1. Associate Professor/Crop Markets Specialist
Crop Insurance
Sept. 13, 2013
Chad Hart
Associate Professor/Crop Markets Specialist 1 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 Farm Bill

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. 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)

8. Federal Crop Insurance: Total Acres Insured

9. Crop Insurance Top 10s Crop Acres (million) Corn 81.28 Soybean 63.77
Pasture
48.08
Wheat
46.34
Cotton
11.41
Sorghum
4.68
Forage
3.30
Barley
3.00
Rice
2.11
Sunflower
1.71
State
Acres (million)
Texas
48.08
North Dakota
23.05
Iowa
21.71
Kansas
18.25
Illinois
17.92
Minnesota
17.47
Nebraska
15.68
South Dakota
14.94
Montana
10.30
Indiana
8.71

10. Crop Insurance Top 10s Crop Premiums ($ billion) Corn 4.32 Soybean
2.27
Wheat
1.78
Cotton
0.84
Sorghum
0.21
Pasture
0.16
Dry Beans
0.10
Potatoes
0.09
Peanuts
Barley
0.08
State
Premiums
($ billion)
Texas
1.08
North Dakota
0.96
Iowa
0.90
Minnesota
0.82
Kansas
0.81
Illinois
0.77
South Dakota
0.70
Nebraska
0.67
Indiana
0.44
Missouri
0.37

11. Crop Insurance Top 10s Crop Liabilities ($ billion) Corn 53.55 Soybean
24.62
Wheat
10.57
Cotton
4.82
Nursery
2.01
Almonds
1.23
Potatoes
1.14
Orange Trees
1.12
Rice
1.10
Sugar Beets
State
Liabilities
($ billion)
Iowa
14.94
Illinois
12.15
Minnesota
10.03
Nebraska
8.73
North Dakota
6.27
Indiana
5.74
Kansas
5.66
South Dakota
5.38
California
Texas
5.23

12. Types of Crop Insurance
Individual Yield (YP)
Area Yield (GRP)
Individual Revenue (RP and RPE)
Area Yield - Individual Revenue Combination (GRIP)

13. 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)

14. 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)

15. Yield Insurance Payout Graph
No Payout
Payout

16. Yield Insurance is like an Option

17. 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

18. Individual Revenue Insurance (RP or RPE)
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

19. Individual Revenue Insurance (RP or RPE)
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

20. RPE Payout Graph
No Payout
Payout

21. Rev. Insurance is like an Option

22. 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

23. Harvest Price Option

24. 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

25. RP Payout Graph No Payment Neither Pay RPE Pays YP Pays Both Pay
RP Pays

26. Corn Insurance Prices
Harvest prices have been higher 5 out of last 13 years

27. Soy Insurance Prices
Harvest prices have been higher 7 out of last 13 years

28. 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

29. 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%

30. 2013 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 Story County, Iowa for corn

31. 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

32. Iowa Corn Acres Insured in 2012
91% of all Iowa
corn acres are
insured

33. Iowa Soy Acres Insured in 2012
91% of all Iowa
soybean acres
are insured

34. 2012 Corn and Soy Coverage Levels

35. Coverage Levels for YP

36. Coverage Levels for RPHPE

37. Coverage Levels for RP

38. Thank you for your time. Any questions. My web site: http://www. econ
Thank you for your time! Any questions? My web site: Iowa Farm Outlook: Ag Decision Maker: