2012 Crop Insurance Update Overview

2012 Crop Insurance UpdateOverview

Feb. 21, 2012George Patrick

Purdue University

For specific information, contact a crop insurance agent

Reference

http://www.farmdoc.illinois.edu/ cropins/index.asp

1. Premium calculator 2. “What if?”3. Analysis of developments4. RMA/FCIC Handbook

Changes in 2011

Reduced insurance programs available for corn and soybeans

• Combined CRC and RA (COMBO)• Eliminated Income Protection Plan

(IP)• Established uniformity in prices used

across policies

2011 Prices used in IN

Corn Projected – Dec. futures in Feb. $6.01 Harvest – Dec. futures in Oct. $6.32Soybeans

Projected – Nov. futures in Feb. $13.43 Harvest – Nov. futures in Oct. $12.14 Use the hlgher of projected or harvest

prices Limit of 2X price increase

Effects of price increases on revenue products

Corn price increased by $0.31 to $6.32/bu. (4.9% increase)

Volatility affects price changes – greater volatility-larger changes

Higher price increases the insurance guarantee level (bushels X price)

Any indemnity is paid at higher price

Effects of price reductions on revenue products

“Use higher of projected or harvest price”Soybean price decrease of $1.29 (9.6%)

from spring (projected) to harvest results in guarantee level using $13.43

Producer has nearly a 10% revenue loss on price alone

Any indemnity is paid at the $13.43 rate

Premium subsidy increased for enterprise unit

Insurance unitBasic unit (land owned or share leased from a landowner)

Optional (divides into smaller units)Enterprise unit all of crop within the county

Premium Subsidies – 2012

c

Level of Insurance Coverage

Insurance 65% 70% 75% 80% 85% 90% Basic 0.59 0.59 0.55 0.48 0.38 NA

Optional

Enterprise

0.59

0.80

0.59

0.80

0.55

0.80

0.48

0.68

0.38

0.53

NA

NA

GRP NA 0.59 0.59 0.55 0.55 0.51 GRIP NA 0.59 0.59 0.55 0.49 0.44

Changes for 2012

1. Price change effect on crop insurance costs

2. Premium rate changes3. Effect of trend yield

adjustment Effect on insurance in 2012

‘12 Premium Rate Changes

Loss ratio has been below target rate for much of the Corn Belt

IN premium rates have been adjusted downward an average - 11 % for corn- 7 % for soybeans

2012 Projected Prices

Based on settlement prices for Feb. Have only first two weeks of Feb.

Corn $5.74 v. $6.01 Beans $12.35 v. $13.39Trend adjusted coverage in ‘12 Corn slightly up, beans slightly down

Trend Adjusted Yield

Indiana Corn Yields Yields increase about 2 bu./yr

10-year average of actual yield underestimates next year’s corn yield by about 10 bushels

% coverage level is over stated

Trend Adjusted Yield

Corn producer with a 10-year APH yield of 175 bu. and county yield trend of 2 bu./yr. has expected yield of 185 bu.

75% of 185 bu. = 138.75 bu.75% of 175 bu. = 131.25 bu.

Figure 1. Actual Corn Yields in Bu/Acre, Randolph County, 1965-07

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

0

20

40

60

80

100

120

140

160

180

Actual

Year

Bus

hels

/Acr

e

Figure 2. Actual and Trend Corn Yields in Bu./Acre Randolph County 1965-07 (trend 1.7 bu/year)

0

20

40

60

80

100

120

140

160

180

Actual

Trend

Year

Bus

hels

/Acr

e

Figure 3. Actual Corn Yields as a Percent of Trend, Randolph County 1965-07

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

40

50

60

70

80

90

100

110

120

130

140

ActualTrend

Year

Perc

ent o

f Tre

nd =

100

Detrending Procedure

Does a good job of helping a producer better understand the magnitude and frequency of losses.

Does not correct very well for the decreasing level of protection

Procedures

1. Get about 40 years of county yield data

2. Estimate regression to determine trend for farms in the county

3. Adjust past crop insurance yields4. Recompute yield guarantee and

insurance premium

TA Yield Determination

Assume 170 bu. average yield with 2 bu./yr. trend

Have yields for 7 years – 2005 to 2011

Determine TA yield for 2012

TA Yield Determination

Year Actual Yield Yield Adjustment

TA Yield

2005 144 2 X 7 = 14 1582006 158 2 X 6 = 12 1702007 168 2 X 5 = 10 1782008 183 2 X 4 = 8 1912009 164 2 X 3 = 6 1702010 194 2 X 2 = 4 1982011 183 1 X 2 = 2 185

Average 170.0 178.0Increase in APH

8 bu. or 4.7%

TA Yield – Trigger Yield and Increased Premium

Regular yield 75% 127.5 bu.

TA yield 75% 133.5 bu.

Yield prot 75% 11.14 v. 11.17COMBO 75% 21.39 v. 21.65

Crop Insurance, Indiana 2006 and 2011

Type of Insurance

APHCRC

IPRA

GRPGRIP

COMBO

TOTAL ACRES (1,000)

Corn% of insured acres

’06 ’1111.9 5.8

28.6 NA 0.6 NA

27.7 NA 3.8 1.8

27.4 13.1 NA 81.7

3,747.9 3839.5

Soybeans% of insured acres

’06 ‘1113.4 6.620.9 NA 0.7 NA 2.6 NA6.8 3.223.8 11.2 NA 79.1

4,383.4 3,833.1