1. Crop Insurance Chad Hart Associate Professor chart@iastate.edu 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. Types of Crop Insurance
Individual Yield (YP)
Area Yield (GRP)
Individual Revenue (RP and RPE)
Area Yield - Individual Revenue Combination (GRIP)

5. 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: $5.68/bu (average of Feb. prices for Dec. corn futures)

6. 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 = $5.68/bu * (75% * 180 bu/ac bu/ac)

7. Yield Insurance Payout Graph
No Payout
Payout

8. Yield Insurance is like an Option

9. 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

10. Individual Revenue Insurance (RP or RPE)
In our example, the farmer has insured $ of revenue per acre (75% * $5.68/bu * 180 bu/ac)
Final value of the crop determined by average futures prices over harvest period

11. 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*$5.68/bu.*180 bu./acre $4.50/bu.*100 bu./acre

12. RPE Payout Graph
No Payout
Payout

13. Rev. Insurance is like an Option

14. 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

15. Harvest Price Option

16. Individual Revenue Insurance (RP)
If yields are 100 bushels per acre and harvest prices average $8.00, the farmer receives $ per acre
0.75*$ 5.68/bu.*180 bu./acre $8.00/bu.*100 bu./acre
8.00

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

18. Corn Insurance Prices
Harvest prices have been higher 4 out of last 12 years

19. Soy Insurance Prices
Harvest prices have been higher 6 out of last 12 years

20. 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

21. 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%

22. 2012 Insurance Premiums Per Acre Premiums ($ per acre)
Cov. Level YP RPE RP_
50%
55%
60%
65%
70%
75%
80%
85%
For our example farm in Story County, Iowa for corn

23. 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

24. Iowa Corn Acres Insured in 2011

25. Iowa Soy Acres Insured in 2011

26. 2011 Corn and Soy Coverage Levels

27. Thank you for your time!
Questions?