Federal Crop Insurance and Disaster Programs

1. Federal Crop Insurance and Disaster Programs Paul D. Mitchell AAE 320: Farming Systems Management

2. Goal Overview current crop insurance programs for main crops How they work, choices farmer must make Overview Federal Disaster Programs How SURE works with crop insurance Disaster Programs are part of the Farm Bill and now crop insurance has become more so Give farmers money when they have Move away from ad hoc payment programs

3. Crop Insurance Program Costs Have Surpassed Commodity Program Costs in Recent Years

4. Different Data, Same Story

5. Types of Crop Insurance Policies Farmers have four choices for most crops Are exceptions for smaller crops Yield Insurance vs Revenue Insurance What triggers a payment? Yield or Revenue below the guarantee? Individual vs. Area-Wide Coverage Whose yield/revenue triggers payment? Your own or your county�s?

6. Catastrophic coverage (CAT) 50% coverage level 55% price election YP, GRP, GRIP AGR-Lite: Insure Schedule F income

7. Types of Policies Yield Protection (YP) Individual Yield Insurance Revenue Protection (RP) and RP-HPE (harvest price exclusion) Individual Revenue Insurance GRP: Group Risk Plan Area-wide (County) Yield Insurance GRIP: Group Risk Income Protection Area-wide (County) Revenue Insurance

8. Types of Policies After choose a policy, have three choices to make Coverage Level (like the deductible) Price Election (payment rate for losses) Unit Structure (some policies have no options) Explain Yield Protection details to understand others

9. YP: Yield Protection If actual harvested yield is less than your Yield Guarantee, receive an indemnity Actual Production History (APH): Average harvested yields over last 4-10 years Yield Guarantee: chose Coverage Level as % of your APH (Actual Production History) Coverage Level: % average yield (APH) chosen as guarantee, from 50% to 85% by 5% intervals Price Election: Choose price paid for each bushel below your yield guarantee, from 100% to 55% of established base price

10. Coverage Level sets Yield Guarantee�Example Year Yield 2005 145 2006 175 2007 140 2008 110 2009 185 2010 175 AVG 155 APH = 155

11. Price Election How much you are paid for each bushel that actual harvest is below yield guarantee Base Price set by USDA-RMA: Average of Dec. corn (Nov. soybean) futures contracts on Chicago Board of Trade during February Choose 100% to 60% of this price in 1% intervals, appears as $/bu options Most farmers choose 100% Price set for large regions 2011: Corn 6.01, Soybeans 13.49, Wheat 9.89

12. YP Indemnity If Harvested Yield < Yield Guarantee Indemnity = Price x (Yguarantee � Yharvested) Price: Chosen Price Election Coverage Level determines your trigger, pay more for higher coverage levels Price Election determines how much paid when have a loss, pay more for higher price election

13. Unit Structure Legally define the area (fields) insured Planted to same crop during insurance period Cannot cut across a county line Separate production records for each unit Three unit types (smallest to largest) Optional Unit, Basic Unit, Enterprise Unit Usually want as many optional units as can Enterprise unit discount now larger: better?? Lots of rules: Crop insurance agent can help you figure out rules

15. Revenue Protection Combines Yield Protection with price protection based on CBOT futures prices Your yield history and CBOT prices set your preliminary Revenue Guarantee Same coverage levels, same unit structures Your revenue at harvest is your yield x CBOT prices (e.g., Nov average of Dec corn) If your harvest revenue is below your guarantee, triggers an indemnity payment

16. Initial and Final Revenue GuaranteeRP vs. RP-HPE Base Price: Feb avg of Dec corn futures Harvest Price: Nov avg of Dec corn futures Initial Revenue Guarantee calculated using the Base Price Final Revenue Guarantee calculated using the maximum of Base Price and Harvest Price Main Point: With RP, if price increases over season, your revenue guarantee increases RP-Harvest Price Exclusion: revenue guarantee not updated with max(Base,Harvest) price Lower indemnities with RP-HPE if price increases and have low yield, so Lower Premiums

17. RP Protects Against BothPrice Increases and Decreases If price falls or have low yield, you know you will have the grain, or the money to buy grain at existing prices, to fulfill contracts If price increases, revenue guarantee increases too, so again you know you will have the grain, or the money to buy the grain at existing prices, to fulfill contracts Still have to market your grain Can now market more aggressively since you will have grain or indemnities to buy grain at existing market prices if you have a yield loss

18. RP vs. RP-HPE vs. YP(150 bu/ac APH and 70% coverage level)

19. RP vs. RP-HPE vs. YP If harvest price > base price and low yield, larger indemnity for RP than for RP-HPE If harvest price < base price, no difference for RP vs RP-HPE Notice: RP-HPE: can do worse than YP if high prices and low yields RP-HPE uses actual higher harvest price to calculate actual revenue, while YP uses actual yield loss at lower base price RP-HPE: worst if low yields and high prices, best if low yields and low prices

20. GRP Group Risk PlanGRIP Group Risk Income Protection GRP = YP, except uses NASS county average yield (not your yield) GRIP with Harvest Revenue Option (GRIP-HR) = RP, except uses NASS county average yield GRIP without Harvest Revenue Option (GRIP-noHR) = RP-HPE, except uses NASS county average yield Payments not made until Mar/Apr when NASS yields come out: cash flow issues?

