Watts and Associates Inc.
Crop Insurance Division
Michigan White Wheat Quality
Adjustment Update
Presented to:
Michigan Wheat Program
Presented by:
Alex Offerdahl
Watts and Associates
March 11, 2015
Confidentiality Notice
Watts and Associates, Inc. has developed this material in cooperation with its clients for the sole use of its recipients for use in
developing progressive agricultural policy and has exclusive ownership rights in part or all of its format and content. The content
of this material, regardless of the format in which it is presented, including orally, in print, or electronically, may not be further
disseminated. This material is protected by law.
Watts and Associates Inc.
Crop Insurance Division
Introduction
• Watts and Associates is an Agricultural Economics
consulting firm based in Billings, MT
• We are the leading developer of new crop insurance
products, including both Federal Crop insurance and
private products.
• In Michigan growers have felt the coverage offered by the
Federal Crop Insurance Program does not offer adequate
or appropriate protection, particularly for quality loss
• We were engaged by the Michigan Wheat Program to
develop a study on the relationship between price discount
and falling number scores.
• We were also asked to work with the program to assist in
working with the agency to change the way quality
adjustment is handled for falling numbers.
Use or disclosure of information or data contained on this sheet is subject to the restrictions on the title page.
1
Watts and Associates Inc.
Crop Insurance Division
Michigan Wheat and
Crop Insurance
Wheat Planted Acres
100,000,000
1,400,000
90,000,000
1,200,000
80,000,000
70,000,000
1,000,000
60,000,000
800,000
50,000,000
600,000
40,000,000
30,000,000
400,000
1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
US
MI
Use or disclosure of information or data contained on this sheet is subject to the restrictions on the title page.
2
Michigan Wheat and
Crop Insurance
Watts and Associates Inc.
Crop Insurance Division
Wheat Production (Bu)
3,000,000,000
60,000,000
2,500,000,000
50,000,000
2,000,000,000
40,000,000
1,500,000,000
30,000,000
1,000,000,000
20,000,000
500,000,000
10,000,000
0
0
1979
1984
1989
1994
1999
US
2004
2009
2014
MI
Use or disclosure of information or data contained on this sheet is subject to the restrictions on the title page.
3
Michigan Wheat and
Crop Insurance
Watts and Associates Inc.
Crop Insurance Division
Wheat Yield (bu/ac)
80
Trend: 0.9 bu/yr
70
60
50
40
Trend: 0.25 bu/yr
30
20
10
0
1979
1981
1983
1985
1987
1989
1991
1993
1995
US
1997
1999
2001
2003
2005
2007
2009
2011
2013
MI
Use or disclosure of information or data contained on this sheet is subject to the restrictions on the title page.
4
Michigan Wheat and
Crop Insurance
Watts and Associates Inc.
Crop Insurance Division
MI Wheat Insurance Participation
800,000
100%
90%
700,000
80%
600,000
70%
500,000
60%
400,000
50%
40%
300,000
30%
200,000
20%
100,000
10%
0
0%
1997
1998
1999
2000
2001
2002
2003
Planted Acres
2004
2005
2006
Insured Acres
2007
2008
2009
2010
2011
2012
2013
2014
Participation Rate
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5
Watts and Associates Inc.
Crop Insurance Division
Michigan Wheat and
Crop Insurance
MI Wheat Insurance Experience
$35,000,000
$30,000,000
$25,000,000
$20,000,000
Total Premium
Grower Premium
Indemnity
$15,000,000
$10,000,000
$5,000,000
$0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Use or disclosure of information or data contained on this sheet is subject to the restrictions on the title page.
6
Michigan Wheat and
Crop Insurance
Watts and Associates Inc.
Crop Insurance Division
MI Wheat Loss and Payback Ratios
16
8
4
2
1
0.5
0.25
0.125
1995
1997
1999
2001
2003
Loss Ratio (%)
2005
2007
2009
2011
2013
Payback Ratio
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7
Watts and Associates Inc.
Crop Insurance Division
Quality Adjustment in
MI White Wheat
• Falling Numbers
– A test for cereal chemical effects of sprout damage
– Technically a test for the effects of an enzyme “Alpha
Amylase”, which breaks down starch
– Industry standard value is 300, with lower values
subject to (often variable) discounts
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8
Watts and Associates Inc.
