Crop Insurance Products Compared

By Jane Fyksen, Crops Editor
Thursday, February 7, 2008 1:21 PM CST

The 2008 crop insurance deadline for most spring-seeded crops is March 15. Producers need to be making decisions now to counter yield and price risk. Recently, at the Corn/Soy Expo in Wisconsin Dells, Ed Ruff and Deb Ihm, both farm business and production management instructors at Southwest Wisconsin Technical College in Fennimore, provided an overview of crop insurance products in Wisconsin and what type of operation might benefit from each.

Producers need to familiarize themselves with the acronyms: CAT is Catastrophic Insurance; APH, Actual Production History, CRC, Crop Revenue Coverage, RPG, Group Risk Plan and GRIP-HR, Group Risk Income Plan with Harvest Revenue.

When you’re talking corn, the crop insured will be all corn grown in the county on insurable acreage, for which premium rates are provided, in which you have a share and planted for harvest as grain or silage. The revenue plan of insurance (CRC) insures corn for grain only. Corn insured includes yellow dent or white corn, including mixed yellow and white, waxy or high-lysine corn. Other corn, like high amylase, high oil, high-protein, flint, flour, Indian or blue corn or a variety genetically adapted to provide forage for wildlife, or any open pollinated corn isn’t insurable unless Special Provisions or a written agreement provides for such insurance.

Causes of loss include: Adverse weather conditions (including hail, frost, freeze, drought and excess precipitation); failure of irrigation water supply (if caused by an insured cause of loss); fire (if due to natural causes); plant diseases (but not damage due to insufficient or improper application of pest or disease control measures).

CAT is the minimum level of Multi Peril Crop Insurance (MPCI). There’s “very little cost” ($100 processing feed for each crop n regardless of acreage). Its niche is to replace federal disaster programs. Producers enroll by county; in other words, if you grow corn in two counties you’re insuring under CAT, you’ll pay $200 in processing fees instead of $100 like your neighbor who only has corn in one county. CAT is available at 55 percent of your APH yield and 55 percent of the price election. Actual production history (APH) yield is used to determine your production guarantee. The APH yield is based on up to 10 years of actual and/or assigned yields.

Corn in Wisconsin in 2008 may be insured at the coverage levels shown below. Crop insurance premiums are subsidized as shown. If, for example, you select the 75 percent coverage level, your coverage will be 75 percent of your approved APH yield; the premium subsidy is 55 percent; and your premium share is 45 percent of the base premium. Administrative fees, in addition to premium costs, for coverage levels above CAT are $30 per crop per county. (Eight and 85 percent coverage levels may not be available in all counties.)

So here are the coverage levels, premium subsidies and your share, respectively: 50 percent, 67 percent, 33 percent; 55 percent, 64 percent, 36 percent; 60 percent, 64 percent, 36 percent; 65 percent, 59 percent, 41 percent; 70 percent, 59 percent, 41 percent; 75 percent, 55 percent, 45 percent; 80 percent, 48 percent, 52 percent; and 85 percent, 38 percent, 62 percent.

CAT is suitable to farms with the following characteristics, according to this pair: Strong financial position, low yield variability and typically no crop disasters. This might be all you need if you’re in your last years before retirement, notes Ruff.

Here’s an example of how to figure a CAT indemnity payment. The crop is corn with an APH yield of 150 bushels. The yield guarantee is: 75 bushels equals 150 times 50 percent. Payment begins when yield is below 75 bushels per acre. The FCIC price is $0.50 a bushel. Actual yield of 50 bushels per acre results in a 25-bushel shortfall times the FICI price, of $31.25.

APH insurance covers yield losses. It has the longest history as a crop insurance product. Payment is made when actual yield is below a yield guarantee. The farmer makes a yield election from 50 to 85 percent of APH.

APH insurance might be considered by producers in a moderate to vulnerable financial position, who use pre-harvest marketing, have high yield variability and some high-risk farmland.

Price elections (for the APH plan) are the price of compensation per bushel or ton in case of loss. They are: grain, $3.75 per bushel, additional price; and silage, $26.50 per ton, established price.

APH plans offer production guarantees based on individual yield history. Optional and basic units are available. The basic unit includes all of your insurable corn acreage in the county by share arrangement. Premiums are reduced 10 percent for a basic unit. As for the “opitional unit,” if a basic unit consists of two or more sections of land, and certain record keeping requirements are met, you may apply for optional units by section. The 10 percent premium discount won’t apply. There’s also an enterprise unit, which generally, is all the insured crop acreage in a county. (Premium discounts apply.)

Here’s an example of an AHP indemnity payment, again for corn with APH of 150 bushels. Say you’ve chosen a yield election of 70 percent. Your yield guarantee of 105 bushels is calculated as follows: 150 x 70 equals 105. You pick he FICI price (from 60 to 100 percent. Say a 90-bushel yield creates a 15-bushel shortfall. A payment of $30 is made at a $2 indemnity price (15 bushels x $2).

Ruff and Ihm say CRC is suited to farms with moderate to vulnerable financial positions that are “aggressive” in their use of pre-harvest marketing and which desire a revenue guarantee.

CRC is APH plus price protection with option, basic and enterprise units. Its revenue insurance that protects against: low yields, low prices and a combination of the two. It pays an indemnity when actual gross revenue falls below a revenue guarantee.

Other CRC considerations are:

- Revenue increases between planting and harvest when futures prices rise between spring and fall.

- APH times the higher of the base price or harvest price times the coverage level.

