Module 9 Crop Insurance Alternatives William
Edwards, Iowa
State University |
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Every year farmers face the threat of damage to their crops from drought, hail, flood, frost, insects, and other natural disasters. They also must contend with volatile market prices. The U.S.D.A. Risk Management Agency (RMA), formerly the Federal Crop Insurance Corporation, and private crop insurance venders have developed a set of insurance programs to help control crop production and revenue risks. Crop insurance coverage is not mandatory, but it does provide a financial safety net in case of severe production losses or revenue declines. Crop producers can choose from among the following types of crop insurance shown in Table 1.
Note: Not all crops can be insured in all states, or all counties within a state. Multiple Peril Crop Insurance (or go to Topics ) Multiple Peril Crop Insurance (MPCI) protects against major crop production losses from a wide range of natural causes. Producers can choose to insure their crops at 50, 55, 60, 65, 70, or 75 percent of their actual production history (APH) yield. These bushels can be insured at a price ranging from 60 percent to 100 percent of the RMA forecast market price each year. The RMA forecast market prices for the next sign up period are normally announced about 60 days before sales close. If the insured unit's actual harvested yield is less than the guaranteed yield, the producer receives a payment equal to the production deficit multiplied by the price election. Premiums per acre for MPCI increase in direct proportion to the price level selected, and at an increasing rate for guaranteeing higher percentages of the APH yield. The RMA pays administrative costs, agent commissions, and premium subsidies ranging from 100 percent at the lowest yield and price levels to around 25 percent at the maximum coverage level. Growers who can prove yields that are higher than average for their county pay a lower premium rate per $100 of coverage. A feature that has been very important to Corn Belt grain producers in recent years is the prevented and delayed planting provision. Major revisions were made in the prevented planting underwriting rules beginning in 1998. MPCI now provides prevented plating coverage equal to 60 percent of the MPCI yield guarantee. Growers may select up to a 70 percent prevented planted guarantee. For example, if a grower's MPCI policy guarantees 10,000 bushels, he/she may insure up to 7,000 bushels for prevented planting. Growers have several options in dealing with delayed or prevented planting. The grower may file a prevented planting insurance claim after the final planting date. The grower may plant the crop up to 20 days after the final planting date, with a 1 percent percent per day reduction in the yield guarantee. Lastly, growers may elect to plant a substitute crop and receive a full guarantee on the substitute crop, if the final planting date for the substitute crop has not passed. Growers that file a claim for prevented planting are not allowed to plant a substitute crop but may plant a cover crop. Catastrophic Insurance (or go to Topics ) Catastrophic insurance (CAT) is a minimum coverage MPCI policy that protects against yield losses in excess of 50 percent of the APH yield. Losses are paid at the rate of 55 percent of the RMA forecast market price. There is no farmer premium for CAT, but the producer must pay a processing fee for each crop, each insured party, and each county insured. Beginning in 1999, the fee will be larger of $60 or 10 percent of the calculated CAT premium. Delayed and prevented planting provisions apply to CAT policies, but no payment is made for replanting or planting a substitute crop. CAT offers partial protection against significant crop failures at a low cost, and is a useful option for producers with high risk-bearing ability. It was instituted as a replacement for the ad hoc crop disaster programs offered by USDA in the past. Group Risk Plan (or go to Topics ) Group Risk Plan (GRP) insurance protects producers against a widespread crop failure. If the average yield for the county in which the insured crop is located falls below the insured level chosen, the producer receives a payment, regardless of the individual farm's yield. County average yields are determined by the National Agricultural Statistics Service (NASS) around April 15. Guarantees of from 70 to 90 percent of the long-term county yield adjusted for trend can be purchased. Rather than selecting a price guarantee, the producer selects a dollar value of coverage per acre. The maximum dollar value that can be chosen is equal to the county yield guarantee chosen multiplied by 150 percent of the current RMA forecast market price. A GRP policy generally has lower premiums than comparable MPCI coverage, and does not require any farm production history. This makes it attractive to producers who do not have production records and cannot prove their yields. Producers whose farm yields closely follow the year-to-year pattern of the county averages receive the most risk protection from GRP. Because payments are not based on individual farm yields, however, growers still have "yield basis" risk. The yield basis is the difference between the percent of the county yield lost and the percent of the farm level yield lost. The yield basis can "widen" as a result of a local disaster such as a hailstorm that has little effect on county yields. Supplemental insurance for localized