Crop Insurance and Shallow Loss Product Choices

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1 Crop Insurance and Shallow Loss Product Choices v Darren Hudson, Combest Endowed Chair of Agricultural Competitiveness, Texas Tech University *Some information based on the dissertation of Kishor Luitel.

2 Farm Bill 2014 ( Summary) Title I (Commodity Program ) COTTON IS NOT ELIGIBLE FOR EITHER PROGRAM (PLC & ARC) Title XI ( Federal Crop Insurance Program) Deep Loss Insurance Products Individual and Area Insurance products Shallow Loss Insurance Products Supplemental Coverage Option Endorsement (SCO Endorsement) Stacked Income Protection Plan (STAX) Only Cotton

3 Flowchart of Decision-Making County Base Update Choice Between ARC and PLC Choose ARC Choose PLC Individual Can choose to Update Payment Yield Not your Problem but. These decisions could very likely affect crop insurance coverage decisions This part is done. Now down to the annual insurance decisions. Beginning in 2015 can choose SCO insurance option

4 Characteristics of Insurance Risk management properties Farm program support properties

5 Inside Farm Bill 2014 Insurance premium cost is paid by Type/ Practice in 2014 and 2015 In 2015 Separate Irrigated and Non-Irrigated insurance products and coverage level Deep loss Deep loss Deep loss Deep loss Irrigated Dry land Irrigated Dry land Irrigated Dry land Irrigated Dry land Insurance choice Premium 2014 insurance Decision Insurance choice 2015 insurance Decision Premium

6 Insurance Decision Area or individual Common Insurance Policy (Deep Loss) STAX SCO Area only Cotton Only All Program Crops + Cotton

7 SCO vs. STAX SCO STAX Coverage Level CCIP to 86% 70-90% Underlying Coverage Required YES NO Subsidy Rate 65% 80% Coverage Type (Trigger) Area Area Payment Type Farm Area

8 Inside Farm Bill 2014 Shallow Loss Insurance STAX 10% loss Shallow loss SCO Shallow loss STAX 16% loss 20% SCO 35% Deep loss Deep loss Actual Revenue 80% subsidy 65% subsidy Revenue Premium Cost

9 Inside Farm Bill 2014 Shallow Loss Insurance STAX 10% loss Shallow loss Coverage gap Deep loss SCO Shallow loss Deep loss STAX 16% loss 20% SCO 35% Actual Revenue 80% subsidy 65% subsidy Revenue Premium Cost

10 An Example of True Premium vs. Paid Premium For an above average yielding dryland cotton farm in Lynn County, TX, the expected revenue per acre is: $ Based on the yield history of this farm, the probability of the actual revenue dropping below 70% of expected ($221.17) is 26% That means the actuarily fair premium is: $57.32 per acre. The actual premium is $11.91 (enterprise unit subsidy of 80%).

11 An Example Cotton Farm Simulated scenarios assuming enterprise unit level coverage Lynn County High Yield Non-Irrigated Cotton Farm Low Yield Non-Irrigated Cotton Farm Yield Exclusion Case: Increases approved yield by 20%

12 Lynn Farm Characteristics Non-Irrigated cotton farm of 2,500 acre Owned acres = 667 acre Shared leased acres = 1833 acre Initial producer net worth = $373,044 Cotton Yield Characteristics Mean ( lb./acre) 20% increase in mean ( lb./acre) Standard Deviation ( lb./acre) Data source Low Productivity Farm Farmers High Productivity Farm Farmers County Reference Yield 282 RMA

13 Results: Risk Averse Lynn County- High Yield Non-Irrigated Cotton Farm Benefit Over No Insurance Case without YE ($/Acre) Benefit Over No Insurance Case with YE ($/Acre) Optimal Coverage (Underlying CL, STAX CL, Pmt Factor) YieldProtection (YP) % Revenue Protection (RP) % Revenue Protection With Harvest Price Exclusion (RPHPE) % Revenue Protection SCO (RP SCO) % RP STAX- RP %, 90-75%, 1.2 RP STAX-RPHPE %, 90-75%, 1.2

14 High Productivity Non-Irrigated Cotton Farm for CCIP and SCO Without YE With YE, 20% Yield Increase

15 High Productivity Non-Irrigated Cotton Farm for STAX and SCO Without YE With YE, 20% Yield Increase

16 Results: Risk Averse Lynn County- Low Yield Non-Irrigated Cotton Farm Benefit Over No Insurance Case without YE ($/Acre) Benefit Over No Insurance Case with YE ($/Acre) Optimal Coverage (Underlying CL, STAX CL, Pmt Factor) YieldProtection (YP) % Revenue Protection (RP) % Revenue Protection With Harvest Price Exclusion (RPHPE) % Revenue Protection SCO (RP SCO) % RP STAX-RP %, 90-75%, 1.2 RP STAX-RPHPE %, 90-75%, 1.2

17 Low Productivity Non-Irrigated Cotton Farm for CCIP and SCO Without YE With YE, 20% Yield Increase

18 Low Productivity Non-Irrigated Cotton Farm for STAX and SCO Without YE With YE, 20% Yield Increase

19 Some Take-away Points STAX RP with underlying RP is always optimal for non-irrigated cotton farm for parameters used in this study Stand-alone Revenue Protection always pays more than SCO endorsement Due to producers premium cost Due to county trigger yield For a same protection level Producer Premium for SCO endorsement is higher than STAX With 20% increase in APH Yield with YE, Producers can purchase 10% lower coverage level with YE to get same benefit as without YE

20 Risk Protection vs. Payments Revenue County is a close match to the farm county product has comparable risk protection to individual farm protection Revenue County is not a close match to the farm county product is not a good risk management tool

21 Thank You and Questions!!!

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