ECON 337: Agricultural Marketing

1. ECON 337: Agricultural Marketing Lee Schulz Assistant Professor lschulz@iastate.edu 515-294-3356 Chad Hart Associate Professor chart@iastate.edu 515-294-9911

2. Crop Insurance • One 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

3. Why Crops Fail

4. Federal Crop Insurance Federal 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 2000 The 2008 and 2014 Farm Bills

5. 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.

6. Federal Crop Insurance

7. Product Innovation Agricultural 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)

8. Federal Crop Insurance:Total Acres Insured

9. Crop Insurance Top 10s

10. Crop Insurance Top 10s

11. Crop Insurance Top 10s

12. Types of Crop Insurance • Individual Yield (YP) • Individual Revenue (RP and RPE) • Area Yield (AYP) • Area Revenue (ARP and ARPE)

13. Example Farm A 100 acre corn farm in Story County, Iowa with a 5-year average yield of 150 bu/acre Purchases insurance at the 80% coverage level Spring price: $4.15/bu (average of Feb. prices for Dec. corn futures)

14. 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 $83.00 per acre = $4.15/bu * (80% * 150 bu/ac - 100 bu/ac)

15. Yield Insurance Payout Graph No Payout Payout

16. Yield Insurance is like an Option

17. 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

18. Individual Revenue Insurance(RP or RPE) In our example, the farmer has insured $498.00 of revenue per acre (80% * $4.15/bu * 150 bu/ac) Final value of the crop determined by average futures prices over harvest period

19. Individual Revenue Insurance(RP or RPE) If yields are 100 bushels per acre and harvest prices average $3.50, the farmer receives $148.00 per acre • 0.80*$4.15/bu.*150 bu./acre - $3.50/bu.*100 bu./acre

20. RPE Payout Graph No Payout Payout

21. Rev. Insurance is like an Option

22. 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

23. Harvest Price Option

24. Individual Revenue Insurance (RP) If yields are 100 bushels per acre and harvest prices average $5.50, the farmer receives $110.00 per acre • 0.80*$4.15/bu.*150 bu./acre - $5.50/bu.*100 bu./acre 5.50

25. RP Payout Graph No Payment Neither Pay RPE Pays YP Pays Both Pay RP Pays

26. Corn Insurance Prices

27. Soybean Insurance Prices

28. 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

29. Current Subsidy Rates

30. 2015 Insurance Premiums Per Acre Premiums ($ per acre) Cov. Level YP RPHPE RP_ 50% 0.64 0.53 0.69 55% 0.93 0.79 1.10 60% 1.23 1.02 1.57 65% 1.89 1.57 2.59 70% 2.32 1.98 3.55 75% 3.08 2.96 5.60 80% 4.37 4.78 9.33 85% 6.60 7.95 15.58 For an example farm in Story County, Iowa for corn

31. 2015 Insurance Premiums Per Acre Premiums ($ per acre) Cov. Level YP RPHPE RP_ 50% 6.76 6.35 8.26 55% 9.08 8.67 11.26 60% 11.03 10.79 13.98 65% 15.07 15.08 19.41 70% 17.89 18.10 23.27 75% 23.08 23.42 30.18 80% 31.11 31.89 40.98 85% 42.89 44.44 56.85 For our example farm in Anoka County, MN for corn

32. 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

33. Corn Acres Insured in 2014 87% of all corn acres are insured

34. Soy Acres Insured in 2014 88% of all soybean acres are insured

35. 2014 Corn and Soy Coverage Levels

36. Coverage Levels for YP

37. Coverage Levels for RPHPE

38. Coverage Levels for RP

39. Class web site: http://www.econ.iastate.edu/~chart/Classes/econ337/Spring2015/ Have a great weekend.