Common Crop Insurance Policy (CCIP) DR. G. A. ART BARNABY, JR. Kansas State University 4B Agricultural Consultants

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1 Common Crop Insurance Policy (CCIP) DR. G. A. ART BARNABY, JR. Kansas State University 4B Agricultural Consultants Phone: Check out our WEB page at Copyright 2010, All Rights Reserved 1

2 Common Crop Insurance Policy (CCIP) 1. How does the new Common Crop Insurance Policy (CCIP) change crop insurance coverage? 2. Would farmers be better off if CCIP used cash prices rather than futures prices for price discovery? 3. Does the CCIP change rates and signup? 2

3 Common Crop Insurance Policy (CCIP) YP RP RP-HPE Yield Protection Revenue Protection Revenue Protection with Harvest Price Exclusion 3

4 aka for new CCIP YP RP RP-HPE APH or MPCI CRC or RA-HPO RA or IP All contracts will use the same price election and is a major change from previous crop insurance contracts. 4

5 Common Crop Insurance Policy Values for Example Corn Farm APH 173 Coverage Level 75% Guaranteed Bu. 130 bu. Base Price $4.00 Maximum Price $8.00 Coverage $

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11 Yield Protection (YP) Payout Table Price Change Yield Decrease 11

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15 Intrinsic Value of CME Call Option Price Increase Yield Decrease 15

16 Call in RP Plus YP Payments Price Increase Yield Decrease 16

17 Call in RP Plus YP Payments Price Increase Yield Decrease 17

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22 Intrinsic Value of CME Put Option Price Increase Yield Decrease 22

23 Put in Revenue Protection with Harvest Price Exclusion Price Increase Yield Decrease 23

24 Revenue Protection with Harvest Price Exclusion (RP-HPE) Payout Table Price Increase Yield Decrease 24

25 What, a put with Negative Values? YP with 100 bushel yield pays $120. RP-HPE reduces the payment by $100 to $20 with a 100 bushel yield and a $1 increase in price. In most cases farmers will be paying higher premiums for RP-HPE than they do for YP, but when prices increase the HPE will take on negative values and YP will pay more than RP-HPE. 25

26 Value of CME Options vs. RP Options HPE has put cost equal to RP-HPE minus YP premium divided by guaranteed bushels. Ex. RP-HPE = $15.70 minus YP = $10.78 equal $4.92 divided by 130 bu. = 3.8 cents. RP call cost equal to RP minus RP-HPE premium divided by guaranteed bushels. Ex. RP = $22.97 minus RP-HPE = $15.70 equal $7.27 divided by 130 bu. = 5.6 cents. CME over 40 Cents for at the money March 11 option. 26

27 Changing CCIP from Futures to Cash Prices Asian Put & Call in CCIP have a zero basis. The Put in CCIP measures the change in price from planting to harvest. Cash settled CCIP would set the base price equal to the futures plus expected basis. The harvest cash price equals the futures plus basis. 27

28 Changing CCIP from Futures to Cash Prices Changing CCIP to cash settled rather than futures settled will not change the result unless the basis widens. If the expected basis is $0.50 under and the harvest price is $0.50 under then the change in price is nearly the same, whether one uses futures or cash prices to make revenue payments. However, if there is also a YP loss then those bushel losses will be paid at a price that is $0.50 less using cash rather than futures to settle CCIP payments. 28

29 Changing CCIP from Futures to Cash Prices RP-HPE price election set at the current basis of $0.50 under. Futures prices decline from $4.00 to $3.50 at Harvest. Harvest basis widens from $0.50 to $0.75 under. Harvest basis strengthen from $0.50 to $0.25 under. 29

30 RP-HPE with Planting $0.50 Under & price falls from $4.00 to $3.50 Zero basis Harvest Basis, $0.75 Under 30

31 RP-HPE with Planting $0.50 Under & price falls from $4.00 to $3.50 Zero basis Harvest Basis, $0.25 Under 31

32 Would changing from Futures to Cash price discovery increase RP payments? 1. Change from futures to cash price discovery would increase RP payments if and only if: 1. Prices fall 2. basis widens 3. And then only over a limited range of yields near the guaranteed bushels. 2. A weak basis creates moral hazard, especially on the YP contract when prices decline. 3. If prices increase or basis becomes stronger then the current futures based RP payout is greater. 32

33 Does the CCIP change rates and signup? 1. Farmers current coverage under CRC, RA, IP & APH will roll to the new equivalent CCIP coverage, unless farmers change their coverage before sales closing. 2. Plant price is the February average closing prices for Dec corn & Nov soybeans. 3. Harvest price is the October average closing prices for Dec corn & Nov soybeans. 33

34 Does the CCIP change rates and signup? 4. Plant price is the February average and harvest price is the August average closing prices for MGE Sep spring wheat. 4. Premium rates are set by RMA as a percentage of coverage and appear to have only minor changes on winter wheat rates. 5. However, premium cost per acre may be higher (higher for winter wheat) because of a higher price election and volatility set by the market. 34

35 Does the CCIP change rates and signup? 7. The RA enterprise unit was eliminated but RMA retained an enterprise unit similar to CRC. 8. Those farmers with larger enterprise discounts under the RA enterprise definition will have higher premiums. 9. There will likely be some change in farmers premium costs because farmers will not be able to adverse select between RA-HPO and CRC, especially on enterprise units, but no major rate changes are expected. 35

36 Don t get caught on the wrong side of the basis! 1. Recently wheat basis has been more than $1 under at delivery points. 2. If wheat farmers were to have a short wheat crop the basis may approach even at delivery points. Longs may squeeze the shorts for delivery. 3. Farmers with forward contracts or basis contracts could lose a dollar before considering any price level change. 36

37 Don t get caught on the wrong side of the basis! 4. With current higher wheat prices some farmers may want to lock in some sales for new crop wheat. 5. Forward contracts will lock in the basis too that will likely be bid wide. 6. An alternative suggestion is to use an HTA, puts/window, or futures if you can stand the margin calls. 37

38 Combined Risk Management 1. ACRE plus 80% of Direct vs. Direct, Counter Cyclical, Marketing Loans (LDP) 2. SURE and Ad Hoc Disaster Aid 3. YP, RP, RP-HPE, GRP, GRIP, GRIP-HRO, AGR, Rainfall Index (RI), Vegetation Index (VI), Livestock Risk Protection, Livestock Gross Margin, etc. 38

39 Thank You DR. G. A. ART BARNABY, JR. Kansas State University 4B Agricultural Consultants Phone: Check out our WEB page at Copyright 2010, All Rights Reserved 47

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