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Getting a Grip on GRIP

Getting a Grip on GRIP. Gary Schnitkey Agricultural Economist University of Illinois. Topics. Illinois versus Iowa experience How GRIP works Risks/Returns Situations where it works. GRIP. GRIP (Group Risk Income Plan) is revenue insurance based on county yields

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Getting a Grip on GRIP

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  1. Getting a Grip on GRIP Gary Schnitkey Agricultural Economist University of Illinois

  2. Topics • Illinois versus Iowa experience • How GRIP works • Risks/Returns • Situations where it works

  3. GRIP • GRIP (Group Risk Income Plan) is revenue insurance based on county yields • GRIP-NoHR (No Harvest Revenue option) – much like RA with base price option • GRIP-HR (Harvest Revenue option) – much like CRC or RA with harvest price option • GRIP is the revenue counterpart to the county-level yield insurance GRP (Group Risk Plan)

  4. Group Products Akin To Group Akin to Insurance Type GRP APH Yield GRIP-NoHR IP, RA with Revenue – no base price guarantee increase GRIP-HR CRC, RA with Revenue - harvest price guarantee increase

  5. Introduced in I states Introduced GRP (Group Risk Plan) 1995 GRIP-NoHR 1999 (Group Risk Income Plan -- No Harvest Revenue option) GRIP-HR 2004 (GRIP -- Harvest Revenue option)

  6. Group Product Use, Corn, Illinois Iowa 2005 Use GRP – 1.2% GRIP – 3.6% GRIP GRP

  7. Group Product Use, Soybeans, Illinois Iowa 2005 Use GRP – 1.9% GRIP – 4.7% GRIP GRP

  8. Percent of Iowa Counties Receiving GRIP-NoHR Payments for Corn, 1999 -2004 ---------- Coverage Level ------------ Year 90% 85% 80% 75% 70% 1999 54% 30% 11% 4% 2% 2000 66 22 2 1 0 2001 72 49 25 11 1 2002 3 3 3 1 1 2003 3 0 0 0 0 2004 82 72 41 16 1 AVG 47% 29% 13% 6% 1%

  9. Percent of Iowa Counties Receiving GRIP-NoHR Payments for Soybeans, 1999 -2004 ---------- Coverage Level ------------ Year 90% 85% 80% 75% 70% 1999 19% 9% 4% 2% 2% 2000 69 57 31 18 6 2001 46 19 8 4 1 2002 0 0 0 0 0 2003 30 15 9 7 5 2004 95 85 71 51 23 AVG 43% 31% 21% 14% 6%

  10. How GRIP Works Marshall County, Iowa 2005 Example

  11. Parameters in 2005 County: Marshall County, Ia Crop: Corn Expected Yield: 164.3 * Expected Price: $2.38 ** * County specific, set by RMA ** Settlement prices during February (Next year for entire month)

  12. Farmer choices Protection Level Choice from within range GRPGRIP Max $579 $587 Min $323 $346 Max varies by year, based on formula Max results in highest premiums and highest payments, when they occur

  13. Farmer choices Coverage Level 70% to 90% Suggestion: Take highest coverage level Change payment/premium by lowering protection level

  14. 2005 Per Acre Premiums, Marshall County, Iowa (100% Protection Level, Corn) Coverage Level GRP GRIP-NoHR GRIP-HR 70% $3.96 $2.96 $5.51 75% 4.80 4.24 7.22 80% 6.17 6.90 10.58 85% 6.89 10.00 13.85 90% 8.60 15.92 20.25

  15. Per Acre Guarantees,90% Coverage Level GRP GRIP-NoHR GRIP-HR Type Yield Revenue Revenue Coverage level .90 .90 .90 x Expected yield 164.3 164.3 164.3 x Price xxx $2.38 $2.38 @ Guarantee 147.9 bu $352 $352 @@ @ Higher of expected or harvest price @@ Will be higher when harvest price > expected price

  16. Payment example“Typical” Year • Actual yield = 170 bu. • Harvest price = $2.00 • Guarantees on previous slide (90% cov level) Shortfall = (Guarantee – Actual)/Guarantee when Guarantee > Actual GRP: .000 (147.9 guarantee < 170 actual) GRIP-NoHR: ($352 - (170*2)) / $352 = .034 GRIP-HR: ($352 - (170*2)) / $352 = .034

  17. Payments (Max Protection Level, 90% Coverage Level) GRP GRIP-NoHR GRIP-HR Prot. level $579 $587 $587 X shortfall .000 .034 .034 X price factor xxx xxx 1.00 * Payment $0 $20 $20 * Higher of (harvest price / expected price) or 1

  18. Payment example“Drought” Year • Actual yield = 130 bu. • Harvest price = $3.00 Shortfall = (Guarantee – Actual)/Guarantee when Guarantee > Actual GRP: (147.9 – 130) / 147.8 = .121 GRIP-NoHR: .000 Guarantee < actual ($390) GRIP-HR: ($443 - (130x3)) / $443 = .120

  19. Per Acre Guarantees, Revised90% Coverage Level GRP GRIP-NoHR GRIP-HR Type Yield Revenue Revenue Coverage level .90 .90 .90 x Expected yield 164.3 164.3 164.3 x Price xxx $2.38 $3.00 @ Guarantee 147.9 bu $352 $443 @@ @ Higher of expected or harvest price @@ Will be higher when harvest price > expected price

