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

1. Illinois versus Iowa experience
2. How GRIP works
3. Risks/Returns
4. Situations where it works
2

 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)
3

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

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

Group Product Use, Corn,
Illinois
12
10
8
6
4
2
0
Iowa 2005 Use
GRP – 1.2%
GRIP – 3.6%
GRP
GRIP
1997 1998 1999 2000 2001 2002 2003 2004 2005P
Year
6

Group Product Use,
Soybeans, Illinois
14
12
10
4
2
0
8
6
Iowa 2005 Use
GRP – 1.9%
GRIP – 4.7%
GRP
GRIP
1997 1998 1999 2000 2001 2002 2003 2004 2005P
Year
7

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%
8

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%
9

Marshall County, Iowa
2005 Example
10

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)
11

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

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

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

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

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
16

Payments (Max Protection
Level, 90% Coverage Level)
GRP
Prot. level $579
GRIP-NoHR GRIP-HR
$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
17

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
18

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

Payments (Max Protection
Level, 90% Coverage Level)
GRP
Prot level $579
GRIP-NoHR GRIP-HR
$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
20

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

Marshall County, Corn
Yields
200
180
160
140
120
100
80
60
40
20
0
19
72
19
75
1977
19
78
19
81
1988
1993
19
84
19
87
19
90
Year
19
93
19
96
19
99
20
02
22

GRIP Shortfalls, Marshall County,
Iowa, Corn (90% coverage level)
Year
1999
2000
2001
2002
2003
2004
Expected Harvest GRIP
Price Price Shortfall (90%)
2.40
2.54
1.96
2.11
0
.034
2.45
2.30
2.38
2.93
2.05
2.43
2.37
1.99
.046
0
0
.127
Shortfalls the same for GRIP-NoHR and GRIP-
HR.
23

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

GRIP Shortfalls, Marshall County,
Iowa, Corn (90% coverage level)
Year
1999
2000
2001
2002
2003
2004
Expected Harvest GRIP
Price Price Shortfall (90%)
4.95
5.36
4.85
4.72
0
.129
4.59
4.53
5.23
7.27
4.37
5.45
7.32
5.26
.013
0
.058
.183
Shortfalls the same for GRIP-NoHR and GRIP-
HR.
25

Risk/returns www.farmdoc.uiuc.edu/cropins/index.html
26

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
27

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

 Frequency of payments
 Example of tables from Evaluator
29

 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
30

1% VaR from Evaluator
$ per acre, Corn
Level APH CRC
65% 203 212
GRP GRIP-NoHR GRIP-HR
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
31

 Average payments over time minus premium
 High levels indicate high costs, negative levels mean expect more insurance payments than premium over time
32

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
33

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

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
35

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
36

 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
37

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

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
39

 GRIP does fit certain situations
 Represent another option in the risk management tool kit
40