Impact Popcorn Conversion Factor Popcorn Insurance Liability Indemnity Payments Draft 5-17-15

Impact of the Popcorn Conversion Factor on Popcorn Insurance Liability (Indemnity) Payments

Foreword

This document describes challenges faced by field staff and processors on contracting acres for the purpose of growing commercially usable popcorn. Producers initially, are excited about the opportunity of growing popcorn based on processor’s popcorn premiums however, when the producer checks with their Crop Insurance agent, the sentiment changes.

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ContentsForeword...............................................................................................................................................................................1

List of Tables and Figures......................................................................................................................................................3

Discussion.............................................................................................................................................................................4

Actual Production History.................................................................................................................................................4

Transition Yields................................................................................................................................................................4

Popcorn Conversion Factor...............................................................................................................................................5

First Scenario (Iowa)..........................................................................................................................................................5

Second Scenario (Indiana).................................................................................................................................................8

Third Scenario (Nebraska)...............................................................................................................................................10

Other Types of Insurance Plans Available.......................................................................................................................12

Questions............................................................................................................................................................................12

Conclusion...........................................................................................................................................................................13

Bibliography........................................................................................................................................................................14

List of Tables and Figures

Table 1 –Suggested 2011 Premium Guarantees for Popcorn and Corn.................................................................................6Table 2 – 2012 Premium Guarantees for Popcorn and Corn.................................................................................................6Table 3 – 2013 Premium Guarantees for Popcorn and Corn.................................................................................................7Table 4 - Suggested 2011 Premium Guarantees for Popcorn and Corn................................................................................8Table 5 - 2012 Premium Guarantees for Popcorn and Corn..................................................................................................8Table 6 - 2013 Premium Guarantees for Popcorn and Corn..................................................................................................9Table 7 - Suggested 2011 Premium Guarantees for Popcorn and Corn..............................................................................10Table 8 - 2012 Premium Guarantees for Popcorn and Corn................................................................................................11Table 9 - 2013 Premium Guarantees for Popcorn and Corn................................................................................................11

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DiscussionActual Production History

Actual Production History (APH) and Yield Protection policies insure producers against yield losses due to natural causes such as drought, excessive moisture, hail, wind, frost, insects, and disease. The farmer selects the amount of average yield he or she wishes to insure; from 50% to 85%. If the harvest is less than the yield insured, the farmer is paid an indemnity based on the difference. Indemnities are calculated by multiplying this difference by the insured percentage of the selected price. (Shields, 2012)

Proving an APH yield requires records for a minimum of four years and a maximum of ten years for each insurance unit. Information used to prove crop yields include sale receipts, farm or commercial storage records, and feed consumption records. The records must be for continuous years, starting with the most recent year and continuing back in time. Once a missing year is reached, no history prior to that date may be used. For example, if a producer has nine years of production records spanning a ten-year period, only the years after the missing one are counted. It is not allowed to drop a yield from one year because of poor production in that year. An exception is made if the crop being insured was not planted in a certain year. In that case, a zero acreage report is submitted and continuous records are maintained even without data for that year. This is important for growers who rotate crops and those who have summer fallow acres that are normally not planted to the same crop continuously. (Iowa State University, 2012)

Transition Yields

If at least four successive years of records are not available, a transition or T yield for each missing year must be substituted. Each county has a different T yield. It is based on the 10-year historical county average yield. Growers with no records are assigned 65 percent of the T yield as their APH yield (see the example). Growers with a record for one year receive 80 percent of the T yield for the other three years. With two records, they receive 90 percent of the T yield, and with three records, they receive 100 percent of the T yield for the one remaining year needed to calculate the APH. Once each year has been assigned a yield, the APH is just a simple average of the four yields. (Iowa State University,2012)

A new farmer or one who has never planted the crop to be insured will receive 100 percent of the T yield for the APH. If the crop continues to be planted for four years, the T yields will be replaced with the actual production each year. New producers who have previously been closely associated with farming a particular unit, such as children taking over a family farm, can use the previous operator’s records to establish an APH yield. (Iowa State University, 2012)

