Extension and Outreach/Department of Economics Crop Insurance 2013 National Agricultural Credit Conference San Diego, California Apr. 17, 2013 Chad Hart Associate Professor/Crop Markets Specialist

Extension and Outreach/Department of Economics 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

Extension and Outreach/Department of Economics Why Crops Fail

Extension and Outreach/Department of Economics 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 Farm Bill

Extension and Outreach/Department of Economics 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.

Extension and Outreach/Department of Economics Federal Crop Insurance

Extension and Outreach/Department of Economics 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)

Extension and Outreach/Department of Economics Federal Crop Insurance: Total Acres Insured

Extension and Outreach/Department of Economics Crop Insurance Top 10s CropAcres (million) Corn81.28 Soybean63.77 Pasture48.08 Wheat46.34 Cotton11.41 Sorghum 4.68 Forage 3.30 Barley 3.00 Rice 2.11 Sunflower 1.71 StateAcres (million) Texas48.08 North Dakota23.05 Iowa21.71 Kansas18.25 Illinois17.92 Minnesota17.47 Nebraska15.68 South Dakota14.94 Montana10.30 Indiana 8.71

Extension and Outreach/Department of Economics Crop Insurance Top 10s Crop Premiums ($ billion) Corn4.32 Soybean2.27 Wheat1.78 Cotton0.84 Sorghum0.21 Pasture0.16 Dry Beans0.10 Potatoes0.09 Peanuts0.09 Barley0.08 State Premiums ($ billion) Texas1.08 North Dakota0.96 Iowa0.90 Minnesota0.82 Kansas0.81 Illinois0.77 South Dakota0.70 Nebraska0.67 Indiana0.44 Missouri0.37

Extension and Outreach/Department of Economics Crop Insurance Top 10s Crop Liabilities ($ billion) Corn53.55 Soybean24.62 Wheat10.57 Cotton 4.82 Nursery 2.01 Almonds 1.23 Potatoes 1.14 Orange Trees 1.12 Rice 1.10 Sugar Beets 1.10 State Liabilities ($ billion) Iowa14.94 Illinois12.15 Minnesota10.03 Nebraska 8.73 North Dakota 6.27 Indiana 5.74 Kansas 5.66 South Dakota 5.38 California 5.38 Texas 5.23

Extension and Outreach/Department of Economics Types of Crop Insurance  Individual Yield (YP)  Area Yield (GRP)  Individual Revenue (RP and RPE)  Area Yield - Individual Revenue Combination (GRIP)

Extension and Outreach/Department of Economics 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 75% coverage level Spring price: $5.65/bu (average of Feb. prices for Dec. corn futures)

Extension and Outreach/Department of Economics 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 $ per acre = $5.65/bu * (75% * 180 bu/ac bu/ac)

Extension and Outreach/Department of Economics Yield Insurance Payout Graph No Payout Payout

Extension and Outreach/Department of Economics Yield Insurance is like an Option

Extension and Outreach/Department of Economics 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

Extension and Outreach/Department of Economics In our example, the farmer has insured $ of revenue per acre (75% * $5.65/bu * 180 bu/ac) Final value of the crop determined by average futures prices over harvest period Individual Revenue Insurance (RP or RPE)

Extension and Outreach/Department of Economics If yields are 100 bushels per acre and harvest prices average $4.50, the farmer receives $ per acre =0.75*$5.65/bu.*180 bu./acre - $4.50/bu.*100 bu./acre Individual Revenue Insurance (RP or RPE)

Extension and Outreach/Department of Economics RPE Payout Graph Payout No Payout

Extension and Outreach/Department of Economics Rev. Insurance is like an Option

Extension and Outreach/Department of Economics 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

Extension and Outreach/Department of Economics Harvest Price Option

Extension and Outreach/Department of Economics Individual Revenue Insurance (RP) If yields are 100 bushels per acre and harvest prices average $7.50, the farmer receives $ per acre =0.75*$ 5.65/bu.*180 bu./acre - $7.50/bu.*100 bu./acre 7.50

Extension and Outreach/Department of Economics RPE Pays Neither Pay Both Pay YP Pays RP Payout Graph RP Pays No Payment

Extension and Outreach/Department of Economics Corn Insurance Prices Harvest prices have been higher 5 out of last 13 years

Extension and Outreach/Department of Economics Soy Insurance Prices Harvest prices have been higher 7 out of last 13 years

Extension and Outreach/Department of Economics 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

Extension and Outreach/Department of Economics Current Subsidy Rates Coverage level Basic Units Optional Units Enterprise Units Whole Farm Units 60% 64% 80% not avail. 65% 59% 80% 70% 59% 80% 75% 55% 77%80% 48% 68%71% 85% 38% 53%56%

Extension and Outreach/Department of Economics 2013 Insurance Premiums Per Acre Premiums ($ per acre) Cov. Level YPRPHPE RP_ 50% % % % % % % % For our example farm in Story County, Iowa for corn

Extension and Outreach/Department of Economics 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

Extension and Outreach/Department of Economics Iowa Corn Acres Insured in % of all Iowa corn acres are insured

Extension and Outreach/Department of Economics Iowa Soy Acres Insured in % of all Iowa soybean acres are insured

Extension and Outreach/Department of Economics 2012 Corn and Soy Coverage Levels

Extension and Outreach/Department of Economics Coverage Levels for YP

Extension and Outreach/Department of Economics Coverage Levels for RPHPE

Extension and Outreach/Department of Economics Coverage Levels for RP

Extension and Outreach/Department of Economics Thank you for your time! Any questions? My web site: Iowa Farm Outlook: Ag Decision Maker: