Crop Insurance Chad Hart Associate Professor chartiastate edu

Crop Insurance Chad Hart Associate Professor chart@iastate. edu 515 -294 -9911 Extension and Outreach/Department of Economics

Crop Insurance Ø One of many risk management strategies Ø Traditionally set up to protect farmers in times of low crop yields Ø Now offers coverage for low prices Ø Available on over 100 commodities Extension and Outreach/Department of Economics

Why Crops Fail Extension and Outreach/Department of Economics

Types of Crop Insurance Ø Individual Yield (YP) Ø Area Yield (GRP) Ø Individual Revenue (RP and RPE) Ø 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. 68/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 $198. 80 per acre = $5. 68/bu * (75% * 180 bu/ac - 100 bu/ac) Extension and Outreach/Department of Economics

Yield Insurance Payout Graph No Payout Extension and Outreach/Department of Economics

Yield Insurance is like an Option 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

Individual Revenue Insurance (RP or RPE) In our example, the farmer has insured $766. 80 of revenue per acre (75% * $5. 68/bu * 180 bu/ac) Final value of the crop determined by average futures prices over harvest period Extension and Outreach/Department of Economics

Individual Revenue Insurance (RP or RPE) If yields are 100 bushels per acre and harvest prices average $4. 50, the farmer receives $316. 80 per acre = 0. 75*$5. 68/bu. *180 bu. /acre - $4. 50/bu. *100 bu. /acre Extension and Outreach/Department of Economics

RPE Payout Graph No Payout Extension and Outreach/Department of Economics

Rev. Insurance is like an Option 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 Extension and Outreach/Department of Economics

Individual Revenue Insurance (RP) If yields are 100 bushels per acre and harvest prices average $8. 00, the farmer receives $280. 00 per acre = 0. 75*$ 8. 00 5. 68/bu. *180 bu. /acre - $8. 00/bu. *100 bu. /acre Extension and Outreach/Department of Economics

RP Payout Graph No Payment Neither Pay RPE Pays YP Pays Both Pay Extension and Outreach/Department of Economics RP Pays

Corn Insurance Prices Harvest prices have been higher 4 out of last 12 years Extension and Outreach/Department of Economics

Soy Insurance Prices Harvest prices have been higher 6 out of last 12 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 Rates Coverage level Basic Units Optional Units Enterprise Units Whole Farm Units 60% 64% 80% not avail. 65% 59% 80% 70% 59% 80% 75% 55% 77% 80% 48% 68% 71% 85% 38% 53% 56% Extension and Outreach/Department of Economics

2012 Insurance Premiums Cov. Level 50% 55% 60% 65% 70% 75% 80% 85% Per Acre Premiums ($ per acre) YP RPE RP_ 1. 10 0. 94 1. 35 1. 80 1. 55 2. 33 2. 55 2. 24 3. 52 3. 91 3. 01 5. 75 5. 36 5. 50 8. 72 7. 83 8. 75 14. 00 11. 79 14. 24 22. 78 17. 97 22. 55 36. 36 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 2011 Extension and Outreach/Department of Economics

Iowa Soy Acres Insured in 2011 Extension and Outreach/Department of Economics

2011 Corn and Soy Coverage Levels Extension and Outreach/Department of Economics

Thank you for your time! Questions? Extension and Outreach/Department of Economics