2012 Crop Insurance UpdateOverview

Feb. 21, 2012

George 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 developments

4. 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. $6.32

Soybeans

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 unit

Basic 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 changes

3. 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. $13.39

Trend 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

Bu

shel

s/A

cre

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

Bu

sh

els

/Ac

re

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

19651967

19691971

19731975

19771979

19811983

19851987

19891991

19931995

19971999

20012003

20052007

40

50

60

70

80

90

100

110

120

130

140

ActualTrend

Year

Pe

rce

nt

of

Tre

nd

=1

00

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 yields

4. 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 = 14 158

2006 158 2 X 6 = 12 170

2007 168 2 X 5 = 10 178

2008 183 2 X 4 = 8 191

2009 164 2 X 3 = 6 170

2010 194 2 X 2 = 4 198

2011 183 1 X 2 = 2 185

Average 170.0 178.0

Increase 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. 11.17

COMBO 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