21. Updated Table for RP and GRIP

22. Lots of Crop Insurance Rules Lots rules: Planting dates, Late and prevented planting, Double cropping, Alternative crop uses, Corn maturity, Yield guarantees, Unit structures, Breaking new ground (CRP vs pasture) Can forfeit your coverage if break a rule Are ways to get the most out of your policy (use the rules to your advantage) Insurance agents don�t always know all the rules, good agents do

23. Subsidies and Crop Insurance USDA-RMA runs crop insurance program, sets policy rules, sets premiums Premiums subsidized so farmers pay less than the �actuarially fair� premium If on average, $100 indemnity paid once every 4 years, then �actuarially fair� premium is $25 Private companies sell insurance policies, but govt. subsidizes their administrative costs No premium load to cover costs All companies sell exactly same policy at same price Means that on average, farmers should make money from crop insurance

24. Premiums Subsidized% of the Fair Premium Farmer Pays Coverage: 50 55 60 65 70 75 80 85 90 YP & RP 33 36 36 41 41 45 52 62 GRP 41 41 45 45 49 GRIP 41 41 45 51 56 Enterprise 20 20 20 20 20 23 32 47 Main point: government and farmers each pay part of the fair (full) premium Higher coverage, greater share of premium you pay CAT: 100% subsidized, just pay $300 admin fee

25. Premiums: Dane County WI, 2011(160 APH) Yield Protection

26. Premiums: Dane County WI, 2011(160 APH) Revenue Protection

27. Premiums: Dane County WI, 2011(160 APH) Revenue Protection-HPE

28. Compare Policies: Basic Units

29. Crop Insurance Program Costs Have Surpassed Commodity Program Costs in Recent Years

30. WI Farmers Practices and Experiences with Crop Insurance Quick overview of WI farmer practices Which policies popular Which coverage levels Quick overview of WI farmer experiences What are loss ratios Farmer Loss Ratios for corn and soybeans

31. WI Farmers and Crop Insurance RP (used to be CRC) most popular among those buying insurance Slightly larger than average sized farms buy it Use more than average number of units 70-75% coverage level popular YO (used to be APH) popular among smaller farms Use fewer than average number of units CAT (corn) then 65% coverage level popular GRIP (and GRP) used by some large farms

32. WI vs. neighboring states% planted acres insured in 2010

33. WI Crop Insurance Participation

34. Experience with Crop Insurance Loss Ratio measures insurance performance Loss Ratio = Indemnities/Premiums Loss Ratio of 1.5 means, on average, $1.50 in indemnities paid for every $1.00 of premiums Crop insurance: Subsidized premiums, farmers and government each pay part Program loss ratio = Indemnity/(Govt. + Farmer Premium) Farmer loss ratio = Indemnity/Farmer Premium Farmers care about farmer loss ratio

35. WI Crop Insurance for Corn in 2007

36. WI Crop Insurance for Soybeans in 2007

37. APH+CRC+RA Average County Program Loss Ratios for Corn 1995-2007

38. APH+CRC+RA Average County Program Loss Ratios for Soybeans 1995-2007

39. Summary of WI Farmer Experiences with Crop Insurance Farmers, on average over the whole state, generally win on crop insurance policies Especially in the north Especially for soybeans Crop insurance is (partially) a subsidy program to help farmers when they need it most, when they have low yields and/or revenues

40. Crop Insurance for Other Crops Almost all major WI crops have a standard crop insurance policy for them, usually YP Forage production and seeding Small Grains: oats, rye, barley Processing Vegetables: Potatoes, sweet corn, snap beans, green peas Miscellaneous crops: Cranberries, hybrid seed corn, mint, apples

41. Crop Insurance Alternatives AGR-Lite: Insure farm�s Schedule F income Multiple crops and livestock, allows you to insure whole farm revenue Alternatives if no a policy exists FSA non-insured crop assistance program (NAP): FSA sells CAT policy if none available Organic prices now available for many crops Corn, soybeans, wheat, etc. Livestock price (not production) policies LGM Dairy has rapidly become popular

42. Livestock Gross Margin Insurance for Dairy (LGM Dairy) New policy 1st offered August 2008 Premium subsidy recently approved, so now premiums lower (in news again) LGM Dairy sets a floor on Income Over Feed Cost (IOFC) If actual IOFC is less than your chosen guarantee, triggers indemnity payment Brian Gould (AAE) local expert on LGM-dairy (using his overheads)

