1. 1 Getting a Grip on GRIP Gary Schnitkey Agricultural Economist University of Illinois

2. 2 Topics 1.Illinois versus Iowa experience 2.How GRIP works 3.Risks/Returns 4.Situations where it works

3. 3 GRIP  GRIP (Group Risk Income Plan) is revenue insurance based on county yields –GRIP-NoHR (No Harvest Revenue option) – much like RA with base price option –GRIP-HR (Harvest Revenue option) – much like CRC or RA with harvest price option  GRIP is the revenue counterpart to the county-level yield insurance GRP (Group Risk Plan)

4. 4 Group Products Akin To GroupAkin toInsurance Type GRP APH Yield GRIP-NoHRIP, RA with Revenue – no base priceguarantee increase GRIP-HRCRC, RA with Revenue - harvest price guarantee increase

5. 5 Introduced in I states Introduced GRP (Group Risk Plan) 1995 GRIP-NoHR 1999 (Group Risk Income Plan -- No Harvest Revenue option) GRIP-HR 2004 (GRIP -- Harvest Revenue option)

6. 6 Group Product Use, Corn, Illinois GRP GRIP Iowa 2005 Use GRP – 1.2% GRIP – 3.6%

7. 7 Group Product Use, Soybeans, Illinois GRIP GRP Iowa 2005 Use GRP – 1.9% GRIP – 4.7%

8. 8 Percent of Iowa Counties Receiving GRIP-NoHR Payments for Corn, 1999 -2004 ---------- Coverage Level ------------ Year 90% 85% 80% 75% 70% 1999 54% 30% 11% 4% 2% 2000 66 22 2 1 0 2001 72 49 25 11 1 2002 3 3 3 1 1 2003 3 0 0 0 0 2004 82 72 41 16 1 AVG 47% 29% 13% 6% 1%

9. 9 Percent of Iowa Counties Receiving GRIP-NoHR Payments for Soybeans, 1999 -2004 ---------- Coverage Level ------------ Year 90% 85% 80% 75% 70% 1999 19% 9% 4% 2% 2% 2000 69 57 31 18 6 2001 46 19 8 4 1 2002 0 0 0 0 0 2003 30 15 9 7 5 2004 95 85 71 51 23 AVG 43% 31% 21% 14% 6%

10. 10 How GRIP Works Marshall County, Iowa 2005 Example

11. 11 Parameters in 2005 County: Marshall County, Ia Crop: Corn Expected Yield: 164.3 * Expected Price: $2.38 ** * County specific, set by RMA ** Settlement prices during February (Next year for entire month)

12. 12 Farmer choices Protection Level Choice from within range GRPGRIP Max$579$587 Min $323$346 Max varies by year, based on formula Max results in highest premiums and highest payments, when they occur

13. 13 Farmer choices Coverage Level 70% to 90% Suggestion: Take highest coverage level Change payment/premium by lowering protection level

14. 14 2005 Per Acre Premiums, Marshall County, Iowa (100% Protection Level, Corn) Coverage LevelGRP GRIP-NoHRGRIP-HR 70%$3.96 $2.96 $5.51 75% 4.80 4.24 7.22 80% 6.17 6.90 10.58 85% 6.89 10.00 13.85 90% 8.60 15.92 20.25

15. 15 Per Acre Guarantees, 90% Coverage Level GRP GRIP-NoHR GRIP-HR Type YieldRevenue Revenue Coverage level.90.90.90 x Expected yield 164.3 164.3 164.3 x Price xxx $2.38 $2.38 @ Guarantee 147.9 bu $352 $352 @@ @ Higher of expected or harvest price @@ Will be higher when harvest price > expected price

16. 16 Payment example “Typical” Year  Actual yield = 170 bu.  Harvest price = $2.00  Guarantees on previous slide (90% cov level) Shortfall = (Guarantee – Actual)/Guarantee when Guarantee > Actual GRP:.000 (147.9 guarantee < 170 actual) GRIP-NoHR: ($352 - (170*2)) / $352 =.034 GRIP-HR: ($352 - (170*2)) / $352 =.034

17. 17 Payments (Max Protection Level, 90% Coverage Level) GRP GRIP-NoHR GRIP-HR Prot. level $579 $587 $587 X shortfall.000.034.034 X price factor xxx xxx 1.00 * Payment $0 $20 $20 * Higher of (harvest price / expected price) or 1

18. 18 Payment example “Drought” Year  Actual yield = 130 bu.  Harvest price = $3.00 Shortfall = (Guarantee – Actual)/Guarantee when Guarantee > Actual GRP: (147.9 – 130) / 147.8 =.121 GRIP-NoHR:.000 Guarantee < actual ($390) GRIP-HR: ($443 - (130x3)) / $443 =.120

19. 19 Per Acre Guarantees, Revised 90% Coverage Level GRP GRIP-NoHR GRIP-HR Type YieldRevenue Revenue Coverage level.90.90.90 x Expected yield 164.3 164.3 164.3 x Price xxx $2.38 $3.00 @ Guarantee 147.9 bu $352 $443 @@ @ Higher of expected or harvest price @@ Will be higher when harvest price > expected price

