1. Prices now 2. TA APH yield endorsement 3. Re-rating 4. Suggestions

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1 Crop Insurance Update Gary Schnitkey University of Illinois Topics 1. Prices now 2. TA APH yield endorsement 3. Re-rating 4. Suggestions 2 1

2 Combo Product and Old Products Type COMBO Product Old Product Yield Yield Protection (YP) Actual Production History (APH) Revenue no Revenue Protection Revenue Assurance with guarantee with Exclusion (RPwExl) base price option (RA BP) increase Income Protection Revenue with Revenue Protection (RP) Crop Revenue Coverage (CRC) guarantee Revenue Assurance with increase harvest price election (RA HP) 3 Price Definitions for Corn and Soybeans in Illinois Projected price average of February CME settlement prices (Dec. for corn, Oct. for soybeans) Harvest price average of October CME settlement prices (Dec. for corn, Oct. for soybeans) Capped at 2 x projected price 4 2

3 Insurance and Commodity Program Prices Corn Projected price E Harvest price Season average price E Soybeans Projected price E Harvest price Season average price E Projected price average of Dec. (corn) of Nov. (beans) CME futures contract in February, used to set insurance guarantees. Harvest price average of Dec. (corn) Nov. (beans) CME futures contract in October, used to calculate insurance revenue. Season average price U.S. average price calculated by USDA from Sept. to August, used for ACRE and SURE. 5 Trend-Adjusted Actual Production History (TA APH) Sponsored by Illinois Corn Research and technical support provided by University of Illinois 6 3

4 Trend Adjusted Yield Endorsement Problem addressed: Corn and soybeans have increasing trends APH is used in crop insurance guarantees and is average of past yields (up to 10) Because average of past yields, APH lags expected yield, which is what APH is meant to measure INTRODUCE: Trend-adjusted APH yield 7 8 4

5 TA APH Endorsement Applies to Corn and Soybean APH policies (except organic, silage, transitional) Does not apply to the catastrophic level (CAT), excludes some non-actual yields 2012 Pilot, 14 states, selected counties 9 TA APH Data Eligibility Must be in eligible county/crop has Risk Management Agency (RMA) trend One actual yield in last four years Make decision by sales closing date (March 15) Make decision on crop/county basis Continuous unless cancelled or terminated by e Federal Crop Insurance Corporation (FCIC) Transferred policies must re-elect 10 5

6 TA APH Full Adjustment Must have at least 4 actual yields to be eligible for full adjustment Percent of trend adjustment applicable 4 or more yields in last 12: 100% 3 yields 75% 2 yields 50% 1 yield 25% Max trend APH yield cannot exceed highest actual yield plus trend (e.g. max actual 190, TA =2, max TA APH = 192) 11 6

7 Trend Rates Corn 0 to to to to to to Trend Rates Soybeans 0 to to to to to to

8 Premiums Total premium the same for same guarantee given APH or TA-APH Use of TA-APH will lower farmer-paid premium because subsidy levels are lower for higher coverage levels Always to the advantage of taking TA endorsement Risk Subsidies (Percent of Total) Coverage Level Basic, Optional Enterprise 50% 67% 80% 55% 64% 80% 60% 64% 80% 65% 59% 80% 70% 59% 80% 75% 55% 77% 80% 48% 68% 85% 38% 53% 15 Macon County Premiums, Illinois, Corn APH Yield = TA APH Yield = Coverage Bu. Trigger Premium Bu. Trigger Premium bu/acre $/acre bu/acre $/acre 50% % % % % % % %