43. Income Over Feed Cost (IOFC) Establish a floor on Income over Feed Costs (IOFC) Class III put options: Creates milk revenue floor Feed call options: Establishes feed cost ceiling Using this bundled option strategy, producer can establish an IOFC floor

44. LGM Dairy Gross Margin (GM) = Expected market value of milk minus Expected feed cost Gross Margin Guarantee (GMG) = GM minus Deductible One GMG and GM per contract Evaluated over entire contract period Actual Gross Margin (AGM) = Actual market value of milk minus Actual feed cost 1 AGM per contract, evaluated over full contract period Indemnity paid if AGM is less then GMG Uses prices as listed above, with feed use based on corn & soybean meal equivalents

45. LGM Dairy Like using bundled options except No contract minimum size limit Max of 240,000 cwt over 10 month fiscal year No actual futures/options market activity Premium not due until after contract matures Buy from a crop insurance agent just like traditional crop insurance policies

46. LGM-Dairy Information Understanding Dairy Markets website: http://future.aae.wisc.edu LGM-Dairy website: http://future.aae.wisc.edu/lgm_dairy.html LGM-Dairy Mailing List: http://future.aae.wisc.edu/lgm_dairy.html#5 Brian W. Gould Victor E. Cabrera (608)263-3212 (608)265-8506 bwgould@wisc.edu vcabrera@wisc.edu

47. Federal Disaster Programs USDA has many disaster programs to help farmers and rural residents http://www.fsa.usda.gov/FSA/webapp?area=home&subject=diap&topic=landing Supplemental Revenue Assistance Payments Noninsured Crop Disaster Assistance Program Tree Assistance Program Livestock Forage Program Livestock Indemnity Program Emergency Farm Loans Emergency Conservation Program Emergency Assistance for Livestock, Honey Bees, and Farm-Raised Fish Main Point: If there is a disaster in your area, contact your local county FSA office for information on programs

48. SURE: Supplemental Revenue Assistance Payments Previously, every time a disaster occurred, Congress would pass an ad hoc disaster bill to give farmers who suffered losses disaster payments 2008 Farm Bill created permanent disaster program called SURE Are other disaster programs too, for livestock and other agricultural producers See previous list

49. SURE: Supplemental Revenue Assistance Payments New comprehensive permanent disaster program for crop farmers Whole farm revenue guarantee added on top of crop insurance guarantees If actual farm revenue below guarantee, SURE pays up to 60% of the difference Free increase in your crop insurance coverage at whole farm level

50. SURE Guarantee Guarantee equals sum of all crop insurance guarantees for farm increased by 15% at the whole farm level, capped at 90% 75% coverage becomes 75% x 1.15 = 86.25% 80% coverage now 80% x 1.15 = 92%, but capped at 90% With SURE, less need for 80% or 85% RP Save money, reduce your crop insurance coverage level and use free SURE coverage

51. SURE Actual Revenue Actual yields x USDA marketing year average price (Sept-Aug) (Not CBOT) Plus crop insurance indemnities, including replant and prevented planting Plus 15% of DP�s, all CCPs & ACRE payments, all LDPs Plus other disaster payments received

52. SURE Requirements Risk Management Purchase Requirement To eligible for SURE payments, you must have all crops insured, including pasture SURE supplements crop insurance and SURE guarantee depends on insurance guarantees Small acreage exclusion applies YP, RP, RP-HPE, GRP, GRIP, AGR-Lite, NAP Cheapest route: YP CAT from crop insurance agent or NAP policy from FSA

53. SURE Payment Eligibility Details Produce in a disaster county or contiguous county or suffer 50% production loss Suffer at least 10% production loss on at least 1 crop from a natural disaster (Price drops alone will not trigger SURE) Satisfy Risk Management Purchase Requirement Must insure all crops of economic significance Economic Significance: crop contributes at least 5% of expected total farm crop revenue Insure hay, not new seeding or forage for grazing

54. SURE: A Big Deal! SURE payments for crop losses occurring in 2008 exceed $2.0 billion WI Ranked 12th with >$72 million SURE payments for crop losses occurring in 2009 so far > $166 million WI so far >$4.2 million Nationally so far, SURE given $2.27 billion

57. Using SURE with Insurance SURE increases your effective coverage at farm level for free, so can cut back on crop coverage level you pay for 60% RP + SURE = 69% farm coverage 65% RP + SURE = 74.75% farm coverage 70% RP + SURE = 80.5% farm coverage 75% RP + SURE = 86.25% farm coverage 80% RP + SURE = 90% farm coverage 85% RP + SURE = 90% farm coverage 75% RP + SURE gives you slightly better than 85% RP alone, so why buy 85% RP?

58. Summary Overviewed 4 main types of crop insurance APH, CRC, GRP, GRIP Individual vs. Area-wide, Yield vs. Revenue Lots of issues not covered, lots of other crops can be insured Very quick overview of SURE Lots of issues not covered, are more disaster programs not covered here