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

chart@iastate.edu515-294-9911

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/