1. Managing Farm Risk with Crop Insurance Jayson K. Harper Professor of agricultural economics Department of Agricultural Economics and Rural Sociology The Pennsylvania State University Penn State is committed to affirmative action, equal opportunity, and the diversity of its workforce

2. Types of Agricultural Risks Production Marketing Financial Legal Human resource Environmental

3. Risk Management Strategies: 1) Retain 2) Shift 3) Reduce 4) Self-insure 5) Avoid

4. Crop Insurance Objective - provide protection options that will make it possible to survive a disaster and return to profitability USDA’s primary risk management program Highly subsidized by USDA Flexible program designed to meet the needs of individual farming operations

5. Multi-Peril Crop Insurance (MPCI) Drought (~60%) excess moisture (~15%) excess wind fire freeze hail tornado insects disease wildlife failure of irrigation supply volcanic eruptions and earthquakes Causes of losses covered:

6. Crops covered by MPCI in Pennsylvania: apples (45) barley (54) processing beans (15) cabbage (1) corn (grain and silage) (66) forage production (66) forage seedling (66) grain sorghum (57) grapes (1) green peas (10) nursery (67) oats (66) pasture, rangeland, forage (66) peaches (30) pears (1) potatoes (13) soybeans (51) fresh-mkt. sweet corn (66) processing sweet corn (12) tobacco (3) fresh-market tomatoes (4) processing tomatoes (16) wheat (57) Also: –Whole farm Revenue Protection (WFRP) –LGM Dairy –LRP Lamb –Apiculture

7. Crop Insurance Program Basics: 1) Determine actual production history (APH) yield minimum of 4 successive years of records maximum of 10 successive years of records (5 years for tree fruits) <4 years of records: use county T-yields Transitional yields vary by county and production practices 0 years of records: 65% of county T-yield 1 year of records: 80% of county T-yield 2 years of records: 90% of county T-yield 3 years of records: 100% of county T-yield

8. Crop Insurance Program Basics: 1)Determine actual production history (APH) yield (cont.) Trend Adjusted Yields (TA) Option to increase APH yields for corn and soybean…available since 2013 Adjustment meant to reflect increases in yields due to use of GMO hybrids and other technologies Important because the APH underlies the guarantees for both the yield and revenue protection insurance

9. Crop Insurance Program Basics: 2) Select type of coverage Yield protection (YP) Pays for yield losses below a selected coverage level at a price determined annually by USDA’s Risk Management Agency (based on CBOT prices if applicable) Revenue protection (RP) Pays for revenue losses below a selected coverage level at the higher of the projected early season or harvest price (as set by the CBOT futures market). Available only for corn, grain sorghum, soybean, barley, and wheat. Revenue protection with harvest price exclusion (RP HPE) Pays for revenue losses below a selected coverage level at projected early season price set by the CBOT futures market. Available only for corn, grain sorghum, soybean, barley, and wheat.

10. Crop Insurance Program Basics: 3) Select desired coverage level 50, 55, 60, 65, 70, or 75% of APH yield 80 and 85% coverage levels available for corn, soybeans, wheat, and barley 50% for catastrophic (CAT) coverage 4) Select desired price election From 55% to 100% of projected price 55% for catastrophic risk protection (CAT)…provides only a low level of protection against yield losses

11. Crop Insurance Program Basics: 5) Select a unit structure: you have the choice of basic, optional, or enterprise units You receive one basic unit for the land you own and cash rent in a county Each different crop creates a separate unit Each crop/county can have a different type of policy You can divide basic units into optional units when crop is grown under distinctly different production practices Optional units can also be established by FSA farm serial number or under sectional equivalents An enterprise unit combines all acres of a single crop within a county into one unit Premium cost: Optional units > Basic units > Enterprise units

12. Crop insurance calculations: Yield guarantee = APH coverage level Revenue guarantee = APH yield coverage level applicable price based on CBOT futures price Premium/acre = Guarantee premium rate price election Notes: –CAT program has a $300/crop/county administrative fee (waived for beginning and limited resource farmers). –MPCI has a $30/crop administrative fee.

13. Example of farmer paid premiums for yield protection and revenue protection coverage by unit structure (130 bu. APH yield, medium risk county)

14. Crop insurance calculations: If actual yield or revenue is less than your guarantee: Yield Loss payment = (yield guarantee – actual production) price election Revenue Loss payment = (Revenue guarantee – actual revenue) If actual yield or revenue is equal to or greater than your guarantee: Loss payment = 0

15. Other types of policies: Dollar Plan—provides protection against declining value from damage that causes a yield loss. Losses are paid when the value of the crops is less than the amount of insurance. –Available in 66 counties for fresh-market sweet corn –Available in 66 counties for forage seeding

16. Other types of policies: LGM-Dairy—provides protection against unexpected declines in market value of milk minus feed costs. It uses adjusted futures prices to determine the difference between expected gross margin and actual gross margin. Can be purchased monthly with the option to buy coverage for 1 to 11 months. –Available in all counties in Pennsylvania

17. Other types of policies: Whole farm revenue protection (WFRP) Provides protection against loss of revenue from natural and named causes of loss and market fluctuations ENROLLMENT/POLICY CHANGE DEADLINES: March15: new applications January 31: renewals/coverage changes

18. Other types of policies: Whole farm revenue protection (WFRP) Insures the revenue of the entire farm rather than individual crops by guaranteeing a percentage of average gross farm revenue. All farm raised crops, animals, and animal products are eligible for coverage. Uses information from a producer's Schedule F tax forms to calculate the policy revenue guarantee.

