Crop Insurance Sept 13 2013 Chad Hart Associate

Crop Insurance Sept. 13, 2013 Chad Hart Associate Professor/Crop Markets Specialist 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

Federal Crop Insurance Corporation – 1938 Ø Government’s initial move in crop insurance Federal Crop Insurance Act of 1980 Ø Premium subsidies Federal Crop Insurance Reform Act of 1994 Ø Catastrophic coverage and higher subsidies Agricultural Risk Protection Act of 2000 The 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 Innovation Agricultural insurance products developed by private companies, reviewed and approved by FCIC Examples: Ø Crop Revenue Coverage (CRC) Ø Revenue Assurance (RA) Ø Income Protection (IP) Ø Group Risk Income Protection (GRIP) Ø Livestock Risk Protection (LRP) Ø 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 10 s Crop Acres (million) Corn 81. 28 Soybean 63. 77 Pasture 48. 08 Wheat 46. 34 Cotton 11. 41 Sorghum 4. 68 Forage 3. 30 Barley 3. 00 Rice 2. 11 Sunflower 1. 71 Extension and Outreach/Department of Economics State Acres (million) Texas 48. 08 North Dakota 23. 05 Iowa 21. 71 Kansas 18. 25 Illinois 17. 92 Minnesota 17. 47 Nebraska 15. 68 South Dakota 14. 94 Montana 10. 30 Indiana 8. 71

Crop Insurance Top 10 s Premiums Crop ($ billion) Corn 4. 32 Soybean 2. 27 Wheat 1. 78 Cotton 0. 84 Sorghum 0. 21 Pasture 0. 16 Dry Beans 0. 10 Potatoes 0. 09 Peanuts 0. 09 Barley 0. 08 Premiums State ($ billion) Texas 1. 08 North Dakota 0. 96 Iowa 0. 90 Minnesota 0. 82 Kansas 0. 81 Illinois 0. 77 South Dakota 0. 70 Nebraska 0. 67 Indiana 0. 44 Missouri 0. 37 Extension and Outreach/Department of Economics

Crop Insurance Top 10 s Liabilities Crop ($ billion) Corn 53. 55 Soybean 24. 62 Wheat 10. 57 Cotton 4. 82 Nursery 2. 01 Almonds 1. 23 Potatoes 1. 14 Orange Trees 1. 12 Rice 1. 10 Sugar Beets 1. 10 Extension and Outreach/Department of Economics Liabilities State ($ billion) Iowa 14. 94 Illinois 12. 15 Minnesota 10. 03 Nebraska 8. 73 North Dakota 6. 27 Indiana 5. 74 Kansas 5. 66 South Dakota 5. 38 California 5. 38 Texas 5. 23

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. 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

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 $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 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 $312. 75 per acre = 0. 75*$5. 65/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 $7. 50, the farmer receives $262. 50 per acre = 0. 75*$ 7. 50 5. 65/bu. *180 bu. /acre - $7. 50/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 5 out of last 13 years Extension and Outreach/Department of Economics

Soy Insurance Prices Harvest 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 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

2013 Insurance Premiums Cov. Level 50% 55% 60% 65% 70% 75% 80% 85% Per Acre Premiums ($ per acre) YP RPHPE RP_ 0. 92 0. 78 1. 08 1. 52 1. 30 1. 89 2. 14 1. 81 2. 85 3. 29 2. 87 4. 63 4. 30 4. 08 6. 78 6. 30 6. 59 11. 06 9. 47 10. 87 18. 33 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 Iowa corn acres are insured Extension and Outreach/Department of Economics

Iowa Soy Acres Insured in 2012 91% of all Iowa soybean acres are 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/ Extension and Outreach/Department of Economics