Drought, Politics and Risk Management Strategies 2012 Insurance Workshop: Drought, Politics and Risk Management Strategies By Dr. G. Art Barnaby, Jr. Professor Agricultural Economics Kansas State University Presented in Brush, CO (October 30); Grand Island, NE (October 31) Salina, KS (November 1) & Enid, OK (November 2) Email barnaby@ksu.edu Check out our WEB page at http://www.AgManager.info

Summary Crop Insurance History 1938 to 1980 crop insurance was a USDA program, 1980 public private partnership. 1984 APH 1991 MVP/Harvest Price 1996 CRC/RP The ARPA 2000 Law provided full subsidy on revenue insurance. Subsidy or AGI Limit? $40 B Cost?, Over Paying Losses?, Will RMA pay all of the underwriting loss?

How Much of the 2012 Loss will the AIPs Pay? AIP pays based on their state loss ratio and fund placement. Because only aggregate data is available the amount of losses AIPs will pay cannot be estimated. AIP with sales concentrated in MN will fare better than those with sales concentration in IN in 2012. Likely the largest amount of losses paid by AIPs will be in Iowa. Their loss ratio is expected to be below 2.2 where AIPs pay the largest share of the loss and on a large premium volume. Losses over the 2.2 loss ratio are mostly paid by government and will limit Indiana losses with less premium volume. 3 3

How Much of the 2012 Loss will the AIPs Pay? There likely are not enough states with underwriting gains to prevent AIPs from having aggregated underwriting losses, but it would not be a surprise is one of the AIPs showed a gain. SRA created 3 State Groups of reinsurance coverage. Group 1 covers Iowa, Illinois, Indiana, Minnesota and Nebraska. The Group 1 states generated over $4 billion in premium and represented over 34% of the total national premium in 2011. 4 4

SRA Loss/Gain Formula for Group 1 States, on $1 Million Retained Premium

SRA Loss/Gain Formula for State Group 1, State Group 2,3 & Assigned Risk, on $1 Million Retained Premium

80/20 Rule Applies In 2011, about 82% of the national crop insurance premium was placed in the Commercial Fund. In 2011, about 18% of the national crop insurance premium was placed in the Assigned Risk Fund. Companies are required to retain 20% of the premium/risk. The 2011 Commercial Fund generated a $2.239B gain but Assigned Risk Fund suffered a -$1.121B loss, for a net gain of $1.117B gain. Historically most of the underwriting losses are in the Assigned Risk Fund. Last Commercial Fund loss was in 2002. Fix the rates and underwriting rules for policies in Assigned Risk Fund and lower taxpayer cost. 7 7

Losses/Gains for a 2 State, Group 1, Hypothetical Insurance Company with Sales Concentration in Minnesota

Losses/Gains for a 2 State, Group 1, Hypothetical Insurance Company with Sales Concentration in Indiana

Marketing Loan, Counter Cyclical, Ad Hoc Disaster Aid, SURE & ACRE are “Puts” & “Insurance” with 100% of “Premium” Paid by USDA There are only 2 variables in revenue, price & yield. All USDA risk management tools including ACRE, SURE, Marketing Loan, etc. are derivatives of options and insurance. ARC can be added to the list. Ad hoc Disaster aid, SURE and ARC are just “free” crop/revenue insurance. Combining “puts” and insurance in to revenue insurance is more efficient than insuring price and yield separately. 10 10

Crop Insurance Totals for the USA on All Crops, All Coverages, All Products, after the ARPA 2000 Law

Counties with Average Coverage per CAT Nursery policy greater than $500,000 with 100% premium subsidy

The 2007 Census of Agriculture, USDA

USA Crop Insurance Performance, All Contracts

Selected Indicators of the Crop Insurance Program

Colorado Corn Crop Insurance History

Minnesota Corn Crop Insurance History

Indiana Corn Crop Insurance History

Colorado Wheat Crop Insurance History

Percent Yield Deviation below Trend is Better in Some Important Corn States than in 1988

Table 1. Current Crop Insurance Harvest Prices vs Table 1. Current Crop Insurance Harvest Prices vs. High Price for CORN on 8/21 @ $8.38 & Soybeans on 9/4 @ $17.68 Corn Soybeans

Kansas Corn for all APH Products based on Average APH and Premiums Purchased for 2012, Assuming $7.50 Harvest Price and a 80% Yield Loss

Indiana Corn for all APH Products based on Average APH and Premiums Purchased for 2012, Assuming $7.50 Harvest Price and a 80% Yield Loss

Minnesota Corn for all APH Products based on Average APH and Premiums Purchased for 2012, Assuming $7.50 Harvest Price and NO Yield Loss

Harvest Price Causes Payments Greater than Expected Farm Revenue? Assumes no Livestock that requires producers to replace their feed supply at higher prices. Assumes a single enterprise corn farm. For example, wheat may have produced less than the “expected” revenue. Assumes APH equals expected yield. Assumes quality loss adjustments equals market discounts. Assumes zero basis. Assumes no hedging or forward contracts. 37 37

Harvest Price Causes Payments Greater than Expected Farm Revenue? All marketing plans assume production and the harvest price replaces bushels at current harvest market price. Harvest price eliminates the negative price in the RP “put”. Conclusion there are many conditions that must hold for farmers’ crop insurance premiums to exceed expected revenue. Farmers with a normal crop will generate revenue that is more than 40% higher, so they are better off with a crop. 38 38

Deductible Disappears for 75% RP Coverage When Harvest price is 25% lower than base price. When harvest price increases by 33.4% and yield equals zero or sales with a zero basis on production plus indemnity. 39 39

39 Year Historical Corn & Soybean Revenue Protection Prices (March 15 Sales Closing)

Cost of YAA “put” in RP coverage for Central Kansas Irrigated Corn Farm for 2012

USDA 2011 Expenses for Farm Safety Net & Other Programs

Crop Insurance Summary FSA employees have lobbied to take over sales, loss adjusting, and production records for crop insurance. FSA will have a program and employment will be maintained. There appears to be little support for FSA to take over crop insurance. CAT will remain “free” and no payment limit. In the short run, the harvest price will be maintained but likely to continue being attacked. Means testing & subsidy limits will continue to be argued. Disaster aid for crops will remain on the agenda, but looks unlikely this year.

Thank You DR. G. A. “ART” BARNABY Jr. KANSAS STATE UNIVERSITY & 4B AG CONSULTANTS, LLC Consider a KSU Masters Degree in Agribusiness! Consider MAST for Agricultural Producer Ed. EMAIL: barnaby@ksu.edu; PHONE: 785-532-1515 Check out our WEB page at WWW.AgManager.info Copyright 2012, All Rights Reserved