Crop Insurance Division
Quality Adjustment in
MI White Wheat
2011 SPOI:
Soft White Wheat will be discounted for falling
numbers, regardless of U.S. grade designation as
follows:
299-200
0.055
199-0
0.183
Use or disclosure of information or data contained on this sheet is subject to the restrictions on the title page.
9
Watts and Associates Inc.
Crop Insurance Division
Quality Adjustment in
MI White Wheat
2012 SPOI:
Soft White Wheat will be discounted for falling
numbers, regardless of U.S. grade designation as
follows:
299-200
0.054
199-0
0.181
Use or disclosure of information or data contained on this sheet is subject to the restrictions on the title page.
10
Watts and Associates Inc.
Crop Insurance Division
Quality Adjustment in
MI White Wheat
2013 SPOI:
Soft White Wheat will be discounted for falling
numbers, regardless of U.S. grade designation as
follows:
299-200
0.054
199-0
0.179
Use or disclosure of information or data contained on this sheet is subject to the restrictions on the title page.
11
Watts and Associates Inc.
Crop Insurance Division
Quality Adjustment in
MI White Wheat
2014 SPOI:
Soft White Wheat will be discounted for falling
numbers, regardless of U.S. grade designation as
follows:
299-275
0.053
274-250
0.071
249-225
0.089
224-200
0.107
199-0
0.196
Use or disclosure of information or data contained on this sheet is subject to the restrictions on the title page.
12
Watts and Associates Inc.
Crop Insurance Division
Quality Adjustment in
MI White Wheat
Discount Translation:
Cash price for soft white wheat in Breckenridge, MI
on 3/04 (Michigan Ag Commodities online posted
bid price): $5.31/bu
FN Value
299-275
274-250
249-225
224-200
199-0
RMA Discount
0.053
0.071
0.089
0.107
0.196
Implied Discount
$0.28
$0.38
$0.47
$0.56
$1.04
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13
Watts and Associates Inc.
Crop Insurance Division
Quality Adjustment
Example
• Quality Adjustment in MI White Wheat
– A grower has an APH of 80 bu/ac and selects a 75%
coverage level. RMA reports a projected price of
$5.00/bu.
– Guarantee = 80 bu/ac x $5.00 x 75% = $300/ac
– Grower harvests 50 bu/ac and has a Falling Number
score of 245 (Reduction in Value factor of 0.071). Yield
is adjusted
• 50 bu/ac x (1.00 - 0.071) = 46.45 bu/ac
– Revenue to Count
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14
Watts and Associates Inc.
Crop Insurance Division
Quality Adjustment
Example
• Quality Adjustment in MI White Wheat
– Harvest price is also $5.00/bu.
– Revenue to Count
• 46.45 bu/ac x $5.00/bu = $232.25/ac
– Indemnity
• $300 – 232.25 = $67.75/ac
– Without Quality Adjustment, indemnity would have
been $50.00/ac.
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15
Watts and Associates Inc.
Crop Insurance Division
Our Study
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16
Watts and Associates Inc.
Crop Insurance Division
Our Study
Falling
Number
Implied Empirical Discount
Factor
Above 300
0.000
299-275
0.000
0.053
274-250
0.000
0.071
249-225
0.035
0.089
224-200
0.111
0.107
199-0
0.306
0.196
SPOI Discount Factor
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17
Watts and Associates Inc.
Crop Insurance Division
Quality Adjustment in
MI White Wheat
RMA’s Proposed Approach:
RMA is working to implement an alternative
approach to severe falling number situations
FN Value
299-275
274-250
249-225
224-200
199-0
2014 Discount
0.053
0.071
0.089
0.107
0.196
2015 (and future)
0.053
0.071
0.089
0.107
RIV
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18
Watts and Associates Inc.
Crop Insurance Division
Reduction in Value
• Reduction in Value (RIV) is used in place of discount
factors in certain crop insurance situations. It is a term
used in the Special Provisions and Loss Adjustment Stand
Handbooks (LASH). Typically it is used for discounts for
which there are no discount schedule to account for it, i.e.
discounts that “fall off the chart”. To establish an RIV a
“Local Market Price” (LMP) must be established.
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19
Watts and Associates Inc.
