Department of Economics Where are we with today’s economics and crop insurance? Chad Hart Fall Agronomy In-Service Training Ames, Iowa September 18, 2008

Department of Economics Production Value Source: USDA-ERS

Department of Economics Purchased Inputs Source: USDA-ERS

Department of Economics Net Farm Income Source: USDA-ERS

Department of Economics Nominal vs. Real Source: USDA-ERS

Department of Economics Historical Iowa Corn Production Costs Source: Duffy and Smith,

Department of Economics Historical Iowa Soybean Production Costs Source: Duffy and Smith,

Department of Economics Iowa Corn Prices vs. Costs Source: USDA-NASS and Duffy and Smith,

Department of Economics Iowa Soybean Prices vs. Costs Source: USDA-NASS and Duffy and Smith,

Department of Economics Iowa Corn after Soybeans Estimated Costs per Acre, Jan Source: Duffy and Smith,

Department of Economics Iowa Herbicide Tolerant Soybeans after Corn Estimated Costs per Acre, Jan Source: Duffy and Smith,

Department of Economics Urea Prices Source: TheMarket.pdf

Department of Economics DAP Prices Source: TheMarket.pdf

Department of Economics Ammonia Prices Source: TheMarket.pdf

Department of Economics Crude Oil Prices Source: DOE – Energy Information Administration

Department of Economics Crude Oil Prices Source: DOE – Energy Information Administration

Department of Economics Crop Costs for Central Illinois Source: Schnitkey, July 2008 CornSoybeans % Change % Change ($/acre) Fertilizer %Fertilizer % Fuel and Oil192637%Crop Ins.81250% Crop Ins %Utilities3433% Seed627826%Seed425326% Utilities4525%Fuel and Oil % Total Non- land Costs %Total Non- land Costs %

Department of Economics Rough Estimates for 2009 Iowa Corn Non-land Cost Land Cost Total Cost Expected Yield Cost per Bushel ($/acre)(bu/acre)($/bu) December 2009 Corn Futures = $5.855 (9/17/08)

Department of Economics Rough Estimates for 2009 Iowa Soybeans Non-land Cost Land Cost Total Cost Expected Yield Cost per Bushel ($/acre)(bu/acre)($/bu) November 2009 Soybean Futures = $11.12 (9/17/08)

Department of Economics Iowa Corn Prices vs. Costs Source: USDA-NASS and Duffy and Smith, Average Net Return per Bushel ( ) -$0.07

Department of Economics Iowa Soybean Prices vs. Costs Source: USDA-NASS and Duffy and Smith, Average Net Return per Bushel ( ) $0.31

Department of Economics Net Return Outlook With costs racing to catch to prices we’ve seen over the past couple of years, net returns are tightening So far, the outlook for 2009 looks better than the historical average But with the volatility we’ve seen across many markets, things can change quickly

Department of Economics Crop Insurance One of many risk management strategies Traditionally set up to protect farmers in times of low crop yields Also offers coverage for low prices Available on over 100 commodities

Department of Economics Historical Crop Insurance Participation

Department of Economics Why Crops Fail

Department of Economics Crop Insurance Subsidies Coverage Level Subsidy % 50% - 55%67% 55% - 65%64% 65% - 75%59% 75% - 80%55% 80% - 85%48%  85%38%

Department of Economics Types of Crop Insurance Individual Yield (APH) Area Yield (GRP) Individual Revenue (CRC, IP, RA) Area Yield - Individual Revenue Combination (GRIP)

Department of Economics Individual Yield Insurance (APH) 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 In 2008, 1.36 million acres of Iowa corn and 1.09 million acres of Iowa soybeans were covered with an APH policy

Department of Economics Individual Revenue Insurance (CRC, IP, RA) 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 Final value of the crop determined by average futures prices over harvest period

Department of Economics Individual Revenue Insurance (CRC, IP, RA) CRC and RA have a “harvest price option” If the harvest price is greater than the planting price, then the harvest price is used in all calculations In 2008, 9.58 million acres of Iowa corn and 7.17 million acres of Iowa soybeans were covered with individual revenue policies

Department of Economics Iowa Crop Insurance Figures Average producer-paid crop insurance premium in Iowa - Corn $22.74/acre - Soybeans $17.57/acre Most typical coverage - Both crops 75% RA

Department of Economics Iowa Crop Insurance Figures Average crop insurance liability in Iowa - Corn $640.14/acre - Soybeans $459.77/acre Total Iowa crop insurance producer-paid premiums $279 million $421 million

Department of Economics Iowa Crop Insurance Premiums & Prices

Department of Economics Iowa Crop Insurance Premiums & Prices

Department of Economics Average Producer-Paid Premiums For RA, APH and CRC graphs would look similar

Department of Economics Insurance Price Settings for 2009 For revenue products, usually set by the Feb. average on harvest-time futures (Nov. for soybeans, Dec. for corn) For APH, price is based on USDA estimates for season-average price

Department of Economics Farm Bill Twist Starting in 2009, farmers will need to participate fully in crop insurance and non-insured crop assistance programs to qualify for the federal government’s new disaster assistance program (SURE) SURE guarantees and payments are tied to crop insurance decisions

Department of Economics Thanks for your time! Any questions?