Department of Economics Where are we with today’s economics and crop insurance? Chad Hart 515-294-9911 2008 Fall Agronomy In-Service

Department of EconomicsDepartment of Economics

Where are we with today’s economics and crop insurance?

Chad [email protected]

515-294-9911

2008 Fall Agronomy In-Service TrainingAmes, Iowa

September 18, 2008

Department of Economics

Production Value

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Crops Livestock

Source: USDA-ERS


Purchased Inputs

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Source: USDA-ERS


Net Farm Income

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Value of agricultural sector production Purchased inputs Net farm income

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Historical Iowa Corn Production Costs

Source: Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-21.pdf

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Historical Iowa Soybean Production Costs


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Iowa Corn Prices vs. Costs

Source: USDA-NASS and Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-21.pdf

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Season-average Price Cost


Iowa Soybean Prices vs. Costs


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Iowa Corn after Soybeans Estimated Costs per Acre, Jan. 2008



Iowa Herbicide Tolerant Soybeans after Corn Estimated Costs per Acre, Jan. 2008



Urea Prices

Source: http://www.fertilizerworks.com/html/market/TheMarket.pdf


DAP Prices



Ammonia Prices



Crude Oil Prices

Source: DOE – Energy Information Administration

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Crude Oil Prices

Source: DOE – Energy Information Administration

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Crop Costs for Central Illinois

Source: Schnitkey, July 2008

Corn Soybeans

2008 2009%

Change2008 2009

% Change

($/acre) ($/acre)

Fertilizer 118 215 82% Fertilizer 45 98 118%

Fuel and Oil 19 26 37% Crop Ins. 8 12 50%

Crop Ins. 20 27 35% Utilities 3 4 33%

Seed 62 78 26% Seed 42 53 26%

Utilities 4 5 25% Fuel and Oil

18 22 22%

Total Non-land Costs

388 529 36% Total Non-land Costs

239 321 34%


Rough Estimates for 2009 Iowa Corn

Non-landCost

Land Cost

Total Cost

Expected Yield

Cost per Bushel

($/acre) (bu/acre) ($/bu)

513.05 190.00 703.05 165 4.26

513.05 225.00 738.05 165 4.47

513.05 260.00 773.05 165 4.69

December 2009 Corn Futures = $5.855 (9/17/08)


Rough Estimates for 2009 Iowa Soybeans

Non-landCost

Land Cost

Total Cost

Expected Yield

Cost per Bushel

($/acre) (bu/acre) ($/bu)

268.10 190.00 458.10 49 9.35

268.10 225.00 493.10 49 10.06

268.10 260.00 528.10 49 10.78

November 2009 Soybean Futures = $11.12 (9/17/08)


Iowa Corn Prices vs. Costs


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Average Net Return per Bushel (1972-2007) -$0.07


Iowa Soybean Prices vs. Costs


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Average Net Return per Bushel (1972-2007) $0.31


Net Return OutlookWith costs racing to catch to prices we’ve

seen over the past couple of years, net returns are tightening

So far, the outlook for 2009 looks better than the historical average

But with the volatility we’ve seen across many markets, things can change quickly


Crop InsuranceOne of many risk management strategies

Traditionally set up to protect farmers in times of low crop yields

Also offers coverage for low prices

Available on over 100 commodities


Historical Crop Insurance Participation

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87

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Mill

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Acr

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Yield Revenue


Why Crops Fail

44%

4%22%

3%

6%

8%

13% DroughtHeatExcess MoistureCold Wet WeatherFreezeHailOther


Crop Insurance Subsidies

Coverage Level Subsidy %50% - 55% 67%55% - 65% 64%65% - 75% 59%75% - 80% 55%80% - 85% 48% 85% 38%


Types of Crop Insurance

Individual Yield (APH)

Area Yield (GRP)

Individual Revenue (CRC, IP, RA)

Area Yield - Individual Revenue Combination (GRIP)


Individual Yield Insurance (APH)

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

In 2008, 1.36 million acres of Iowa corn and 1.09 million acres of Iowa soybeans were covered with an APH policy


Individual Revenue Insurance(CRC, IP, RA)

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

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


Individual Revenue Insurance(CRC, IP, RA)

CRC and RA have a “harvest price option”

If the harvest price is greater than the planting price, then the harvest price is used in all calculations

In 2008, 9.58 million acres of Iowa corn and 7.17 million acres of Iowa soybeans were covered with individual revenue policies


Iowa Crop Insurance Figures

Average producer-paid crop insurance premium in Iowa

- Corn $22.74/acre

- Soybeans $17.57/acre

Most typical coverage

- Both crops 75% RA


Iowa Crop Insurance Figures

Average crop insurance liability in Iowa

- Corn $640.14/acre

- Soybeans $459.77/acre

Total Iowa crop insurance producer-paid premiums

- 2007 $279 million

- 2008 $421 million


Iowa Crop Insurance Premiums & Prices

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Producer-Paid Premiums Corn RA Price Soy RA Price


Iowa Crop Insurance Premiums & Prices

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Producer-Paid Premiums Soy RA Price 2.2*Corn Price


Average Producer-Paid Premiums

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Corn Soybeans

For RA, APH and CRC graphs would look similar


Insurance Price Settings for 2009

For revenue products, usually set by the Feb. average on harvest-time futures (Nov. for soybeans, Dec. for corn)

For APH, price is based on USDA estimates for season-average price


Farm Bill Twist

Starting in 2009, farmers will need to participate fully in crop insurance and non-insured crop assistance programs to qualify for the federal government’s new disaster assistance program (SURE)

SURE guarantees and payments are tied to crop insurance decisions


Thanks for your time!

Any questions?

Documents

Department of Economics Where are we with today’s economics and crop insurance? Chad Hart 515-294-9911 2008 Fall Agronomy In-Service