Once four years or more of production history are available, the APH is the simple average of all of the yearly reported yields. The four years of history will eventually build to ten years. After ten years of history are reached, the APH becomes a moving ten-year average yield. As each new year of production history is added, the oldest record is dropped out of the calculation. (Iowa State University, 2012)

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Popcorn Conversion Factor

The Popcorn Revenue Coverage (Pilot) Crop Provisions state that the projected and harvest prices for popcorn shall be established as the “price for grain type corn determined in accordance with the [CEPP] multiplied by a factor published in the actuarial documents.” The Special Provisions of Insurance for Popcorn Yield Protection authorizes use of this same factor in determining the price election. In addition, the factor effectuates a change in the unit of measure, converting the prices from a grain type corn price per bushel basis to a popcorn price per pound basis. The factor was provided by the submitter of the Popcorn Revenue Coverage (Pilot) Program. (W & A Crop Insurance Division, 2011)

Since the price of popcorn is substantially higher than that of dent corn, determining both the projected price and the harvest price constituted a key component of the development of a revenue-based product for popcorn. Fortunately, popcorn competes strongly for acreage with dent corn, and therefore the production incentives for these two crops are closely linked. Popcorn is generally priced at a fixed differential or as a percentage of the price of field corn at the beginning of the crop year. The relationship does not float during the growing season; as a result growers carry price risk. In recent years, most of contracts have shifted to a “futures factor” model, wherein the price is set as the futures market price, converted to dollars per pound, multiplied by a fixed factor. As a result, the developer determined a constant conversion factor could be applied to both the base and harvest prices to convert corn futures prices (and therefore the revenue projected and harvest prices for dent corn) to popcorn values. (W & A Crop Insurance Division,2011)

The projected price for a producer who chooses revenue protection or revenue protection with the harvest price exclusion equals the projected price for corn determined in accordance with the Commodity Exchange Price Provisions (CEPP) multiplied by a factor contained in the actuarial documents. (USDA, 2011)

The harvest price for a producer who chooses revenue protection will be the harvest price for corn determined in accordance with CEPP multiplied by the same factor that was used to establish the projected price. (USDA, 2011)

First Scenario (Iowa)

Producer has interested in growing popcorn. Processor calls on the Producer to contract acres Producer states that his average popcorn yield history is 3808 pound per acre. His field corn average bushels per acre are 173. Farm is non-irrigated and wholly owned by the producer. Grower turns down contract based on lack of insurance coverage.

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In 2011, the factor was suggested to be 0.0459 in Watts & Associates; Popcorn Revenue Coverage Pilot Program Supporting Materials. When comparing popcorn to corn, you can see that the premium liability is just slightly higher on popcorn than corn. This difference is only about 1% of the total Premium liability per acre.

Premium Guarantee - Popcorn Premium Guarantee - Corn

3808 Lbs. / Acre 173 Bushels / Acre75% Percentage Coverage Level 0.75 Percentage Coverage Level

2856 Pounds Covered / ac 130 Bu. Covered / Acre

$ 5.65 Projected Price per bu. of Corn $ 5.65 Projected Price per bu. of Corn0.0459 Popcorn Conversion Factor 1 Corn Conversion

$ 0.26 Price per Lb. of Popcorn $ 5.65 Price per Bu of Corn

2856 Pounds covered / ac 130 Bu. Covered / Acre $ 0.26 Price per Lb. of Popcorn $ 5.65 Projected Price per bu. of Corn

$ 741 Premium Liability per Ac $ 733 Premium Liability per AcTable 1 –Suggested 2011 Premium Guarantees for Popcorn and Corn.

In CY 2012, the CEPP changed the conversion factor from the suggested 0.0459 (W & A Crop Insurance Division,2011) to 0.0400 (USDA, 2011), effectively reducing the conversion factor nearly 13%. In the example given below, this reduction calculates out to an $88 loss in guaranteed dollars per acre.