hazards is a good complement to a Group Risk Plan policy. Research has shown that the coverage level chosen for GRP needs to be 15 to 20 percentage points higher than for MPCI to provide comparable coverage. Crop Revenue Insurance (or go to Topics) Crop revenue insurance plans protect growers against reductions in gross revenue rather than yield. Three different revenue insurance plans are available in selected states and counties. [1] Crop Revenue Coverage (CRC) is available for corn, wheat, soybeans, grain sorghum, and cotton in all major growing states. Part of the CRC revenue guarantee is based on the APH yield, just as for an MPCI policy. However, the price used to calculate the revenue guarantee is set just before the CRC sign up deadline. For spring planted crops the planting time price is 100 percent of the February average of the new crop daily closing futures price. For a reduced premium growers may elect to insure for 95 percent of the February price. The planting time price times the APH yield times the coverage level equals the minimum revenue guarantee. Coverage options are 50, 55, 60, 65, 70, and 75 percent of the expected revenue. At harvest, the revenue guarantee is recalculated using the harvest price, which is defined as 100 (or 95) percent of the average daily closing price for the nearby futures contract during the month prior to contract expiration. If the harvest time CRC revenue guarantee is higher than the minimum revenue guarantee, the grower receives the higher guarantee, with no additional premium charged. However, the maximum increase in the insurable price from planting to harvest is limited as follows:
If the producer's actual gross revenue, calculated as the actual yield times the harvest price, is below the guaranteed revenue level an indemnity payment equal to the difference is paid. Thus, indemnity payments can be triggered by various combinations of prices and yields. The increasing coverage feature of CRC effectively guarantees the insured production at its harvest time replacement value. This allows growers to forward price grain without fearing a crop failure on their own farm combined with an increasing market price. Producers insured under CRC will either produce enough bushels to meet forward pricing commitments or receive enough CRC indemnity dollars to replace the lost inventory, even if market prices are substantially higher at harvest than when they forward priced. CRC coverage can be purchased for both basic and optional units, and late, prevented, or replant provisions apply. [2] Revenue Assurance (RA) was available only in Iowa for 1998, but will be expanded to Illinois and Minnesota in 1999. It also guarantees a minimum gross revenue per acre, for corn or soybeans. Like CRC, the price used to calculate the revenue guarantee is the average of the new crop futures price in February. The revenue guarantee chosen can range from 65 to 75 percent of the expected revenue. At harvest the price used to calculate the actual revenue is the FSA posted county price where the insured unit is located during October for soybeans or November for corn. Revenue Assurance policies can be purchased for both basic and optional units. Producers can also insure all acres of the same crop under one unit, or even combine corn and soybean acres into a single whole farm unit, in return for a reduction in their premiums. Provisions for late or delayed planting or replanting are the same as for MPCI. [3] Income Protection (IP) is available in selected counties in several states. The Income Protection plan uses 100 percent of the new crop futures prices prior to sales closing to set the level of gross revenue protection, but protection levels do not increase if prices rise by harvest. It insures all of a producer's acres for the insured crop as a single unit, whereas the CRC and RA plans allow separate units. Under all three revenue insurance plans, if prices decline from planting to harvest even a small yield loss may trigger indemnity payments. For example, if the market were to decline by 15 percent, growers with 70 percent coverage would need only a 17 percent yield loss to trigger payments, while a 70 percent MPCI contract would require a 30 percent yield loss to trigger payments. However, if the market price were to increase by 15 percent, it would now require a 39 percent yield loss under IP or RA to trigger payments, while the required yield loss under CRC and MPCI would remain at 30 percent. Because the RA or IP revenue guarantee does not increase if prices rise between planting and harvest, premium costs will generally be lower than for CRC policies. Revenue insurance premiums under all three plans are subsidized by RMA at a rate comparable to MPCI policies. Tables 2 and 2a compare the results under several different yield and price scenarios for typical MPCI, CAT, GRP, CRC, and RA policies. Income Protection (IP) policies are similar to CRC and RA policies except that 100% of the relevant futures prices are used to calculate the revenue guarantee and the actual revenue, and the guarantee cannot increase at harvest. The Managing Risks and Software (MRP) program allows the user to analyze alternative outcomes for a specific farm(s) or field(s). Supplemental Coverage (or go to Topics ) Private insurance companies have developed a variety of policies that supplement the coverage available under the standard MPCI policies. The most common supplemental policy used is companion hail insurance, which generally has a lower deductible