Agricultural Marketing ECON 337: Agricultural Marketing Chad Hart Associate Professor chart@iastate.edu 515-294-9911 1

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

Federal Crop Insurance Federal Crop Insurance Corporation – 1938 Government’s initial move in crop insurance Federal Crop Insurance Act of 1980 Premium subsidies Federal Crop Insurance Reform Act of 1994 Catastrophic coverage and higher subsidies Agricultural Risk Protection Act of 2000 The 2008 and 2014 Farm Bills

Federal Crop Insurance: A Public/Private Partnership The Federal Government works with private insurance companies to offer crop insurance. Since 1998, all federal crop insurance products are sold and serviced by private companies. The Federal Government sets and/or approves premium rates and insurance terms. Both entities share risks and returns from crop insurance.

Federal Crop Insurance

Federal Crop Insurance: Total Acres Insured

Types of Crop Insurance Individual Yield (YP) Individual Revenue (RP and RPE) Area Yield (AYP) Area Revenue (ARP and ARPE)

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 80% coverage level Spring price: $3.96/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 $174.24 per acre = $3.96/bu * (80% * 180 bu/ac - 100 bu/ac)

Yield Insurance Payout Graph No Payout Payout

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 RPHPE) In our example, the farmer has insured $570.24 of revenue per acre (80% * $3.96/bu * 180 bu/ac) Final value of the crop determined by average futures prices over harvest period

Individual Revenue Insurance (RP or RPHPE) If yields are 100 bushels per acre and harvest prices average $3.50, the farmer receives $220.24 per acre 0.80*$3.96/bu.*180 bu./acre - $3.50/bu.*100 bu./acre

RPHPE 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 $5.50, the farmer receives $242.00 per acre 0.80*$3.96/bu.*180 bu./acre - $5.50/bu.*100 bu./acre 5.50

RP Payout Graph No Payment Neither Pay RPHPE Pays YP Pays Both Pay RP Pays

Corn Insurance Prices

Soybean Insurance Prices

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 60% 64% 80% 65% 59% 70% 75% 55% 77% 48% 68% 71% Coverage level Basic Units Optional Units Enterprise Units Whole Farm Units 60% 64% 80% not avail. 65% 59% 70% 75% 55% 77% 48% 68% 71% 85% 38% 53% 56%

2017 Insurance Premiums Per Acre Premiums ($ per acre) Cov. Level YP RPHPE RP_ 50% 0.57 0.47 0.62 55% 0.81 0.69 0.98 60% 1.09 0.91 1.43 65% 1.69 1.45 2.43 70% 2.29 2.12 3.63 75% 3.35 3.53 6.12 80% 5.09 5.96 10.49 85% 8.30 10.42 18.09 For an example farm in Story County, Iowa for corn

2017 Insurance Premiums Per Acre Premiums ($ per acre) Cov. Level YP RPHPE RP_ 50% 8.07 7.63 9.72 55% 10.92 10.43 13.29 60% 13.36 13.06 16.52 65% 18.40 18.32 23.02 70% 21.95 22.04 27.69 75% 28.43 28.61 35.92 80% 38.48 38.92 48.73 85% 53.26 54.39 67.72 For our example farm in Anoka County, MN 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

Corn Acres Insured in 2016 87% of all corn acres are insured

Soy Acres Insured in 2016 87% of all soybean acres are insured

2016 Corn and Soy Coverage Levels

Coverage Levels for YP

Coverage Levels for RPHPE

Coverage Levels for RP

Class web site: Lab in Heady 68. http://www.econ.iastate.edu/~chart/Classes/econ337/Spring2017/ Lab in Heady 68.