- APH yield is specific to a farm or a unit.

- It’s based on yield history of the insured individual unit.

- The farmer selects a coverage level fro 50 to 85 percent of expected gross revenue.

The base price for corn is the average of December’s futures contract price during February. (For soybeans, it’s the average of November’s futures contract price during February.) The harvest price for corn is the average of December’s futures during October. (For beans, it’s the average of November’s futures contract during October.)

Recent base prices for corn under CRC are: 2006, $2.38; 2007, $4.06. Ruff tells farmers they can establish a pretty high gross revenue if they have a high yield history and the kind of prices seen of late.

Running through an example of CRC indemnity payment, Ruff reminds that yield and price are considered revenue based. Base revenue guarantee is calculated as follows: 150 bushel APH yield, $4.06 base price (using last year’s) x 75 percent coverage selection equals $456.75.

If harvest prices are higher, the revenue guarantee is updated to a higher guarantee. Indemnity payments occur because of low prices, low yields or a combination. So, actual yield of 150 bushels at a harvest price of $3 equals $450, which results in an indemnity of $6.75 per acre ($456.75 minus $450, which equals $6.75). Actual yield of 100 bushels per acre at a harvest price of $3 is $300, which results in an indemnity of $156.75 an acre ($456.75 minus $300 equals $156.75).

GRP insures against widespread loss of production based on county average yields. No individual loss protection is available under this plan. Ruff and Ihm say that this insurance is “insuring county yields.” It pays indemnities when county yield falls below a yield guarantee. The yield guarantee equals the expected county yield times a farmer-chosen yield election. Yield elections range from 70 to 90 percent of county yield.

Other points to understand about GRP are:

- County yields are determined by the National Agricultural Statistics Service

- NASS yield data is released in March of the year following harvest

- A protection level is selected; protection levels range from 60 to 100 percent

- The maximum protection level is a value set for each insured crop in a county

- Farmers have two choices to make under GRP n a yield election and protection level

- A higher yield election increases the yield guarantee

- When the yield is below the yield guarantee, a higher protection level has higher indemnity payments than does a lower protection level.

Farms in strong financial shape might utilize GRP, these two farm business instructors say. Other farm characteristics suited to GRP are: Relatively high-quality farmland; farm yields that closely track county yields; and use of pre-harvest marketing. A farmer is betting on the county having a problem with this type of crop insurance, says Ruff, who is himself also a farmer cash-cropping 85 acres in Farmersburg, Iowa.

To figure the indemnity payment with GRP, figure corn with an APH of 150 bushels and the county yield of 140 bushels. The county has a protection value set in dollars. The indemnity payment is the percent yield shortfall times a protection level. Say a farmer elects a 90 percent yield election resulting in a yield guarantee of 135 bushels per acre. A count yield of 140 bushels is above the yield guarantee, thus no indemnity is generated, notes Ruff of this example.

GRIP combines GRP with price protection to insure against widespread loss of revenue due to a combination of low yields and/or low prices. No individual protection is available under this plan.

According to Ruff and Ihm, CRIP is revenue insurance paying indemnities when county revenue is below a revenue guarantee. A harvest revenue option has a guarantee that will increase if the harvest price is above the base price. GRIP-HR is effected by: Expected county yield, expected price, harvest price and coverage level.

Things to consider about GRIP are:

- Expected county yield is determined for each crop insured in a county (yield is based on county history)

- Expected price is based on Chicago Board of Trade futures contracts just as the CRC price is

- Harvest prices are based on CBOT futures contracts monthly average (for corn, it’s the December contract in October; for beans, the November contract in October)

- Limits to price moves exist (for corn - $1.50 per bushel, for soybeans - $3 per bushel) Ruff says you may find yourself not as well protected as you’d like if there’s a weather event and extreme volatility in the marketplace.

- Coverage levels range from 70 to 90 percent of expected revenue

- County revenue is actual county yield times a harvest price

- Yields are NASS released in March following harvest

- Payments are made the year following harvest

- As for indemnity payments under GRIP-HR, payment equals the percent revenue shortfall times the protection level times a “factor” and the factor has a maximum value of “1” to harvest price divided by expected price

- Farmers have two choices to make n coverage level and protection level

- Coverage level can be selected from 70 to 90 percent in 5 percent increments

- Higher coverage levels result in higher insurance payments when they occur

- A higher protection level has a higher indemnity than does a lower protection level election

- Premiums depend on the county and the coverage and protection level chosen by the farmer - and higher coverage and protection levels result in higher premiums

- Group products don’t provide for replant or prevented planting.

Ruff explains that GRIP and GRP are adjusted by the county level. GRP is a “put” option on expected county yield, he compares, noting that GRIP is a “put” option on expected county revenue. A basis risk exists similar to what price options have for basis risk. It’s the difference between the percent of county yield loss and percent of farm yield loss.

GRIP should be considered by farms in strong financial positions and that use pre-harvest marketing.

Finally, he provides an example for GRIP. The expected county yield is 152 bushels and the expected price is $4.06. The coverage level is 90 percent. The revenue guarantee is $555.40. Say the county yield is 150 bushels and the harvest price is $3, resulting in a county revenue of $450 per acre. The result is a revenue shortfall of 0.1898. Take 0.1898 times $555.40 to get the indemnity of $105.41 per acre.

Comments »

Comment on this story

Comments will be approved within 48 hours

Name:

Email: (optional)

Comments:

Image Verification: (Case sensitive)