loss than MPCI, but for hail damage only. Supplemental replacement cost insurance is also available for MPCI, for producers who like to utilize preharvest pricing as a marketing tool. It is similar to the inventory replacement risk coverage that is already included in CRC contracts. Supplemental replacement cost insurance will pay the producer the difference between the actual harvest price and the RMA forecast price on all bushels for which an MPCI indemnity is paid. Other supplemental policies are available which effectively raise either the bushel guarantee or the price guarantee offered by traditional MPCI insurance. Of course, all these supplemental policies require extra premium costs. Participation in Crop Insurance Alternatives (or go to Topics ) For 1998 all of the alternative crop insurance contracts discussed above were available for at least some growers. The level of participation differed greatly by the type of program, however. Figure 1 compares the number of policies sold nationally for corn in both 1997 and 1998. The 1998 data includes policies for producers who will report no corn acres planted. The CRC corn contracts have been very popular, as measured by the number of policies sold. There were 228,083 MPCI and 130,279 CAT contracts written for corn in 1998 corn. In addition, there were 73,727 CRC contracts, 4,389 GRP corn contracts, 5,835 RA contracts, and 1,461 IP corn contracts. Sales of IP were small compared to the other crop insurance plans because contracts were offered only in selected counties in three states. Iowa was the only state to offer all three types of revenue insurance in 1998. There were 25,719 CRC, 5,820 RA, and only 45 IP policies written for Iowa corn. Traditional MPCI and CAT policies are still the most popular, accounting for 38,701 policies on Iowa corn in 1998. There were also 13,936 CAT and 1,138 GRP corn policies in Iowa. For soybeans CRC policies were almost as popular as they were for corn, with 70,153 contracts written nationally in 1998. In contrast, there were 197,175 MPCI, 130,240 CAT contracts, 3,045 GRP, 1,513 IP, and 5,114 RA policies (all in Iowa) written for soybeans. Statistics for wheat policies include both spring wheat and winter wheat contracts. There were 26,315 CRC contracts written nationally for wheat in 1998, with almost half of them being written in Kansas. Nationally, there were 177,903 MPCI, 107,485 CAT, 73 GRP, and 131 IP policies written on wheat. RA was not offered on wheat. Loss Experience on the 1997 Crop (or go to Topics ) The crop insurance loss statistics as reported by RMA are now available for 1997 crops. Loss ratios varied widely by policy. Figure 2 compares the 1997 loss ratios for corn by type of policy. The loss ratio for crop insurance is calculated by dividing the total indemnity payments made by the total premiums paid, including both the farmer cost and the RMA subsidy. The MPCI loss ratio for corn nationally was 42 percent, versus 40 for GRP and 28 for CRC. Catastrophic insurance had a loss ratio of only 12 percent, which would be expected due to its low yield guarantee and the absence of severe crop failures in 1997. Premiums Paid (or go to Topics ) The average premiums paid per acre for crop insurance coverage on corn in 1997 are shown in Figure 3. Values include both the RMA subsidy and the premium paid by the producer. The highest average premium was for the CRC policies, over $14 per acre, while the lowest was for the CAT policies. Of course the premium paid depends on the coverage level chosen, which is not the same for all types of policies. Growers paid a larger percentage of the total premium for CRC than for other policies, nearly 73 percent. This compares to 60 percent of the MPCI premiums and 65 percent of the GRP premiums. Growers paid none of the premiums for CAT, except the $50 processing charge per crop. The tables in this publication compare some of the important coverage features and participation rates for the different types of crop insurance available. Each policy can be customized by selecting different price and yield coverage levels, add-on features, and insurance unit designations. See your local insurance agent to get details on coverages and premiums available for your own farm.
Edwards, William: Managing Risk with Crop Insurance. Iowa State University Extension publication FM-1854, 1997. Edwards, William: Crop Revenue Insurance. Iowa State University Extension publication FM- 1853, 1997. Federal Crop Insurance Corporation webpage: http://www.act.fcic.usda.gov/ National Crop Insurances home page: http://www.ag-risk.org/ Questions for MRP Module 9: 1. Which do you consider to be your most important source of risk in crop production, price volatility or production risk? 2. Which crop insurance products currently available in your state protect against yield risk, only? Against both yield and price risk? 3. How is the value of gross revenue guarantee determined under CRC, RA, and IP insurance policies? For which policies does the guarantee increase if the market price increases between plating and harvest? 4. What characteristics of a cropping operation would make GRP crop insurance an attractive risk management option? 5. Which type of insurance policy had the highest average premium per acre in 1997? Which had the lowest? Which had the largest subsidy per acre? 6. How does delayed or prevented planting of a crop affect the insurance coverage on that crop? End of Module (or go to Topics ) |
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