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Risk Management Programs in the 2008 Farm Bill

Risk Management Programs in the 2008 Farm Bill. William Edwards, Extension Economist. Risk Management Tools. Direct payments. Loan deficiency payments (LDPs) or marketing loans Price counter-cyclical payments Revenue counter-cyclical payments (ACRE)--new

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Risk Management Programs in the 2008 Farm Bill

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  1. Risk Management Programs in the 2008 Farm Bill William Edwards, Extension Economist

  2. Risk Management Tools • Direct payments. • Loan deficiency payments (LDPs) or marketing loans • Price counter-cyclical payments • Revenue counter-cyclical payments (ACRE)--new • Permanent disaster payments (SURE)--new

  3. Direct Payments • Few changes • Paid on 83.3% of base acres for 2009, 2010, 2011, back to 85% in 2012. • Advance payment of 22% beginning Dec. 1 of prior year (2009-2011) • Remainder paid after October 1.

  4. LDPs and Marketing Loans • Posted County Price is now a 30-day moving average. • No change to corn and soybean loan rates. • No payment limits, so no need to buy certificates.

  5. Price Counter-Cyclical Payments • Soybean target price increases from $5.80 to $6.00 in 2010-2012. • Wheat target price increases from $3.92 to $4.17 in 2010-2012. • Price triggers: 2009 2010 • Corn $2.35 $2.35 • Soybeans $5.36 $5.56 • Wheat $3.40 $3.65

  6. Supplemental Revenue Assistance (SURE)A Permanent Disaster Program

  7. Supplemental Revenue Assistance (SURE) • New in the 2008 farm bill • “Add-on” coverage to crop revenue insurance • All crops, not individual crops • Administered by Farm Service Agency • In place through 2012

  8. To be Eligible: • Land must be in a “disaster” county (U.S. Secretary of Ag designation) • Or, in a contiguous county • Or, production loss on all crops on the farm must exceed 50% of expected gross value. • At least one crop must have a 10% or greater yield loss.

  9. SURE is Based on All Acres Farmed by an Operator • Aggregate guarantees and revenues across: • All crops • All counties • States

  10. Increases Guarantees by 15% • Adds 15% to value of crop insurance guarantee • Maximum is 90% of expected revenue

  11. Yields Used for SURE • Use higher of crop insurance proven yield (APH) or counter-cyclical payment base yield (93.5% of 1998-2001 yields) • If APH yield uses “plug” yields (60% of T-yield) these years are not used for SURE.

  12. SURE Guarantees • For APH crop insurance, SURE yield x % guarantee. • Ex: 160 bu. x 86.25% = 138 bu. • For revenue insurance use crop insurance indemnity price • Ex: 160 bu. x 86.25% x $5.40 = $745.20

  13. SURE Actual Revenue • Actual yields (same as for insurance) • USDA Marketing year average cash price (Sept. 2008 – Aug. 2009 for 2008 crop) • Plus crop insurance payments received • Plus 15% of FSA direct payments • Plus any other FSA or disaster payments

  14. SURE Payment • (Guarantee minus actual revenue) x 60% • Limit of $100,000 per year per producer and per spouse • Final payment not known until September 2009

  15. Example (all corn) • Crop insurance (basic RA) • 75% guarantee • 160 bu/acre APH yield • $5.40 indemnity price • $648 per acre guarantee • SURE guarantee • $648 + 15% = $745.20 / acre guarantee

  16. Example • Crop insurance • Actual yield is 140 bu. per acre • November futures price is $3.74 • Actual revenue is $524 per acre • Crop insurance payment is $648 - $524 = $124 per acre

  17. Example--SURE • Actual yield is 140 bu. per acre • 2008 marketing year price is $4.20 • Actual revenue is $588 per acre • Plus $124 crop insurance payment • Plus 15% of $20 FSA direct payment ($3) • Equals $715 SURE revenue • Shortfall = $745 - $715 = $30 • Payment = 60% x $30 = $18

  18. However, • If 2008 corn marketing year price is above $4.42, there is no SURE payment.

  19. Remember--- • SURE payments are based on: • All crops and all counties together • Marketing year cash price instead of harvest futures price • 60% of loss

  20. All Major Crops Must be Insured.Exceptions: • Pasture • Crops whose expected value is less than 10% of the total for the farm. • Expected value is: crop insurance proven yield (or default) x crop insurance indemnity price

  21. Insurance Choices • Standard multiple peril policies (yield, revenue, individual or group) • Catastrophic (CAT): 50% guarantee @ 55% of the indemnity price • Noninsured Assistance Program (NAP) for non-insurable crops, including pasture

  22. Insurable CropsRMA website, Actuarial Documents • Corn • Soybeans • Oats for grain • Alfalfa (60% stand, 5 years old or less) • Red clover (60% stand or more) • Mixed forage (25-59% alfalfa stand, 5 years old or less) • Others?