9 Re-Ratings Problem: Insurance premiums too high relative to payments Show with Loss ratio Insurnace payments Total premiums Should be equal to 1.0 No patterns across geography or crops 17 Crop Insurance Performance, Total for 1995 through 2010, Crops in the U.S. Crop Total Premium Subsidy Total Payments Loss Ratio $ (millions) Corn 23,389 13,167 13, Soybeans 13,795 7,902 9, Wheat 10,415 6,017 10, Cotton 5,580 3,453 5, Grain Sorghum 1, , Potatoes Nursery (Fg&C) Peanuts Dry Beans Sunflowers Sugar Beets All Other 8,163 5,218 7, Crops sorted by loss ratio 18 9

10 Crop Insurance Performance, Total for 1995 through 2010, States in the U.S. State. Total Premium Subsidy Total Payments Loss Ratio $ (millions) Illinois 49,354 26,054 22, Hawaii Iowa 55,426 28,885 27, Minnesota 50,687 28,263 26, Nebraska 42,565 23,381 22, Indiana 26,062 13,478 15, South Dakaota 39,288 23,098 33, North Dakota 55,652 32,242 50, Texas 59,646 36,359 66, Alabama 5,403 3,138 6, Oklahoma 10,774 6,448 12, North Carolina 13,374 7,948 17, State sorted by loss ratio 19 Loss Ratios by County, All Crops,

11 COMBO Guarantees YP RPwExl RP APH Yield 180 bu. 180 bu. 180 bu. Projected price (1) $6.00 $6.00 $6.00 Coverage level 80% 80% 80% Yield guarantee (2) 144 bu. Revenue guarantee (3) $864 Min. revenue guarantee (4) $864 (1) Projected price is the price election for YP (2) Yield guarantee = APH yield x coverage level (3) Revenue guarantee = APH yield x projected price x coverage level (4) Min. revenue guarantee can go up if harvest price > projected price 21 Price Decline YP RPwExl RP Actual Yield 200 bu. 200 bu. 200 bu. Harvest Price $4.00 $4.00 $4.00 Guarantee 144 bu. $864 $864 Yield for YP (Revenue for 200 bu. $800 $800 Rev *) Yield loss 0 bu. Insurance payment $0 $64 $64 * Revenue = 200 bu. yield x $4.00 harvest price 22 11

12 Widespread Drought YP RPwExl RP Actual Yield 120 bu. 120 bu. 120 bu. Harvest Price $7.00 $7.00 $7.00 Guarantee 144 bu. $864 $1,008 * Yield for YP (Revenue for Rev **) 120 bu. $840 $840 Yield loss 24 bu. Payment $144 *** $24 $168 * Higher harvest price is used in guarantee (180 bu. X $7.00 x.80) ** Revenue = 120 bu. yield x $7.00 harvest price *** YP payment equals 24 bu. yield loss x $ Microsoft Excel Spreadsheet available for download from FAST section of farmdoc ( 12

13 Minimum Revenue Protection with Harvest Revenue Protection Coverage Price Exclusion Revenue Revenue Level Enterprise Basic Optional Guarantee Enterprise Basic Optional Guarantee $ per Acre $/acre $ per Acre $/acre 50% % % % % % % % Consider moving to RP with Exclusion at higher coverage level 25 RP-Excl 85% Minus RP 80% Actual Harvest Price Yield bushel APH yield, $5.80 projected price 26 13

14 Unit Definitions Enterprise unit all of one crop in a county (with an important restriction on next slide, change from 2010) Basic unit Divided by the following: 100% share all owned and cash rent farmland Less than 100% share divided by each landlord Example: Owned land, cash rent land from 5 landlords, share rent land from 3 landowners. This farm has 4 units: One for owned and cash rent land and one for the each share rent land under differing share rent landlords. Optional unit division of basic units by township sections 27 Enterprise Unit Definition To be eligible for enterprise units: Two or more sections (eligible for optional units) At least 20% of crop acres or 20 acres, whichever is lower in each section 28 14

15 Other Changes No SURE NO BE 29 Suggestions If you were happy with crop insurance program last year, stick with it Most are at 75 to 85 percent coverage levels Consider RP with Exclusion at higher coverage level than RP 30 15

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