  20. Payments (Max Protection Level, 90% Coverage Level) GRP GRIP-NoHR GRIP-HR Prot level $579 $587 $587 X shortfall .121 .000 .120 X price factor xxx xxx 1.26 @ Payment $70 $0 $89 @ Higher of (harvest price / expected price) or 1 (3.00 harvest price / 2.38 expected price) = 1.26

  21. GRP Shortfalls, Marshall County, Iowa, Corn (90% coverage level) Expected Final GRP Year Yield Yield Shortfall (90%) 1995 131.1 133.7 0 1996 133.2 139.4 0 1997 133.2 136.4 0 1998 135.3 144.5 0 1999 136.5 153.8 0 2000 137.6 144.0 0 2001 146.7 150.5 0 2002 146.7 181.8 0 2003 150.1 175.9 0 2004 158.4 183.2 0

  22. Marshall County, Corn Yields 1993 1988 1977

  23. GRIP Shortfalls, Marshall County, Iowa, Corn (90% coverage level) Expected Harvest GRIP Year Price Price Shortfall (90%) 1999 2.40 1.96 0 2000 2.54 2.11 .034 2001 2.45 2.05 .046 2002 2.30 2.43 0 • 2.38 2.37 0 • 2.93 1.99 .127 Shortfalls the same for GRIP-NoHR and GRIP-HR.

  24. GRP Shortfalls, Marshall County, Iowa, Soybeans (90% coverage level) Expected Final GRP Year Yield Yield Shortfall (90%) 1995 45.2 50.6 0 1996 46.6 49.2 0 1997 46.6 50.4 0 1998 47.7 51.6 0 1999 51.8 50.3 0 2000 52.6 45.2 .045 2001 53.4 49.7 0 2002 52.5 53.5 0 2003 53.1 31.7 .336 2004 53.6 51.6 0

  25. GRIP Shortfalls, Marshall County, Iowa, Corn (90% coverage level) Expected Harvest GRIP Year Price Price Shortfall (90%) 1999 4.95 4.85 0 2000 5.36 4.72 .129 2001 4.59 4.37 .013 2002 4.53 5.45 0 • 5.23 7.32 .058 • 7.27 5.26 .183 Shortfalls the same for GRIP-NoHR and GRIP-HR.

  26. Risk/returnswww.farmdoc.uiuc.edu/cropins/index.html

  27. Crop Insurance Evaluator: For an example farm in each county for corn and soybeans shows the following for different insurance product: • Frequency of payments • Premiums • Average payments • Net costs • Ability to prevent disasters

  28. Marshall County, Corn • “Average” farm for county • 159 bu. APH yield, average variability • Evaluations shown for 2005 year • Evaluations based on maximum protection level

  29. Frequency of payments • Example of tables from Evaluator

  30. 1% VAR • A 1% VaR of $200 means that 1% of the time revenue will be below $200 • Measure of risk reduction • Want VaRs to be as high as possible

  31. 1% VaR from Evaluator$ per acre, Corn Level APH CRC GRP GRIP-NoHR GRIP-HR 65% 203 212 75% 221 231 198 205 204 85% 243 247 205 216 217 90% 213 223 226 • Group products lower risk less than Individual products • Low coverage Individual not as “good” as high coverage Group

  32. Net Costs • Average payments over time minus premium • High levels indicate high costs, negative levels mean expect more insurance payments than premium over time

  33. Net Costs from Evaluator$ per acre, Corn Level APH CRC GRP GRIP-NoHR GRIP-HR 65% 1.45 2.26 75% 1.74 2.04 .78 -3.94 -4.65 85% 3.76 4.77 -4.65 -12.50 -17.87 90% -9.77 -17.13 -26.47 • Individual products have higher costs than Group products

  34. Marshall County, Soybeans • “Average” farm for county • 50 bu. APH yield, average variability • Evaluations shown for 2005 year • Evaluations based on maximum protection level

  35. 1% VaR from Evaluator$ per acre, Soybeans Level APH CRC GRP GRIP-NoHR GRIP-HR 65% 166 174 75% 183 192 159 162 164 85% 203 207 165 173 175 90% 168 179 180 • Group products lower risk less than Individual products • Low coverage Individual not as “good” as high coverage Group

  36. Net Costs from Evaluator$ per acre, Soybeans Level APH CRC GRP GRIP-NoHR GRIP-HR 65% .57 1.06 75% .81 .93 -.56 -2.66 -2.68 85% 1.48 2.89 -3.18 -7.96 -8.95 90% -5.31 -10.52 -12.60 • Individual products have higher costs than Group products

  37. Risk/Returns Summary • Group products cost less than individual products. Over time, group products may average more in payments than paid in premiums • Group products reduce risk less than individual farm products

  38. Situations Where Group Products Work: • Farm-yields either: • Closely follow county-yields (i.e., large farm), or • Are above county-yields • Farm has low APH • Farm is in relatively strong financial position • Tend to work best in “good” producing counties

  39. Situations Where Group Products Do Not Work as Well: • Highly leveraged farms • Farms where re-planting occurs often • Hail is a major concern • Farms with high-risk farmland

  40. Summary • GRIP does fit certain situations • Represent another option in the risk management tool kit

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