20. 20 Payments (Max Protection Level, 90% Coverage Level) GRP GRIP-NoHR GRIP-HR Prot level $579 $587 $587 X shortfall.121.000.120 X price factor xxx xxx 1.26 @ Payment $70 $0 $89 @ Higher of (harvest price / expected price) or 1 (3.00 harvest price / 2.38 expected price) = 1.26

21. 21 GRP Shortfalls, Marshall County, Iowa, Corn (90% coverage level) Expected Final GRP Year Yield Yield Shortfall (90%) 1995 131.1 133.7 0 1996133.2 139.4 0 1997133.2 136.4 0 1998135.3 144.5 0 1999136.5 153.8 0 2000137.6 144.0 0 2001146.7 150.5 0 2002146.7 181.8 0 2003150.1 175.9 0 2004158.4 183.2 0

22. 22 Marshall County, Corn Yields 1977 1988 1993

23. 23 GRIP Shortfalls, Marshall County, Iowa, Corn (90% coverage level) Expected Harvest GRIP Year Price Price Shortfall (90%) 1999 2.40 1.96 0 2000 2.54 2.11.034 2001 2.45 2.05.046 2002 2.30 2.43 0 2003 2.38 2.37 0 2004 2.93 1.99.127 Shortfalls the same for GRIP-NoHR and GRIP- HR.

24. 24 GRP Shortfalls, Marshall County, Iowa, Soybeans (90% coverage level) Expected Final GRP Year Yield Yield Shortfall (90%) 1995 45.2 50.6 0 1996 46.6 49.2 0 1997 46.6 50.4 0 1998 47.7 51.6 0 1999 51.8 50.3 0 2000 52.6 45.2.045 2001 53.4 49.7 0 2002 52.5 53.5 0 2003 53.1 31.7.336 2004 53.6 51.6 0

25. 25 GRIP Shortfalls, Marshall County, Iowa, Corn (90% coverage level) Expected Harvest GRIP Year Price Price Shortfall (90%) 1999 4.95 4.85 0 2000 5.36 4.72.129 2001 4.59 4.37.013 2002 4.53 5.45 0 2003 5.23 7.32.058 2004 7.27 5.26.183 Shortfalls the same for GRIP-NoHR and GRIP- HR.

26. 26 Risk/returns www.farmdoc.uiuc.edu/cropins/index.html

27. 27 Crop Insurance Evaluator: For an example farm in each county for corn and soybeans shows the following for different insurance product:  Frequency of payments  Premiums  Average payments  Net costs  Ability to prevent disasters

28. 28 Marshall County, Corn  “Average” farm for county  159 bu. APH yield, average variability  Evaluations shown for 2005 year  Evaluations based on maximum protection level

29. 29  Frequency of payments  Example of tables from Evaluator

30. 30 1% VAR  A 1% VaR of $200 means that 1% of the time revenue will be below $200  Measure of risk reduction  Want VaRs to be as high as possible

31. 31 1% VaR from Evaluator $ per acre, Corn Level APH CRCGRP GRIP-NoHR GRIP-HR 65% 203 212 75% 221 231 198 205 204 85% 243 247 205 216 217 90% 213 223 226  Group products lower risk less than Individual products  Low coverage Individual not as “good” as high coverage Group

32. 32 Net Costs  Average payments over time minus premium  High levels indicate high costs, negative levels mean expect more insurance payments than premium over time

33. 33 Net Costs from Evaluator $ per acre, Corn Level APH CRCGRP GRIP-NoHR GRIP-HR 65% 1.45 2.26 75% 1.74 2.04.78 -3.94 -4.65 85% 3.76 4.77 -4.65 -12.50 -17.87 90% -9.77 -17.13 -26.47  Individual products have higher costs than Group products

34. 34 Marshall County, Soybeans  “Average” farm for county  50 bu. APH yield, average variability  Evaluations shown for 2005 year  Evaluations based on maximum protection level

35. 35 1% VaR from Evaluator $ per acre, Soybeans Level APH CRCGRP GRIP-NoHR GRIP-HR 65% 166 174 75% 183 192 159 162 164 85% 203 207 165 173 175 90% 168 179 180  Group products lower risk less than Individual products  Low coverage Individual not as “good” as high coverage Group

36. 36 Net Costs from Evaluator $ per acre, Soybeans Level APH CRCGRP GRIP-NoHR GRIP-HR 65%.57 1.06 75%.81.93 -.56 -2.66 -2.68 85% 1.48 2.89 -3.18 -7.96 -8.95 90% -5.31 -10.52 -12.60  Individual products have higher costs than Group products

37. 37 Risk/Returns Summary  Group products cost less than individual products. Over time, group products may average more in payments than paid in premiums  Group products reduce risk less than individual farm products

38. 38 Situations Where Group Products Work:  Farm-yields either: 1.Closely follow county-yields (i.e., large farm), or 2.Are above county-yields  Farm has low APH  Farm is in relatively strong financial position  Tend to work best in “good” producing counties

39. 39 Situations Where Group Products Do Not Work as Well:  Highly leveraged farms  Farms where re-planting occurs often  Hail is a major concern  Farms with high-risk farmland

40. 40 Summary  GRIP does fit certain situations  Represent another option in the risk management tool kit