Crop Insurance

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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.
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