$ 5.65 Projected Price per Bu. of Corn $ 5.65 Projected Price per bu. of Corn

0.0400 Popcorn Conversion Factor 1 Corn Conversion $ 0.23 Price per Lb. of Popcorn $ 5.65 Price per Bu of Corn

2856 Pounds Covered / Acre 130 Bu. Covered / Acre

$ 0.23 Price per Lb. of Popcorn $ 5.65 Projected Price per bu. of Corn $ 645 Premium Liability per Ac $ 733 Premium Liability per Ac

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Table 2 – 2012 Premium Guarantees for Popcorn and Corn.

In CY 2013, the CEPP changed the conversion factor from 0.0400 (USDA, 2011) to 0.0368 (USDA, 2012), an 8% reduction from the previous year and nearly 20% reduction from the first year. This reflects a $147 loss in guaranteed dollars per acre from the suggested 2011 factor to CY 2013.


3808 Lbs. / Acre 173 Bushels / Acre0.75 Percentage Coverage Level 0.75 Percentage Coverage Level


$ 5.65 Projected Price per Bu. of Corn $ 5.65 Projected Price per bu of Corn0.0368 Popcorn Conversion Factor 1 Corn Conversion


2856 Pounds Covered / Acre 130 Bu. Covered / Acre $ 0.21 Price per Lb. of Popcorn $ 5.65 Projected Price per bu of Corn

$ 594 Premium Liability per Acre $ 733 Premium Liability per Ac

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Table 3 – 2013 Premium Guarantees for Popcorn and Corn.

Second Scenario (Indiana)

Long time popcorn producer has interest in passing the farm down to his son. Processor calls on the Producer to contract acres. Their farm yields average yields of 3843 lbs. / ac popcorn and 175 bu. / ac Field Corn. Farm is non-irrigated and wholly owned by the producer. Grower decides not to grow based on the lack of insurance coverage guarantee when meeting with his Load Officer for this year’s Operation Loan.

In 2011, the factor was suggested to be 0.0459 in Watts & Associates; Popcorn Revenue Coverage Pilot Program Supporting Materials. When comparing popcorn to corn, you can see that the premium liability is just slightly higher on popcorn than corn. This difference is only about 1% of the total Premium liability per acre.







$ 747 Premium Liability per Ac $ 742 Premium Liability per AcTable 4 - Suggested 2011 Premium Guarantees for Popcorn and Corn.









Table 5 - 2012 Premium Guarantees for Popcorn and Corn.

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$ 5.65 Projected Price per Bu. of Corn $ 5.65 Projected Price per bu. of Corn0.0368 Popcorn Conversion Factor 1 Corn Conversion


2882 Pounds Covered / Acre 131 Bu. Covered / Acre $ 0.21 Price per Lb. of Popcorn $ 5.65 Projected Price per bu. of Corn

$ 599 Premium Liability per Acre $ 742 Premium Liability per AcTable 6 - 2013 Premium Guarantees for Popcorn and Corn.

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Third Scenario (Nebraska)

Potential Grower is interested in growing popcorn and wants to grow. When he meets with his crop insurance agent, he finds out that his county, Dodge, isn’t listed on the Popcorn Pilot Program. Crop Insurance agent, not familiar with popcorn, states that there is not insurance coverage for Dodge count for Popcorn.

Coverage in other counties may also be available by individual written agreement if certain criteria are met, including records for at least three years of actual production history (APH). Contact a crop insurance agent for more information. (USDA, 2013) Crop Insurance agents will often look at T-Yields of adjacent counties that are listed under the Popcorn Pilot Program or have history growing popcorn. For this scenario, we will look at Colfax County, Nebraska. The averages in this county are 4198 lbs. / ac of popcorn and 176 bu. / ac of field corn.

In 2011, the factor was suggested to be 0.0459 in Watts & Associates; Popcorn Revenue Coverage Pilot Program Supporting Materials. When comparing popcorn to corn, you can see that the premium liability is about 9% higher on popcorn than corn. This comes out to approximately $71 / acre premium over corn.







