Livestock Risk Protection (LRP) Livestock Gross Margin (LGM)
Extension and Outreach/Department of Economics
Federal Crop Insurance:Total Acres Insured
Extension and Outreach/Department of Economics
Crop Insurance Top 10sCrop Acres (million)Corn 81.28Soybean 63.77Pasture 48.08Wheat 46.34Cotton 11.41Sorghum 4.68Forage 3.30Barley 3.00Rice 2.11Sunflower 1.71
State Acres (million)Texas 48.08North Dakota 23.05
Iowa 21.71Kansas 18.25Illinois 17.92Minnesota 17.47Nebraska 15.68South Dakota 14.94
Montana 10.30Indiana 8.71
Extension and Outreach/Department of Economics
Crop Insurance Top 10s
CropPremiums($ billion)
Corn 4.32Soybean 2.27Wheat 1.78Cotton 0.84Sorghum 0.21Pasture 0.16Dry Beans 0.10Potatoes 0.09Peanuts 0.09Barley 0.08
StatePremiums($ billion)
Texas 1.08North Dakota 0.96
Iowa 0.90Minnesota 0.82Kansas 0.81Illinois 0.77South Dakota 0.70
Nebraska 0.67Indiana 0.44Missouri 0.37
Extension and Outreach/Department of Economics
Crop Insurance Top 10s
CropLiabilities ($ billion)
Corn 53.55Soybean 24.62Wheat 10.57Cotton 4.82Nursery 2.01Almonds 1.23Potatoes 1.14Orange Trees 1.12Rice 1.10Sugar Beets 1.10
StateLiabilities ($ billion)
Iowa 14.94Illinois 12.15Minnesota 10.03Nebraska 8.73North Dakota 6.27
Indiana 5.74Kansas 5.66South Dakota 5.38
California 5.38Texas 5.23
Extension and Outreach/Department of Economics
Types of Crop InsuranceIndividual Yield (YP)
Area Yield (GRP)
Individual Revenue (RP and RPE)
Area Yield - Individual Revenue Combination (GRIP)
Extension and Outreach/Department of Economics
Example Farm
A 100 acre corn farm in Story County, Iowa with a 5-year average yield of 180 bu/acre
Purchases insurance at the 75% coverage level
Spring price: $5.65/bu (average of Feb. prices for Dec. corn futures)
Extension and Outreach/Department of Economics
Individual Yield Insurance (YP)
Farmer chooses percentage of expected yield to insure– Expected yield measured by average yield
Price at which the crop is valued is set up front and does not change
If yields are 100 bushels per acre, the farmer receives $197.75 per acre = $5.65/bu * (75% * 180 bu/ac - 100 bu/ac)
Extension and Outreach/Department of Economics
0
50
100
150
200
250
Price ($ per bushel)
Yie
ld (B
ushe
ls p
er a
cre)
Yield Insurance Payout Graph
No Payout
Payout
Extension and Outreach/Department of Economics
Yield Insurance is like an Option
$0
$50
$100
$150
$200
$250
$300
90 95 100 105 110 115 120 125 130 135 140 145 150 155
Actual Yield (bu. per acre)
Insu
ranc
e P
aym
ent (
$ pe
r acr
e)
Extension and Outreach/Department of Economics
Individual Revenue Insurance(RP or RPE)
Farmer chooses percentage of expected revenue to insure
– Expected revenue measured by average yield times initial crop
price
Price at which the crop is valued can move with price changes in the
market
Extension and Outreach/Department of Economics
In our example, the farmer has insured $762.75 of revenue per acre
(75% * $5.65/bu * 180 bu/ac)
Final value of the crop determined by average futures prices over harvest period
Individual Revenue Insurance(RP or RPE)
Extension and Outreach/Department of Economics
If yields are 100 bushels per acre and harvest prices average $4.50, the farmer receives $312.75 per acre
=0.75*$5.65/bu.*180 bu./acre - $4.50/bu.*100
bu./acre
Individual Revenue Insurance(RP or RPE)
Extension and Outreach/Department of Economics
0
50
100
150
200
250
$3.00 $3.50 $4.00 $4.50 $5.00 $5.50 $6.00 $6.50 $7.00
Price ($ per bushel)
Yie
ld (b
u. p
er a
cre)
RPE Payout Graph
Payout
No Payout
Extension and Outreach/Department of Economics
Rev. Insurance is like an Option
$0
$100
$200
$300
$400
$500
$600
$200 $300 $400 $500 $600 $700 $800 $900 $1,000
Actual Revenue ($ per acre)
Insu
ranc
e P
aym
ent (
$ pe
r acr
e)
Extension and Outreach/Department of Economics
Individual Revenue Insurance (RP)
This policy has a “harvest price option”
If the harvest price is greater than the planting price, then the harvest price is used in all calculations
In essence, the policy is giving you a put option with the strike price at the planting price
Extension and Outreach/Department of Economics
Harvest Price Option
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$3.00 $3.50 $4.00 $4.50 $5.00 $5.50 $6.00 $6.50 $7.00
Harvest Price ($ per bu.)
