Market Outlook, Farm Bill, and Crop Insurance WinField Sales Leadership Meeting Shoreview, Minnesota Mar. 25, 2015 Chad Hart Associate Professor/Crop Markets Specialist chart@iastate.edu 515-294-9911 1 1

U.S. Corn Supply and Use 2011 2012 2013 2014 2015 Area Planted (mil. acres) 91.9 97.3 95.4 90.6 89.0 Yield (bu./acre) 147.2 123.1 158.1 171.0 166.8 Production (mil. bu.) 12,360 10,755 13,829 14,216 13,595 Beg. Stocks 1,128 989 821 1,232 1,777 Imports 29 160 36 25 Total Supply 13,517 11,904 14,686 15,472 15,397 Feed & Residual 4,557 4,315 5,036 5,300 5,275 Ethanol 5,000 4,641 5,134 5,200 5,225 Food, Seed, & Other 1,428 1,397 1,367 1,395 1,410 Exports 1,543 730 1,917 1,800 1,850 Total Use 12,528 11,083 13,454 13,695 13,760 Ending Stocks 1,637 Season-Average Price ($/bu.) 6.22 6.89 4.46 3.70 3.50 Sources: USDA-WAOB 2011-14, USDA-OCE 2015 2 2

U.S. Soybean Supply and Use 2011 2012 2013 2014 2015 Area Planted (mil. acres) 75.0 77.2 76.8 83.7 83.5 Yield (bu./acre) 41.9 40.0 44.0 47.8 46.0 Production (mil. bu.) 3,094 3,042 3,358 3,969 3,800 Beg. Stocks 215 169 141 92 385 Imports 16 41 72 25 20 Total Supply 3,325 3,252 3,570 4,086 4,205 Crush 1,703 1,689 1,734 1,795 1,840 Seed & Residual 88 105 97 116 Exports 1,365 1,317 1,647 1,790 1,820 Total Use 3,155 3,111 3,478 3,701 3,775 Ending Stocks 430 Season-Average Price ($/bu.) 12.50 14.40 13.00 10.20 9.00 Sources: USDA-WAOB 2011-14, USDA-OCE 2015 3 3

Corn Yields Top: 2014 Yield Bottom: Change from last year Units: Bu/acre Source: USDA-NASS

Soybean Yields Top: 2014 Yield Bottom: Change from last month Units: Bu/acre Source: USDA-NASS

World Corn Production Source: USDA-WAOB 6 6

World Soybean Production Source: USDA-WAOB 7 7

Hog Crush Margin The Crush Margin is the return after the pig, corn and soybean meal costs. Carcass weight: 200 pounds Pig price: 50% of 5 mth out lean hog futures Corn: 10 bushels per pig Soybean meal: 150 pounds per pig Source: ISU Extension

Cattle Crush Margin The Crush Margin is the return after the feeder steer and corn costs. Live weight: 1250 pounds Feeder weight: 750 pounds Corn: 50 bushels per head Source: ISU Extension

U.S. Meat Production & Prices Source: USDA-WAOB 10 10

Corn Export Shifts Source: USDA-FAS

Corn Export Sales Source: USDA-FAS

Soybean Export Shifts Source: USDA-FAS

Soybean Export Shifts Source: USDA-FAS

Crude Oil Prices Sources: EIA and CME

Strength of the U.S. Dollar Source: Federal Reserve

Corn Grind for Ethanol

Ethanol Stocks

Current Corn Futures 3.98 3.74 Source: CME Group, 3/24/2015

Current Soybean Futures 10.00 9.27 Source: CME Group, 3/24/2015

2014/15 Crop Margins

2015/16 Crop Margins

Corn Prices vs. Costs Per Bushel Cost calculated as Per Acre Cost from ISU Extension divided by Actual Yield per Acre Sources: USDA-NASS for Prices, Duffy for Costs

Soybean Prices vs. Costs Per Bushel Cost calculated as Per Acre Cost from ISU Extension divided by Actual Yield per Acre Sources: USDA-NASS for Prices, Duffy for Costs