$ 817 Premium Liability per Ac $ 746 Premium Liability per AcTable 7 - Suggested 2011 Premium Guarantees for Popcorn and Corn.

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Table 8 - 2012 Premium Guarantees for Popcorn and Corn.





$ 5.65 Projected Price per Bu. of Corn $ 5.65 Projected Price per bu. of Corn0.0368 Popcorn Conversion Factor 1 Corn Conversion


3149 Pounds Covered / Acre 132 Bu. Covered / Acre $ 0.21 Price per Lb. of Popcorn $ 5.65 Projected Price per bu. of Corn

$ 655 Premium Liability per Acre $ 746 Premium Liability per Ac Table 9 - 2013 Premium Guarantees for Popcorn and Corn.

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Other Types of Insurance Plans Available

Group Risk Plan (GRP) insures against widespread loss of production based on county average yields. When the county yield (T-Yield) for the insured crop, as determined by the National Agricultural Statistics Service (NASS), falls below the trigger level chosen by the farmer, an indemnity is paid regardless of the individual farmer’s actual yield. Yield levels are available for up to 90% of the expected county yield. GRP protection involves less paperwork and costs less than the farm-level coverage described above. However, individual crop losses may not be covered if the county yield does not suffer a similar loss. This insurance is suitable for farmers whose crop losses typically follow the county pattern. (Shields, 2012)

Group Risk Income Protection (GRIP) makes indemnity payments only when the average county revenue for the insured crop falls below the revenue chosen by the farmer. (Shields, 2012)

Revenue Protection (RP) insures producers against yield losses due to natural causes such as drought, excessive moisture, hail, wind, frost, insects, and disease, and revenue losses caused by a change in the harvest price from the projected price. The producer selects the amount of average yield he or she wishes to insure; from 50% to 75% (in some areas to 85%). The projected price and the harvest price are 100% of the price determined by futures contracts. The amount of insurance protection is based on the greater of the projected price or the harvest price. If the harvested plus any appraised production multiplied by the harvest price is less than the amount of insurance protection, the producer is paid an indemnity based on the difference. (Shields, 2012)

Revenue Protection With Harvest Price Exclusion insures producers in the same manner as Revenue Protection, except the amount of insurance protection is based on the projected price only (i.e., the amount of insurance protection is not increased if the harvest price is greater than the projected price). (Shields, 2012)

Questions

1. Why the reduction in Popcorn Conversion Factor?2. What factors are taken into consideration to alter the Popcorn Conversion Factor? 3. What data is utilized in calculating the conversion factor?4. Is the addition of counties to the pilot program (insurance coverage) possible?

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Conclusion

In result of the data provided in this report, there has been a dramatic drop in the conversion factor reducing the overall liability for the crop insurance agencies to provide crop insurance coverage per acre for popcorn. The reduction of the conversion factor by nearly 20% in the Indiana and Iowa examples effectively reduces the guaranteed dollars per acre for the producer by the same amount. The Nebraska example showed a similar drop in coverage but not as drastic. This reduction in coverage influences the decision of the individual producer when deciding which crops to grow next year.

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BibliographyIowa State University. (2012). Proven Yields and Insurance Units for Crop Insurance. Iowa State University.

Shields, D. A. (2012). Federal Crop Insurance: Background. Congressional Research Service.

USDA. (2011). Informational Memorandum: PM-11-055. Kansas City.

USDA. (2011). Popcorn Revenue Insurance Standards Handbook: 2012 and Succeeding Crop Years.

USDA. (2012). Informational Memorandum: PM-12-058. Kansas City.

USDA. (2013). 2013 Nebraska Commodity Insurance Fact Sheet - Popcorn. RMA.

W & A Crop Insurance Division. (2011). Popcorn Revenue Coverage Pilot Program Supporting Materials.

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Documents

Impact Popcorn Conversion Factor Popcorn Insurance Liability Indemnity Payments Draft 5-17-15