Crop Insurance Division
Example: RIV Vs. Current
Discount Schedule approach
• A grower has an APH of 60 bu/ac and purchased a 75 %
coverage Level for Revenue Protection. The Projected
Price was $6.00/bu. His Guarantee is $270/ac
• A grower harvests 50 bu/ac with a falling number score of
185. The product is subject to quality adjustment, which
will reduce the grower’s production to count based on its
reduced value.
• The two approaches both calculate Quality Adjustment
Factors, which are then applied to determine production to
count, and then indemnities
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21
Watts and Associates Inc.
Crop Insurance Division
Discount Schedule Approach
• The SPOI display a schedule of falling numbers values
and attendant discount factors. Based on a score of 185,
the grower’s production to count is discounted by a factor
0.196.
– 1.000 – Discount Factor = Quality Adjustment Factor
1.000 - 0.196 = 0.804
– Gross Production x Quality Adjustment Factor = Production to Count
50 bu x 0.804 = 40.2 bu
Falling Number
SPOI Discount Factor
Above 300
299-275
0.053
274-250
0.071
249-225
0.089
224-200
0.107
199-0
0.196
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22
Watts and Associates Inc.
Crop Insurance Division
Reduction in Value Approach
• The SPOI still display discount factors for values of 200 or above, but
for lower values, specify a Reduction in Value approach. At 185, RIV
is applied. The grower is discounted $2.00/bu by the local elevator for
his/her damaged production.1.000 – Discount Factor = Quality
Adjustment Factor
– Determine Local Market Price.
Based on calls to local elevators, a LMP of $5.00/bu is established by the Approved
Insurance Provider (the loss adjuster).
– Reduction in Value / Local Market Price = Discount Factor
$2.00/bu RIV ÷ $5.00 = 0.400
– 1.000 – Discount Factor = Quality Adjustment Factor
1.000 – 0.4000 = 0.600
– Gross Production x Quality Adjustment Factor = Production to Count
50 bu/ac X 0.600 = 30 bu/ac
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23
Watts and Associates Inc.
Crop Insurance Division
Comparison
Discount Factor
Guarantee
$270/ac
Gross Production
50 bu/ac
Discount Factor
0.196
Production to Count 40.2 bu/ac
Revenue to Count
$201/ac
Indemnity
$69/ac
RIV
$270/ac
50 bu/ac
0.400
30.0 bu/ac
$150/ac
$120/ac
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24
Watts and Associates Inc.
Crop Insurance Division
Questions?
Alex Offerdahl
Watts and Associates
4331 Hillcrest Rd
Billings, MT 59870
406-252-7776
aofferdahl@wattsandassociates.com
Use or disclosure of information or data contained on this sheet is subject to the restrictions on the title page.
25
Watts and Associates Inc.
Innocuous Statistics
Crop Insurance Division
Insured Acres
350
300
Millions of Acres
250
200
150
100
50
0
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
Use or disclosure of information or data contained on this sheet is subject to the restrictions on the title page.
2011
2013
26
Watts and Associates Inc.
Innocuous Statistics
Crop Insurance Division
Liability
$140,000
$120,000
Millionsof Dollars
$100,000
$80,000
$60,000
$40,000
$20,000
$0
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
Use or disclosure of information or data contained on this sheet is subject to the restrictions on the title page.
2011
2013
27
Watts and Associates Inc.
Innocuous Statistics
Crop Insurance Division
Total Premium
$14,000.00
$12,000.00
Millions
of Dollars
$10,000.00
$8,000.00
$6,000.00
$4,000.00
$2,000.00
$0.00
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
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2009
2011
2013
28
Watts and Associates Inc.
Innocuous Statistics
Crop Insurance Division
U.S. Premium Totals
$14,000.00
$12,000.00
Millions of Dollars
$10,000.00
$8,000.00
$6,000.00
$4,000.00
$2,000.00
$0.00
1989
1991
1993
1995
1997
1999
2001
Premium Subsidy
2003
2005
2007
2009
2011
2013
Producer Premium
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29
Watts and Associates Inc.
Innocuous Statistics
Crop Insurance Division
Aggregate Crop Insurance Loss History
$20,000.00
$18,000.00
$16,000.00
Millions of Dollars
$14,000.00
$12,000.00
$10,000.00
$8,000.00
Total Premium
$6,000.00
Indemnity
Producer Premium
$4,000.00
$2,000.00
$0.00
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
Use or disclosure of information or data contained on this sheet is subject to the restrictions on the title page.
2011
2013
30