Thoughts for 2015 and Beyond Supply/demand concerns Record corn and soybean crops, but also record demand Markets are in a holding pattern, waiting for news Watching South American crop progress and U.S. acreage Projected negative margins for 2014 and 2015 crops 2014/15 USDA 2015/16 Futures (3/24/15) Corn $3.70 $3.50 $3.74 $3.98 Soybeans $10.20 $9.00 $10.00 $9.27

Farm Bill: Old vs. New Direct Payments (DP) Countercyclical Payments (CCP) Marketing Loans (LDP) Revenue Countercyclical Payments (ACRE) Countercyclical Payments (PLC) Marketing Loans (LDP) Revenue Countercyclical Payments (ARC) New programs, but they have strong similarities to previous programs

PLC: Corn Payment Potential Reference Price = $3.70 per bushel Payment Yield = 150 bushels per acre Marketing Year Price ($/bu) PLC Payment Rate ($/bu) PLC Payment ($/base acre) $3.10 $0.60 $76.50 $3.20 $0.50 $63.75 $3.30 $0.40 $51.00 $3.40 $0.30 $38.25 $3.50 $0.20 $25.50 $3.60 $0.10 $12.75 $3.70 $0.00 Notes: PLC payments are made on 85% of base acres.

ARC-CO: 2014 Corn Revenue Guarantee Year Yield MYA Price ARC Price 2009 141.0 $3.55 $3.70 2010 149.0 $5.18 2011 128.0 $6.22 2012 138.0 $6.89 2013 115.0 $4.46 Oly. Ave. 135.7 $5.29 Benchmark Revenue = $717.85 per acre ARC Revenue Guarantee = $617.35 per acre Notes: Revenue Guarantee equals 86% of Benchmark.

ARC-CO: 2014 Potential Corn Payment ARC Revenue Guarantee = $617.35 per acre ARC Max Payment Rate = $71.79 per acre But ARC-CO is paid on 85% of base acres and 85% of $77.92 is $61.02 Price: $3.00 $3.50 $4.00 $4.50 Yield: 100 $61.02 125 $46.62 150 $14.75 $0.00 175 $4.12 200

ARC-IC: 2014 Corn & Soybean Combined Revenue Guarantee Year Corn Yield ARC Price Revenue Soy Yield 2009 157.0 $3.70 $580.90 43.0 $9.59 $412.37 2010 186.0 $5.18 $963.48 55.0 $11.30 $621.50 2011 187.0 $6.22 $1163.14 56.0 $12.50 $700.00 2012 163.0 $6.89 $1123.07 50.0 $14.40 $720.00 2013 156.0 $4.46 $695.76 46.0 $13.00 $598.00 Oly. Ave. $927.44 $639.83 In 2014, if the farm is planted 60% to corn and 40% to soybeans, then Benchmark Revenue = $812.40 per acre Revenue Guarantee = $698.66 per acre

ARC-IC : 2014 Potential Corn & Soybean Combined Payment Actual 2014 farm yields: Corn 180 bushels per acre Soy 50 bushels per acre Marketing year prices: Corn $4.00 per bushel Soy $10.50 per bushel Calculated revenues: Corn $720.00 per acre Soy $525.00 per acre ARC Revenue: 60%*$720.00 + 40%*$525.00 = $642.00 ARC-IC is paid on 65% of base acres ARC-IC Payment = $36.83 per acre (65% of $698.66-$642.00)

PLC pays, ARC does not Neither pay Both pay ARC pays, PLC does not The choice depends on where you expect prices and yields to be over the next 5 years. There are price/yield combinations where PLC pays and ARC does not. There are also price/yield combinations where ARC pays and PLC does not.