Ins.
Pric
e ($
per
bu.
)
Extension and Outreach/Department of Economics
Individual Revenue Insurance (RP)
If yields are 100 bushels per acre and harvest prices average $7.50, the farmer
receives $262.50 per acre
=0.75*$ 5.65/bu.*180 bu./acre - $7.50/bu.*100 bu./acre
7.50
Extension and Outreach/Department of Economics
0
50
100
150
200
250
$3.00 $3.50 $4.00 $4.50 $5.00 $5.50 $6.00 $6.50 $7.00
Price ($ per bu.)
Yie
ld (b
u. p
er a
cre)
0
50
100
150
200
250
$3.00 $3.50 $4.00 $4.50 $5.00 $5.50 $6.00 $6.50 $7.00
Price ($ per bu.)
Yie
ld (b
u. p
er a
cre) RPE Pays Neither Pay
Both Pay
YP Pays
RP Payout Graph
RP Pays
No Payment
Extension and Outreach/Department of Economics
$0
$1
$2
$3
$4
$5
$6
$7
$8
2000 2002 2004 2006 2008 2010 2012
Pric
e ($
per
bu.
)
Planting Harvest
Corn Insurance PricesHarvest prices have been higher 5 out of last 13 years
Extension and Outreach/Department of Economics
$0
$2
$4
$6
$8
$10
$12
$14
$16
2000 2002 2004 2006 2008 2010 2012
Pric
e ($
per
bu.
)
Planting Harvest
Soy Insurance PricesHarvest prices have been higher 7 out of last 13 years
Extension and Outreach/Department of Economics
What Units to Choose?
• Optional Units: Each farm is separate• Basic Units: Combine owned and cash
rented acres in same county• Enterprise Units: Combine all acres of
the same crop in same county• Whole Farm: Combine all crops in county
Extension and Outreach/Department of Economics
Current Subsidy RatesCoverage
levelBasic Units
Optional UnitsEnterprise
UnitsWhole Farm
Units
60% 64% 80% not avail.
65% 59% 80% 80%
70% 59% 80% 80%
75% 55% 77% 80%
80% 48% 68% 71%
85% 38% 53% 56%
Extension and Outreach/Department of Economics
2013 Insurance Premiums Per Acre Premiums ($ per acre)
Cov. Level YP RPHPE RP_ 50% 0.92 0.78 1.08 55% 1.52 1.30 1.89 60% 2.14 1.81 2.85 65% 3.29 2.87 4.63 70% 4.30 4.08 6.78 75% 6.30 6.59 11.06 80% 9.47 10.87 18.33 85% 14.45 17.63 29.89
For our example farm in Story County, Iowa for corn
Extension and Outreach/Department of Economics
Choosing Insurance Policy
Choice depends on several factors
Type of farm and crop mix
How well the county average yield represents your farm
Your marketing strategy
Extension and Outreach/Department of Economics
Iowa Corn Acres Insured in 2012
91% of all Iowacorn acres areinsured
Extension and Outreach/Department of Economics
Iowa Soy Acres Insured in 2012
91% of all Iowasoybean acresare insured
Extension and Outreach/Department of Economics
2012 Corn and Soy Coverage Levels
Extension and Outreach/Department of Economics
Coverage Levels for YP
Extension and Outreach/Department of Economics
Coverage Levels for RPHPE
Extension and Outreach/Department of Economics
Coverage Levels for RP
Extension and Outreach/Department of Economics
Thank you for your time!
Any questions?
My web site:http://www.econ.iastate.edu/~chart/
Iowa Farm Outlook:http://www.econ.iastate.edu/ifo/
Ag Decision Maker:http://www.extension.iastate.edu/agdm/