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ECON 337: Agricultural Marketing. Chad Hart Assistant Professor chart@iastate.edu 515-294-9911. 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

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ECON 337: Agricultural Marketing

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ECON 337:

Agricultural Marketing

Chad Hart

Assistant Professor

chart@iastate.edu

515-294-9911


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


Why Crops Fail


Types of Crop Insurance

  • Individual Yield (YP)

  • Area Yield (GRP)

  • Individual Revenue (RP and RPE)

  • Area Yield - Individual Revenue Combination (GRIP)


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: $5.68/bu (average of Feb. prices for Dec. corn futures)


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 $198.80 per acre = $5.68/bu * (75% * 180 bu/ac - 100 bu/ac)


Yield Insurance Payout Graph

No Payout

Payout


Yield Insurance is like an Option


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


Individual Revenue Insurance(RP or RPE)

In our example, the farmer has insured $766.80 of revenue per acre (75% * $5.68/bu * 180 bu/ac)

Final value of the crop determined by average futures prices over harvest period


Individual Revenue Insurance(RP or RPE)

If yields are 100 bushels per acre and harvest prices average $4.50, the farmer receives $316.80 per acre

  • 0.75*$5.68/bu.*180 bu./acre - $4.50/bu.*100 bu./acre


RPE Payout Graph

No Payout

Payout


Rev. Insurance is like an Option


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


Harvest Price Option


Individual Revenue Insurance (RP)

If yields are 100 bushels per acre and harvest prices average $7.00, the farmer receives $245.00 per acre

  • 0.75*$ 5.68/bu.*180 bu./acre - $7.00/bu.*100 bu./acre

7.00


RP Payout Graph

No Payment

Neither Pay

RPE Pays

YP Pays

Both Pay

RP Pays


CornInsurance Prices

Harvest prices have been higher 4 out of last 12 years


Soy Insurance Prices

Harvest prices have been higher 6 out of last 12 years


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

What Units to Choose?


Current Subsidy Rates


2012 Insurance Premiums

Per Acre Premiums ($ per acre)

Cov. Level YP RPE RP_

50% 1.10 0.94 1.35

55% 1.80 1.55 2.33

60% 2.55 2.24 3.52

65% 3.91 3.01 5.75

70% 5.36 5.50 8.72

75% 7.83 8.7514.00

80%11.7914.2422.78

85%17.9722.5536.36

For our example farm in Story County, Iowa for corn


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


Iowa Corn Acres Insured in 2011


Iowa Soy Acres Insured in 2011


2011 Corn and Soy Coverage Levels


Coverage Levels for GRIP


Coverage Levels for GRP


Coverage Levels for RP


Coverage Levels for RPE


Coverage Levels for YP


Class web site:

http://www.econ.iastate.edu/~chart/Classes/econ337/Spring2012/

Lab in Heady 68


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