1. Agricultural Marketing
ECON 339X:
Agricultural Marketing
Chad Hart
Assistant Professor
John Lawrence
Professor 1

2. Today’s Topic
Crop Insurance

3. 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

4. Why Crops Fail

5. Types of Crop Insurance
Individual Yield
Area Yield
Individual Revenue
Area Yield - Individual Revenue Combination

6. OLD NEW Actual Production History (APH) Yield Protection (YP)
Crop Revenue Coverage (CRC)
Revenue Assurance with
harvest price option (RA-HPO)
Revenue Protection (RP)
Revenue Protection with
harvest price exclusion
(RP-HPE)
Revenue Assurance (RA)
Income Protection (IP)

7. Acres Insured in 2010 Corn and Soybeans--Iowa

8. 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: $6.01/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 = $6.01/bu * (75% * 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 RPE)
In our example, the farmer has insured $ of revenue per acre (75% * $6.01/bu * 180 bu/ac)
Final value of the crop determined by average futures prices over harvest period

15. 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*$6.01/bu.*180 bu./acre $4.50/bu.*100 bu./acre

16. Revenue Insurance 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 $7.00, the farmer receives $ per acre
0.75*$7.00/bu.*180 bu./acre $7.00/bu.*100 bu./acre

21. Insurance Payout Graph
Only
RI Pays
Neither Pay
Only YI Pays
Both Pay

22. Corn Insurance Prices
Harvest prices have been higher 3 out of last 11 years

23. Soy Insurance Prices
Harvest prices have been higher 6 out of last 11 years

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. 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

27. 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

28. Class web site: