1 Getting a Grip on GRIP Gary Schnitkey Agricultural Economist University of Illinois

2 Topics 1.Illinois versus Iowa experience 2.How GRIP works 3.Risks/Returns 4.Situations where it works

3 GRIP  GRIP (Group Risk Income Plan) is revenue insurance based on county yields –GRIP-NoHR (No Harvest Revenue option) – much like RA with base price option –GRIP-HR (Harvest Revenue option) – much like CRC or RA with harvest price option  GRIP is the revenue counterpart to the county-level yield insurance GRP (Group Risk Plan)

4 Group Products Akin To GroupAkin toInsurance Type GRP APH Yield GRIP-NoHRIP, RA with Revenue – no base priceguarantee increase GRIP-HRCRC, RA with Revenue - harvest price guarantee increase

5 Introduced in I states Introduced GRP (Group Risk Plan) 1995 GRIP-NoHR 1999 (Group Risk Income Plan -- No Harvest Revenue option) GRIP-HR 2004 (GRIP -- Harvest Revenue option)

6 Group Product Use, Corn, Illinois GRP GRIP Iowa 2005 Use GRP – 1.2% GRIP – 3.6%

7 Group Product Use, Soybeans, Illinois GRIP GRP Iowa 2005 Use GRP – 1.9% GRIP – 4.7%

8 Percent of Iowa Counties Receiving GRIP-NoHR Payments for Corn, Coverage Level Year 90% 85% 80% 75% 70% % 30% 11% 4% 2% AVG 47% 29% 13% 6% 1%

9 Percent of Iowa Counties Receiving GRIP-NoHR Payments for Soybeans, Coverage Level Year 90% 85% 80% 75% 70% % 9% 4% 2% 2% AVG 43% 31% 21% 14% 6%

10 How GRIP Works Marshall County, Iowa 2005 Example

11 Parameters in 2005 County: Marshall County, Ia Crop: Corn Expected Yield: * Expected Price: $2.38 ** * County specific, set by RMA ** Settlement prices during February (Next year for entire month)

12 Farmer choices Protection Level Choice from within range GRPGRIP Max$579$587 Min $323$346 Max varies by year, based on formula Max results in highest premiums and highest payments, when they occur

13 Farmer choices Coverage Level 70% to 90% Suggestion: Take highest coverage level Change payment/premium by lowering protection level

Per Acre Premiums, Marshall County, Iowa (100% Protection Level, Corn) Coverage LevelGRP GRIP-NoHRGRIP-HR 70%$3.96 $2.96 $ % % % %

15 Per Acre Guarantees, 90% Coverage Level GRP GRIP-NoHR GRIP-HR Type YieldRevenue Revenue Coverage level x Expected yield x Price xxx $2.38 Guarantee bu $352 Higher of expected or harvest price Will be higher when harvest price > expected price

16 Payment example “Typical” Year  Actual yield = 170 bu.  Harvest price = $2.00  Guarantees on previous slide (90% cov level) Shortfall = (Guarantee – Actual)/Guarantee when Guarantee > Actual GRP:.000 (147.9 guarantee < 170 actual) GRIP-NoHR: ($352 - (170*2)) / $352 =.034 GRIP-HR: ($352 - (170*2)) / $352 =.034

17 Payments (Max Protection Level, 90% Coverage Level) GRP GRIP-NoHR GRIP-HR Prot. level $579 $587 $587 X shortfall X price factor xxx xxx 1.00 * Payment $0 $20 $20 * Higher of (harvest price / expected price) or 1

18 Payment example “Drought” Year  Actual yield = 130 bu.  Harvest price = $3.00 Shortfall = (Guarantee – Actual)/Guarantee when Guarantee > Actual GRP: (147.9 – 130) / =.121 GRIP-NoHR:.000 Guarantee < actual ($390) GRIP-HR: ($443 - (130x3)) / $443 =.120

19 Per Acre Guarantees, Revised 90% Coverage Level GRP GRIP-NoHR GRIP-HR Type YieldRevenue Revenue Coverage level x Expected yield x Price xxx $2.38 Guarantee bu $352 Higher of expected or harvest price Will be higher when harvest price > expected price

20 Payments (Max Protection Level, 90% Coverage Level) GRP GRIP-NoHR GRIP-HR Prot level $579 $587 $587 X shortfall X price factor xxx xxx Payment $70 $0 Higher of (harvest price / expected price) or 1 (3.00 harvest price / 2.38 expected price) = 1.26

21 GRP Shortfalls, Marshall County, Iowa, Corn (90% coverage level) Expected Final GRP Year Yield Yield Shortfall (90%)

22 Marshall County, Corn Yields

23 GRIP Shortfalls, Marshall County, Iowa, Corn (90% coverage level) Expected Harvest GRIP Year Price Price Shortfall (90%) Shortfalls the same for GRIP-NoHR and GRIP- HR.

24 GRP Shortfalls, Marshall County, Iowa, Soybeans (90% coverage level) Expected Final GRP Year Yield Yield Shortfall (90%)

25 GRIP Shortfalls, Marshall County, Iowa, Corn (90% coverage level) Expected Harvest GRIP Year Price Price Shortfall (90%) Shortfalls the same for GRIP-NoHR and GRIP- HR.

26 Risk/returns

27 Crop Insurance Evaluator: For an example farm in each county for corn and soybeans shows the following for different insurance product:  Frequency of payments  Premiums  Average payments  Net costs  Ability to prevent disasters

28 Marshall County, Corn  “Average” farm for county  159 bu. APH yield, average variability  Evaluations shown for 2005 year  Evaluations based on maximum protection level

29  Frequency of payments  Example of tables from Evaluator

30 1% VAR  A 1% VaR of $200 means that 1% of the time revenue will be below $200  Measure of risk reduction  Want VaRs to be as high as possible

31 1% VaR from Evaluator $ per acre, Corn Level APH CRCGRP GRIP-NoHR GRIP-HR 65% % % %  Group products lower risk less than Individual products  Low coverage Individual not as “good” as high coverage Group

32 Net Costs  Average payments over time minus premium  High levels indicate high costs, negative levels mean expect more insurance payments than premium over time

33 Net Costs from Evaluator $ per acre, Corn Level APH CRCGRP GRIP-NoHR GRIP-HR 65% % % %  Individual products have higher costs than Group products

34 Marshall County, Soybeans  “Average” farm for county  50 bu. APH yield, average variability  Evaluations shown for 2005 year  Evaluations based on maximum protection level

35 1% VaR from Evaluator $ per acre, Soybeans Level APH CRCGRP GRIP-NoHR GRIP-HR 65% % % %  Group products lower risk less than Individual products  Low coverage Individual not as “good” as high coverage Group

36 Net Costs from Evaluator $ per acre, Soybeans Level APH CRCGRP GRIP-NoHR GRIP-HR 65% % % %  Individual products have higher costs than Group products

37 Risk/Returns Summary  Group products cost less than individual products. Over time, group products may average more in payments than paid in premiums  Group products reduce risk less than individual farm products

38 Situations Where Group Products Work:  Farm-yields either: 1.Closely follow county-yields (i.e., large farm), or 2.Are above county-yields  Farm has low APH  Farm is in relatively strong financial position  Tend to work best in “good” producing counties

39 Situations Where Group Products Do Not Work as Well:  Highly leveraged farms  Farms where re-planting occurs often  Hail is a major concern  Farms with high-risk farmland

40 Summary  GRIP does fit certain situations  Represent another option in the risk management tool kit