1. Agricultural Marketing
ECON 337:
Agricultural Marketing
Chad Hart
Associate Professor 1

2. 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

3. Why Crops Fail

4. 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

5. 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.

6. Federal Crop Insurance

7. Federal Crop Insurance: Total Acres Insured

8. Types of Crop Insurance
Individual Yield (YP)
Individual Revenue (RP and RPE)
Area Yield (AYP)
Area Revenue (ARP and ARPE)

9. 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 80% coverage level
Spring price: $3.96/bu (average of Feb. prices for Dec. corn futures)

10. 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 = $3.96/bu * (80% * 180 bu/ac bu/ac)

11. Yield Insurance Payout Graph
No Payout
Payout

12. Yield Insurance is like an Option

13. 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

14. Individual Revenue Insurance (RP or RPHPE)
In our example, the farmer has insured $ of revenue per acre (80% * $3.96/bu * 180 bu/ac)
Final value of the crop determined by average futures prices over harvest period

15. Individual Revenue Insurance (RP or RPHPE)
If yields are 100 bushels per acre and harvest prices average $3.50, the farmer receives $ per acre
0.80*$3.96/bu.*180 bu./acre $3.50/bu.*100 bu./acre

16. RPHPE Payout Graph
No Payout
Payout

17. Rev. Insurance is like an Option

18. 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

19. Harvest Price Option

20. Individual Revenue Insurance (RP)
If yields are 100 bushels per acre and harvest prices average $5.50, the farmer receives $ per acre
0.80*$3.96/bu.*180 bu./acre $5.50/bu.*100 bu./acre
5.50

21. RP Payout Graph No Payment Neither Pay RPHPE Pays YP Pays Both Pay
RP Pays

22. Corn Insurance Prices

23. Soybean Insurance Prices

24. 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

25. 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%

26. 2017 Insurance Premiums Per Acre Premiums ($ per acre)
Cov. Level YP RPHPE RP_
50%
55%
60%
65%
70%
75%
80%
85%
For an example farm in Story County, Iowa for corn

27. 2017 Insurance Premiums Per Acre Premiums ($ per acre)
Cov. Level YP RPHPE RP_
50%
55%
60%
65%
70%
75%
80%
85%
For our example farm in Anoka County, MN for corn

28. 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

29. Corn Acres Insured in 2016
87% of all
corn acres
are insured

30. Soy Acres Insured in 2016
87% of all
soybean acres
are insured

31. 2016 Corn and Soy Coverage Levels

32. Coverage Levels for YP

33. Coverage Levels for RPHPE

34. Coverage Levels for RP

35. Class web site: Lab in Heady 68.
Lab in Heady 68.