  23. Noninsurable Crops (NAP) • Alfalfa (older than 5 years) • Mixed forages (older than 5 years) • Rye, wheat, barley? • Sorghum? • Horticultural crops

  24. For 2009 - 2012 • NAP fee limits are $250 per crop, $750 per county, $1,875 per producer. • CAT fee limits are $300 per crop, $900 per county, $2,250 per producer • Insurable forages must be covered by September 30 (CAT or regular) • NAP crops by December 1

  25. Questions About SURE • How is the SURE guarantee affected by: • Increasing insurance guarantee (CRC, RA-HPO)? • Decreased insurance guarantee (late planting)? • Group policies (GRP, GRIP)?

  26. What to do? • Find out if you are in an eligible county for 2008 • Estimate potential payments • Ag Decision Maker calculator atwww.extension.iastate.edu/agdm/ • Watch for FSA announcements • Insure all required crops for 2009

  27. Average Crop Revenue Election (ACRE) • USDA counter-cyclical program based on gross revenue • Replaces price counter-cyclical payment (CCP) in 2003 farm bill (optional)

  28. What do you give up? • 20 % of your current direct payments Iowa averages.

  29. USDA loan rate lowered by 30%. • Loan Deficiency Payments (LDPs) are available when market price is below the loan rate • Will it matter?

  30. Give up price counter-cyclical payment • These are available when the marketing year price is below: • $2.35 for corn • $5.36 for soybeans • Will it matter?

  31. What do you gain? • Possible payment if both state level revenue and farm level revenue are below the triggers. • Payments are for each crop. • Decision is for each FSA farm unit.

  32. State Trigger • Average US cash marketing price for last 2 years (September through August) • Average of last 5 years of state yields, excluding high and low years (Olympic) • x 90%

  33. State Triggers for Iowa

  34. State Triggers cannot change by more than 10% each year(up or down)

  35. Actual Revenue • State: 2009 state yield x current marketing year price (Sept.- Aug.) • Farm: 2009 farm yield x current marketing year price • Both must be below the respective trigger level for a payment to be made.

  36. Payment • State trigger minus state actual revenue • Not more than 25% of the state trigger • X ratio of average farm yield to average state yield • Paid on 83.3 % of planted acres (but not more than USDA base acres)

  37. State trigger is 166 bu. x $4.10 = $681 (corn) Farm trigger is 180 bu. X $4.10 = $738 + $20 crop insurance premium = $758 2009 state yield is 160 bu. 2009 farm yield is 200 bu. 2009 marketing year price is $3.50 2009 state revenue is 160 bu. x $3.50 = $560 2009 farm revenue is 200 bu. x $3.50 = $700 ACRE payment = ($681 - $560) x 83.3% x 180 bu. / 166 bu. = $109

  38. Looking Beyond • Can elect into ACRE in 2009, 2010, 2011, or 2012. • Once elected you cannot opt out. • Average prices and yields will be updated each year. • Triggers cannot change more than 10 %.

  39. Decision • Give up 20% of direct payments • Maybe some LDP or CCP payment • May get an ACRE payment if: • Prices trend downward from 2007/2008 • State and farm have low yields • Probably won’t get an ACRE payment if: • Prices rise or are steady • No low yield years occur

  40. Resource Material on Ag Decision Maker • Fact sheets • SURE calculator • ACRE estimator • www.extension.iastate.edu/agdm/

  41. Example of New Grain PCP Calculations vs Actual LDP Rates for 05/06 Corn, Webster County, IA Month LDP uses an average of 25 reporting days per month 30 Day LDP uses the previous 30 reported prices LDP Rate is the rate reported by FSA

  42. Decision Points for SURE • If all crops will be insured anyway, there is no added cost for SURE. • If additional crops have to be insured, there is an added cost. • $300 per crop for catastrophic coverage • $250 per crop for NAP coverage • Standard APH or revenue insurance at a low level could be cheaper for small areas

  43. Determine if you are eligible for a SURE payment. • Secretarial declared disaster county, or • Contiguous county, or • At least 50% loss of gross revenue • APH yield x crop insurance prices x acres, summed over all crops (SURE expected revenue), compared to: • Actual yield x USDA marketing year price x acres, summed over all crops (SURE actual revenue) • Unlikely in Iowa

  44. Information Needed • Yields submitted for crop insurance, for all land farmed. • Crop insurance payments received. • USDA commodity payments received.

  45. Will I get a SURE payment? • If you got a crop insurance payment for 2008, “probably.” • Unless: • One insurance unit had a big yield loss and the rest did not. Price loss affects all units. • Grain prices trend upward through August (so USDA marketing year price is significantly higher than the harvest insurance price).

  46. Maximum USDA marketing year prices to trigger SURE payment Assumes harvested yield is 10% less than APH yield.

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