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Making Sound Crop Insurance Decisions

Making Sound Crop Insurance Decisions. By Gary Schnitkey, Bruce Sherrick, and Scott Irwin. Overview of Workshop. Current trends in crop insurance Tools for evaluating crop insurance products Premium Calculator on farmdoc Payout Estimator on CD Insurance Evaluator on farmdoc. Trends.

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Making Sound Crop Insurance Decisions

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  1. Making Sound Crop Insurance Decisions By Gary Schnitkey, Bruce Sherrick, and Scott Irwin

  2. Overview of Workshop • Current trends in crop insurance • Tools for evaluating crop insurance products • Premium Calculator on farmdoc • Payout Estimator on CD • Insurance Evaluator on farmdoc

  3. Trends • Movement towards revenue products • Low use of pre-harvest marketing • Introduction of Counter-cyclical payments (2002 Farm Bill)

  4. Source: U.S.D.A., Risk Management Agency

  5. Most Farmers Hedge Little Prior to Harvest Percent of crops sold in year of harvest Region Corn Soybeans Northern 20 % 21 % Central 17 15 Southern 23 22 * FBFM data for 1995 through 2001.

  6. Counter-Cyclical Program Corn Beans Wheat Trigger Price $2.32 $5.36 $3.34 - higher of season average price or loan rate 1.98 5.00 2.80 CC rate .34 .36 .54 * National loan rate becomes $1.95 for corn, and $2.75 for wheat between 2004 and 2007

  7. Season Average Price • National price • For corn and soybeans, based on marketings between September and August • The 2002 season average prices will not be known for certain until Sept 2003 • For corn and soybeans, payments in October, February, and October

  8. Related Season Average Prices to Futures Prices • Chicago Board of Trade (CBOT) prices • December contract for corn • November contract for soybeans • Examined relationship in fall and spring • Average of settlement prices during February for spring (Same prices used for insurance purposes)

  9. Chance of CC Payments, Corn, Given CBOT Futures in Spring

  10. ------------- CC Rate of: ----------- Futures Expected Equal $.00 More Price CC Rate to $.00 and $.15 $0.15 ------- Percent of Time ----- $4.75 $0.20 36 8 56 $5.00 $0.16 45 8 47 $5.25 $0.13 55 8 37 $5.50 $0.10 65 7 27 $5.75 $0.07 74 6 20 Chance of CC Payments, Beans, Given CBOT Futures in Spring Nov.

  11. Current Trends • CC payments provide price protection • Enhance the attractiveness of yield products (APH, GRP) • Lessen need to pre-harvest hedge (However, most farmers don’t hedge enough)

  12. Premium Calculator • Available in crop insurance section of farmdoc (www.farmdoc.uiuc.edu) • Calculates premiums for: • All multi-peril products • All coverage levels • Basic, optional, enterprise units

  13. Payout Estimator • Microsoft Excel spreadsheet that shows payouts for different insurance products by county. • Packet will describe Payout Estimator

  14. Multi-Peril Insurance for Corn, Soybeans 1.Farm products Actual Production History (APH) Income Protection (IP) Revenue Assurance (RA) Crop Revenue Coverage (CRC) 2. County level products Group Risk Plan (GRP) Group Risk Income Plan (GRIP)

  15. Farm Insurance Products 1. Yield insurance -- Actual Production History (APH) 2. Revenue without guarantee increase -- Income Protection (IP) -- Revenue Assurance -- Base Price (RA-BP) 3. Revenue with guarantee increase -- Crop Revenue Coverage (CRC) -- Revenue Assurance -- Harvest Price (RA-HP)

  16. APH Yield Guarantee APH yield 140 bu. Yield election 75% Price $2.00 Yield guarantee 105 bu. (140 bu. X .75)

  17. APH Indemnity Payment Yield guarantee 105 bu. Indemnity price $2.00 Actual yield 100 bu. Payment $10 ** **$30.75 = (105 guarantee – 100 bu yield) x 2.00

  18. IP (RA-BP) Revenue Guarantee APH yield 140 bu. Base price $2.32 Coverage level 75 % Revenue guarantee $243 (140 bu. x $2.32 x .75)

  19. Prices for Revenue Insurance Products “Base” Prices: Corn -- CBOT Dec. contract avg. in February Soybeans -- CBOT Nov. contract avg. in Feb. “Harvest” Prices: Corn -- CBOT Dec. avg in October (CRC) and November (RA, GRIP) Soybeans -- CBOT Nov. contract avg. in October

  20. IP (RA-BP) Gross Revenue Harvest price $2.05 Actual yield 100 bu. Gross revenue $205 ** ** $205 = $2.05 x 100 bu.

  21. IP (RA-BP) Indemnity Payment Revenue guarantee $243 Gross revenue $205 Indemnity payment $48 ** ** (revenue guarantee – gross revenue)

