ECON 337: Agricultural Marketing Lee Schulz Assistant Professor [email protected] 515-294-3356 Chad Hart Associate Professor [email protected] 515-294-9911 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 Why Crops Fail 13% 8% 44% 6% 3% 22% 4% Drought Heat Excess Moisture Cold Wet Weather Freeze Hail Other Federal Crop Insurance Federal Crop Insurance: Total Acres Insured Types of Crop Insurance Individual Yield (YP) Area Yield (GRP) Individual Revenue (RP and RPE) Area Yield - Individual Revenue Combination (GRIP) 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: $4.62/bu (average of Feb. prices for Dec. corn futures) 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 $161.70 per acre = $4.62/bu * (75% * 180 bu/ac - 100 bu/ac) Yield Insurance Payout Graph 200 No Payout 150 100 Payout 50 Price ($ per bushel) 00 7. 50 6. 00 6. 50 5. 00 5. 50 4. 00 4. 50 3. 00 3. 50 2. 00 2. 50 1. 00 0 1. Yield (Bushels per acre) 250 Yield Insurance is like an Option 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 Individual Revenue Insurance (RP or RPE) In our example, the farmer has insured $623.70 of revenue per acre (75% * $4.62/bu * 180 bu/ac) Final value of the crop determined by average futures prices over harvest period Individual Revenue Insurance (RP or RPE) If yields are 100 bushels per acre and harvest prices average $4.50, the farmer receives $173.70 per acre = 0.75*$4.62/bu.*180 bu./acre - $4.50/bu.*100 bu./acre RPE Payout Graph No Payout Payout Rev. Insurance is like an Option 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 Harvest Price Option Individual Revenue Insurance (RP) If yields are 100 bushels per acre and harvest prices average $7.50, the farmer receives $262.50 per acre = 0.75*$ 7.50 4.62/bu.*180 bu./acre - $7.50/bu.*100 bu./acre RP Payout Graph No Payment Neither Pay RPE Pays YP Pays Both Pay RP Pays Corn Insurance Prices Harvest prices have been higher 5 out of last 14 years Soy Insurance Prices Harvest prices have been higher 7 out of last 14 years What Units to Choose? Optional Units: Each farm is separate Basic Units: Combine owned and cash rented acres in same county Enterprise Units: Combine all acres of the same crop in same county Whole Farm: Combine all crops in county Current Subsidy Rates Coverage level Basic Units Optional Units Enterprise Units Whole Farm Units 60% 64% 80% not avail. 65% 59% 80% 80% 70% 59% 80% 80% 75% 55% 77% 80% 80% 48% 68% 71% 85% 38% 53% 56% 2014 Insurance Premiums Cov. Level 50% 55% 60% 65% 70% 75% 80% 85% Per Acre Premiums ($ per acre) YP RPHPE RP_ 0.74 0.62 0.83 1.09 0.93 1.33 1.54 1.29 2.02 2.37 2.01 3.30 2.91 2.62 4.60 4.14 4.19 7.50 6.23 7.04 12.67 9.50 11.61 20.97 For our example farm in Story County, Iowa for corn 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 Iowa Corn Acres Insured in 2013 97% of all Iowa corn acres are insured Iowa Soy Acres Insured in 2013 94% of all Iowa soybean acres are insured 2013 Corn and Soy Coverage Levels Coverage Levels for YP Coverage Levels for RPHPE Coverage Levels for RP Class web site: http://www.econ.iastate.edu/~chart/Classes/econ337/ Spring2014/ See you in lab.