19. Other types of policies: Whole farm revenue protection (WFRP) STAND-ALONE POLICY: covering the whole farming operation or UMBRELLA TYPE POLICY: selected crops can also be protected by individual crop insurance policies. Note: Loss payments from other insurance count towards the revenue guarantee.

20. Other types of policies: Rainfall Index Pasture and Forage Policy Now available statewide Pays a loss if precipitation in your area is less than normal minus your deductible Your area is a 12 x 12 mile square area where your farm is located Flexible: you can insure entire year or a minimum of two 2-month time periods, for all or part of your acreage Enrollment deadline is November 30

21. Supplemental Coverage Option (SRO) If you have Agricultural Risk Coverage (ARC) through FSA, you are not eligible to purchase SRO Available for corn and soybean for both yield and revenue protection policies Provides additional coverage for a portion of the deductible on your crop insurance policy

22. Supplemental Coverage Option (SRO) Based on county-level risk Heavily subsidized; Feds pay 65% of premium cost Provides the same coverage as your underlying policy (ie. yield or revenue protection) Losses are triggered by county yield or revenue

23. Supplemental Coverage Option (SRO) Covers losses between the coverage level on your individual policy and 86% of either expected county yield or revenue Example: You chose the 75% level of coverage (YP, RP or RP HPE)…your deductible is 25% You purchase the SRO endorsement Up to 11% of expected county yield or revenue is now protected (86% - 75%)

24. Supplemental Coverage Option (SRO) Under SRO you’ll now have both individual and county loss triggers… It is possible that you could have a loss payment based on: 1)losses at both the county and farm level 2)losses only at the county level 3)losses only at the farm level

25. Noninsured Crop Disaster Assistance Program (NAP) Eligible Crops: Agricultural commodities for which the CAT level of crop insurance is not available, including controlled environment crops (mushrooms and floriculture), industrial crops, specialty crops (maple syrup and honey), value loss crops (aquaculture, Christmas trees, ginseng, ornamentals, and turfgrass), and certain seed crops.

26. NAP Program (cont.) Eligible producers: a landowner, tenant, or sharecropper who shares in the risk of producing an eligible crop (<$900,000 gross revenue) Eligible natural disaster (before or during harvest): –Damaging weather (drought, excess moisture) –Natural occurrence (earthquake, flood) –Excessive heat, insect infestation, plant disease

27. NAP Program Coverage Levels Losses of more than 50% expected production are paid based on a farmers crop acreage, approved yield, and net production at 55% of the average market price established by the FSA state committee (CAT) Additional coverage levels of 50, 55, 60 and 65% paid at 100% of the average market price are available to additional premium

28. NAP Program Cost Must apply to FSA for coverage by state closing date and pay applicable service fee ($250/crop/county, max $750/county and $1,875 multiple counties) Note: Limited-resource farmers can request waiver of fees For higher levels of coverage, 5.25% premium based on maximum payment limitation (max $6,525.50 per producer)

29. NAP Program Reporting To remain eligible for NAP assistance farmers must report crop acreage information, production practices used, and the disposition of the harvested crop (ie., how much was marketable)

30. Do I need crop insurance? Yield variability Cash flow requirements Self insurance CAT coverage Premium discounts for higher levels of coverage Whole-farm coverage (WFRP)

31. Sales closing dates JANUARY 31– existing WFRP policies MARCH 15-- spring seeded crops, new WFRP policies MAY 31– nursery crops JULY 31– fall forage seeding SEPTEMBER 30-- fall seeded crops, forage production, rainfall index policies NOVEMBER 20-- fruit crops NOVEMBER 30– area risk forage production For more information, visit the Penn State Crop Insurance Education Web Site: http://extension.psu.edu/business/crop-insurance

32. Ag Marketing Issues for 2015 Continuing low commodity prices High beef and pork prices Falling dairy prices Russia Strong dollar

33. Corn Usage Crop2004201020132014 Feed57.8%36.7%38.2%38.8% Food12.8%10.8%10.3% Exports17.1%14.0%14.2%12.9% Ethanol12.4%38.5%37.3%38.0%

34. Other mostly Russia and Ukraine

35. Corn Futures Price (CBOT) Market data is the property of Chicago Mercantile Exchange (CME).Access to this website and use of this market data is subject to the following: (a) Market data is for the recipients own personal use and may not be redistributed without permission of CME, which may depend on execution of an agreement and payment of the applicable fee; (b) CME and its licensors reserve all Intellectual Property Rights to market data; (c) CME and TradingCharts disclaims all liability for market data and use thereof, and any and all losses, damages or claims arising from use of market data; (d) CME and TradingCharts may suspend or terminate receipt of market data by any party if CME has reason to believe market data is being misused or misrepresented. It is also a condition of access to this website that you agree to not copy, disseminate, capture, reverse engineer or otherwise use information provided on this site for any other purpose except for the direct display in Internet browser of the end user only, and only in the format provided. These pages © TradingCharts.com, Inc. Dec ’15: $4.14

36. Soybean Notes China’s objection to GMO beans is over South American crop is huge – up 23% from last year

37. Soybean Carryout & Price YearCarryout mil. bu. PriceDays Use of carryout 2009151$9.5916 2010215$11.3023 2011175$12.5019 2012141$14.4016 201392$13.0015 2014450$10.2040.3

38. Soybean Futures Price (CBOT) Nov ‘15: $9.74