Three Choices PLC + SCO ARC-County ARC-Individual Price protection with top-up county-level insurance protection ARC-County County-level revenue protection based on historical averages ARC-Individual Farm-level revenue protection based on historical averages Choice holds for 2014-2018 crop years

Corn Marketing Year Average Price Projections

Soybean Marketing Year Average Price Projections

Supplemental Coverage Option (SCO) An additional policy to cover “shallow losses” Shallow loss = part of the deductible on the producer’s underlying crop insurance policy SCO has a county-level payment trigger Indemnities are paid when the county experiences losses greater than 14% Premium subsidy: 65% Starts in 2015 Can’t have ARC and SCO together

Supplemental Coverage Option (SCO) RP RPHPE YP

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

Product Innovation Agricultural insurance products developed by private companies, reviewed and approved by FCIC Examples: Crop Revenue Coverage (CRC) Revenue Assurance (RA) Income Protection (IP) Group Risk Income Protection (GRIP) Livestock Risk Protection (LRP) Livestock Gross Margin (LGM)

Federal Crop Insurance: Total Acres Insured

Crop Insurance Top 10s Crop Acres (million) Corn 78.94 Soybean 73.76 Pasture 52.78 Wheat 47.90 Cotton 10.35 Sorghum 5.30 Forage 3.07 Rice 2.66 Barley 2.18 Canola 1.70 State Acres (million) Texas 44.44 North Dakota 23.45 Iowa 22.21 Illinois 19.20 Kansas 18.82 Minnesota 17.68 Nebraska 17.63 South Dakota 15.95 Montana 10.44 Indiana 9.33

Crop Insurance Top 10s Crop Premiums ($ billion) Corn 3.65 Soybean 2.26 Wheat 1.45 Cotton 0.72 Sorghum 0.21 Pasture 0.20 Apples 0.10 Potatoes Rice 0.09 Dry Beans 0.08 State Premiums ($ billion) Texas 0.98 North Dakota 0.91 Iowa 0.74 South Dakota 0.72 Illinois 0.68 Kansas 0.67 Minnesota 0.66 Nebraska 0.58 California 0.39 Missouri 0.38

Crop Insurance Top 10s Crop Liabilities ($ billion) Corn 43.94 Soybean 27.45 Wheat 9.26 Cotton 4.04 Almonds 2.19 Rice 1.78 Nursery 1.56 Grapes 1.49 Orange Trees 1.31 Potatoes 1.17 State Liabilities ($ billion) Iowa 13.28 Illinois 10.89 Minnesota 8.76 Nebraska 7.83 California 7.71 North Dakota 5.54 Indiana 5.15 South Dakota 4.86 Kansas 4.82 Texas 4.74

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 Anoka County, Minnesota with a 5-year average yield of 150 bu/acre Purchases insurance at the 80% coverage level Spring price: $4.15/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 $83.00 per acre = $4.15/bu * (80% * 150 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 RPE) In our example, the farmer has insured $498.00 of revenue per acre (80% * $4.15/bu * 150 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 $3.50, the farmer receives $148.00 per acre 0.80*$4.15/bu.*150 bu./acre - $3.50/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 $5.50, the farmer receives $110.00 per acre 0.80*$4.15/bu.*150 bu./acre - $5.50/bu.*100 bu./acre 5.50

RP Payout Graph No Payment Neither Pay RPE 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%

2015 Insurance Premiums Per Acre Premiums ($ per acre) Cov. Level YP RPHPE RP_ 50% 6.76 6.35 8.26 55% 9.08 8.67 11.26 60% 11.03 10.79 13.98 65% 15.07 15.08 19.41 70% 17.89 18.10 23.27 75% 23.08 23.42 30.18 80% 31.11 31.89 40.98 85% 42.89 44.44 56.85 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 2014 87% of all corn acres are insured

Soy Acres Insured in 2014 88% of all soybean acres are insured

2014 Corn and Soy Coverage Levels

Coverage Levels for YP

Coverage Levels for RPHPE

Coverage Levels for RP

Thank you for your time. Any questions. My web site: http://www. econ Thank you for your time! Any questions? My web site: http://www.econ.iastate.edu/~chart/ Iowa Farm Outlook: http://www.econ.iastate.edu/ifo/ Ag Decision Maker: http://www.extension.iastate.edu/agdm/