Crop Insurance

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ECON 337:
Agricultural Marketing
Chad Hart
Assistant Professor
[email protected]
515-294-9911
Econ 337, Spring 2012
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
Econ 337, Spring 2012
Why Crops Fail
13%
8%
44%
6%
3%
22%
Econ 337, Spring 2012
4%
Drought
Heat
Excess Moisture
Cold Wet Weather
Freeze
Hail
Other
Types of Crop Insurance
Individual Yield (YP)
Area Yield (GRP)
Individual Revenue (RP and RPE)
Area Yield - Individual Revenue
Combination (GRIP)
Econ 337, Spring 2012
Example Farm
A 100 acre corn farm in Story County, Iowa
with a 5-year average yield of 180 bu/acre
Purchases insurance at the 75% coverage
level
Spring price: $5.68/bu
(average of Feb. prices for Dec. corn futures)
Econ 337, Spring 2012
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 $198.80 per acre
= $5.68/bu * (75% * 180 bu/ac - 100 bu/ac)
Econ 337, Spring 2012
Yield Insurance Payout Graph
Yield (Bushels per acre)
250
200
No Payout
150
100
Payout
50
Price ($ per bushel)
Econ 337, Spring 2012
00
7.
50
6.
00
6.
50
5.
00
5.
50
4.
00
4.
50
3.
00
3.
50
2.
00
2.
50
1.
1.
00
0
Yield Insurance is like an Option
Insurance Payment ($ per acre)
$300
$250
$200
$150
$100
$50
$0
90
95 100 105 110 115 120 125 130 135 140 145 150 155
Actual Yield (bu. per acre)
Econ 337, Spring 2012
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
Econ 337, Spring 2012
Individual Revenue Insurance
(RP or RPE)
In our example, the farmer has insured
$766.80 of revenue per acre
(75% * $5.68/bu * 180 bu/ac)
Final value of the crop determined by
average futures prices over harvest
period
Econ 337, Spring 2012
Individual Revenue Insurance
(RP or RPE)
If yields are 100 bushels per acre and
harvest prices average $4.50, the
farmer receives $316.80 per acre
= 0.75*$5.68/bu.*180 bu./acre
- $4.50/bu.*100 bu./acre
Econ 337, Spring 2012
RPE Payout Graph
250
Yield (bu. per acre)
200
No Payout
150
100
Payout
50
0
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
Price ($ per bushel)
Econ 337, Spring 2012
$6.00
$6.50
$7.00
Rev. Insurance is like an Option
Insurance Payment ($ per acre)
$600
$500
$400
$300
$200
$100
$0
$200
$300
$400
$500
$600
$700
Actual Revenue ($ per acre)
Econ 337, Spring 2012
$800
$900
$1,000
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
Econ 337, Spring 2012
$7.50
Harvest Price Option
Ins. Price ($ per bu.)
$7.00
$6.50
$6.00
$5.50
$5.00
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
Harvest Price ($ per bu.)
Econ 337, Spring 2012
$6.00
$6.50
$7.00
Individual Revenue Insurance
(RP)
If yields are 100 bushels per acre and harvest
prices average $7.00, the farmer receives
$245.00 per acre
= 0.75*$ 7.00
5.68/bu.*180 bu./acre
- $7.00/bu.*100 bu./acre
Econ 337, Spring 2012
RP Payout Graph
250
No Payment
Yield (bu. per acre)
200
Neither Pay
RPE Pays
150
YP Pays
100
Both Pay
RP Pays
50
0
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
Price ($ per bu.)
Econ 337, Spring 2012
$6.00
$6.50
$7.00
Corn Insurance Prices
$7
$6
Harvest prices have been higher
4 out of last 12 years
Price ($ per bu.)
$5
$4
$3
$2
$1
$0
2000
2002
2004
2006
Planting
Econ 337, Spring 2012
2008
Harvest
2010
2012
Soy Insurance Prices
$14
$12
Price ($ per bu.)
$10
$8
$6
$4
$2
Harvest prices have been higher
6 out of last 12 years
$0
2000
2002
2004
2006
Planting
Econ 337, Spring 2012
2008
Harvest
2010
2012
What Units to Choose?
• Optional Units: Each farm is separate
• Basic Units: Combine owned and cash
rented acres in same county
• Enterprise Units: Combine all acres of
the same crop in same county
• Whole Farm: Combine all crops in county
Econ 337, Spring 2012
Current Subsidy Rates
Coverage
level
Basic Units
Optional Units
Enterprise
Units
Whole Farm
Units
60%
64%
80%
not avail.
65%
59%
80%
80%
70%
59%
80%
80%
75%
55%
77%
80%
80%
48%
68%
71%
85%
38%
53%
56%
Econ 337, Spring 2012
2012 Insurance Premiums
Cov. Level
50%
55%
60%
65%
70%
75%
80%
85%
Per Acre Premiums ($ per acre)
YP
RPE
RP_
1.10
0.94
1.35
1.80
1.55
2.33
2.55
2.24
3.52
3.91
3.01
5.75
5.36
5.50
8.72
7.83
8.75
14.00
11.79
14.24
22.78
17.97
22.55
36.36
For our example farm in Story County, Iowa for corn
Econ 337, Spring 2012
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
Econ 337, Spring 2012
Iowa Corn AcresGRIPInsured in 2011
1.8%
RPE
YP
3.7%
5.5%
GRP
0.4%
RP
88.5%
GRIP
Econ 337, Spring 2012
GRP
RP
RPE
YP
Iowa Soy AcresGRIPInsured
in 2011
GRP
0.4%
0.9%
RPE YP
3.6% 6.5%
RP
88.5%
GRIP
Econ 337, Spring 2012
GRP
RP
RPE
YP
2011 Corn and Soy Coverage Levels
35%
% of Insured Acres
30%
25%
20%
15%
10%
5%
0%
50%
55%
60%
65%
70%
75%
Coverage Level
Corn
Econ 337, Spring 2012
Soy
80%
85%
90%
100%
Coverage Levels for GRIP
90%
% of Insured Acres
80%
70%
60%
50%
40%
30%
20%
10%
0%
50%
55%
60%
65%
70%
75%
Coverage Level
Corn
Econ 337, Spring 2012
Soy
80%
85%
90%
60%
Coverage Levels for GRP
% of Insured Acres
50%
40%
30%
20%
10%
0%
50%
55%
60%
65%
70%
75%
Coverage Level
Corn
Econ 337, Spring 2012
Soy
80%
85%
90%
40%
Coverage Levels for RP
% of Insured Acres
35%
30%
25%
20%
15%
10%
5%
0%
50%
55%
60%
65%
70%
75%
Coverage Level
Corn
Econ 337, Spring 2012
Soy
80%
85%
90%
35%
Coverage Levels for RPE
% of Insured Acres
30%
25%
20%
15%
10%
5%
0%
50%
55%
60%
65%
70%
75%
Coverage Level
Corn
Econ 337, Spring 2012
Soy
80%
85%
90%
25%
Coverage Levels for YP
% of Insured Acres
20%
15%
10%
5%
0%
50%
55%
60%
65%
70%
75%
Coverage Level
Corn
Econ 337, Spring 2012
Soy
80%
85%
90%
Class web site:
http://www.econ.iastate.edu/~chart/Classes/econ337/
Spring2012/
Lab in Heady 68
Econ 337, Spring 2012
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