  22. Crop Revenue CoverageRevenue Assurance – Harvest Price • Revenue insurance (pays when below a revenue guarantee) • Increase in revenue guarantee • Increase in guarantee good for “aggressive” users of forward contracts or futures contracts

  23. CRC (RA-HP) Revenue Guarantee APH yield 140 bu. Base price $2.32 Coverage level 75 percent Revenue guarantee (harvest price < $2.32) $243 = 140 bu. x $2.32 x .75 Revenue guarantee (harvest price > $2.32) Harvest price = $2.80 $294 = 140 bu. x $2.80 x .75

  24. CRC (RA-HP) Gross Revenue and Payment Harvest price $2.00 Actual yield 100 bu. Gross revenue $200 Revenue guarantee $243 Payment (243 –200) $43

  25. CRC (RA-HP) Gross Revenue and Payment Harvest price $2.80 Actual yield 100 bu. Gross revenue $280 Revenue guarantee $294 Payment (294 –280) $14

  26. Group Risk Plan (GRP) Crop: Corn County: Jefferson Expected county yield: 97.6 bu. Maximum protection level: $256 Yield election: 90% Protection level: $256 Yield guarantee: 87.8 (97.6 x .90)

  27. GRP Indemnities Yield guarantee: 87.8 bu Protection level: 256 Actual county yield: 80 bu. Indemnity payment: $23 $256 x (87.8 - 80) / 87.8 Protection level x percent shortfall

  28. Group Risk Income Plan (GRIP) Crop: Corn County: Jefferson Expected county yield: 97.6 bu. Expected price: $2.32 Coverage level: 90% Revenue guarantee: $203 ($203 = 97.6 bu. x 2.32 x .9)

  29. GRIP Payment Protection level: $376 Revenue guarantee $215 County yield: 80 Harvest price: $2.05 Gross revenue: $164 Indemnity payment: $72 $376 x (203 – 164)/203 protection level x revenue shortfall

  30. Insurance Evaluator • Available on farmdoc in the crop insurance section • Shows an evaluation of farm level products for one example farm in the county • Compares risks and returns of the products.

  31. Individual Workshop packets distributed at eachMeeting Location….(a few examples from Sangamon County included in proceedings)

  32. Farm-level Analysis (simulation) • Needed items: • Yield distribution for farm/county • Price distribution for harvest • Yield-Price Relationships • Insurance elections, local conditions (e.g., basis) • “It’s tough to make predictions, especially about the future.” • -- Yogi Berra

  33. Historic Yields – Sangamon County Illinois

  34. Sangamon County farm (see FAST tool)

  35. Prices from futures/options markets, • adjusted for local basis

  36. Historic Price vs. Yields – Sangamon County

  37. Putting it all together… See Handout for Location-Specific Information

  38. http://www.farmdoc.uiuc.edu/cropins/evaluator/index.asp

  39. Case Farm Description, Sangamon

  40. Comparison of crop insurance premiums - Sangamon This table contains estimates of the farmer paid per acre premium costs of various crop insurance products by coverage election level to help provide a sense of the differences in costs among insurance alternatives. Actual premiums may vary slightly, and other unit and practice options may exist. A qualified insurance agent should be consulted for actual crop insurance quotes.

  41. Comparison of crop insurance payments - Sangamon This table shows the average per acre indemnity payments by product and election level under the assumptions of the case farm described above. Payments can vary significantly from year to year depending on prices and yields, with many years generating no payments, and some years generating much higher payments. The averages shown are the long run values that would be expected to occur when averaged over a large number of years.

  42. Comparison of crop insurance payment likelihoods Sangamon This table indicates the frequency, or percentage of years that each crop insurance option would make an indemnity payment. An entry of 15%, for example, indicates that the crop insurance product would have a payment triggered in 15 out of 100 years. A higher percentage indicates that the product generates a payment to the producer more often than one with a lower percentage.

  43. Comparison of crop insurance net costs - Sangamon Over many years, payments from crop insurance will offset part or all of their premium costs. This table shows the net cost of insurance products found by combining the premium costs with information about frequency and amount of payments (previous tables). Negative entries indicate that the insurance costs more on average than it pays back. Positive entries indicate that the insurance actually pays back more over the long run than it costs. Note that in this case, higher coverage (lower subsidy rates) result in higher net costs for individual products and lower net costs (positive payments) for group products.

  44. Comparison of revenue - Sangamon Average Gross Revenues are estimated assuming all the crop is sold at harvest. Gross Revenue equals crop sales plus any LDP payments, plus insurance proceeds, less insurance premium costs.

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