Transcript Sensitivity Analysis

Getting a Grip
on GRIP
Gary Schnitkey
Agricultural
Economist
University of Illinois
1
Topics
1.
2.
3.
4.
Illinois versus Iowa experience
How GRIP works
Risks/Returns
Situations where it works
2
GRIP
 GRIP (Group Risk Income Plan) is revenue
insurance based on county yields
– GRIP-NoHR (No Harvest Revenue option) –
much like RA with base price option
– GRIP-HR (Harvest Revenue option) – much
like CRC or RA with harvest price option
 GRIP is the revenue counterpart to the
county-level yield insurance GRP (Group Risk
Plan)
3
Group Products Akin To
Group
GRP
Akin to
APH
Insurance Type
Yield
GRIP-NoHR
IP, RA with
base price
Revenue – no
guarantee increase
GRIP-HR
CRC, RA with
harvest price
Revenue guarantee increase
4
Introduced in I states
Introduced
GRP (Group Risk Plan)
1995
GRIP-NoHR
1999
(Group Risk Income Plan -- No Harvest
Revenue option)
GRIP-HR
2004
(GRIP -- Harvest Revenue option)
5
Group Product Use, Corn,
Illinois
Percent of Insured Acres
12
Iowa 2005 Use
GRP – 1.2%
GRIP – 3.6%
10
8
GRIP
6
4
GRP
2
0
1997
1998
1999
2000
2001
Year
2002
2003
2004 2005P
6
Group Product Use,
Soybeans, Illinois
Percent of Insured Acres
14
Iowa 2005 Use
GRP – 1.9%
GRIP – 4.7%
12
10
8
GRIP
6
GRP
4
2
0
1997
1998
1999
2000
2001
2002
2003
2004 2005P
Year
7
Percent of Iowa Counties
Receiving GRIP-NoHR Payments
for Corn, 1999 -2004
Year
1999
2000
2001
2002
2003
2004
---------- Coverage Level -----------90%
85% 80% 75% 70%
54% 30% 11%
4% 2%
66
22
2
1
0
72
49
25
11
1
3
3
3
1
1
3
0
0
0
0
82
72
41
16
1
AVG
47%
29%
13%
6%
1%
8
Percent of Iowa Counties
Receiving GRIP-NoHR Payments
for Soybeans, 1999 -2004
Year
1999
2000
2001
2002
2003
2004
---------- Coverage Level -----------90% 85%
80% 75% 70%
19%
9%
4%
2%
2%
69
57
31
18
6
46
19
8
4
1
0
0
0
0
0
30
15
9
7
5
95
85
71
51
23
AVG
43%
31%
21%
14%
6%
9
How GRIP Works
Marshall County, Iowa
2005 Example
10
Parameters in 2005
County:
Marshall County, Ia
Crop:
Corn
Expected Yield: 164.3 *
Expected Price: $2.38 **
* County specific, set by RMA
** Settlement prices during February
(Next year for entire month)
11
Farmer choices
Protection Level
Choice from within
GRP
Max
$579
Min
$323
range
GRIP
$587
$346
Max varies by year, based on formula
Max results in highest premiums and
highest payments, when they occur
12
Farmer choices
Coverage Level
70% to 90%
Suggestion:
Take highest coverage level
Change payment/premium by
lowering protection level
13
2005 Per Acre Premiums,
Marshall County, Iowa
(100% Protection Level, Corn)
Coverage
Level
GRP
70%
$3.96
75%
4.80
80%
6.17
85%
6.89
90%
8.60
GRIP-NoHR
$2.96
4.24
6.90
10.00
15.92
GRIP-HR
$5.51
7.22
10.58
13.85
20.25
14
Per Acre Guarantees,
90% Coverage Level
Type
Coverage level
x Expected yield
x Price
Guarantee
GRP GRIP-NoHR
Yield
Revenue
.90
.90
164.3
164.3
xxx
$2.38
147.9 bu
$352
GRIP-HR
Revenue
.90
164.3
$2.38 @
$352 @@
@ Higher of expected or harvest price
@@ Will be higher when harvest price > expected
price
15
Payment example
“Typical” Year
 Actual yield = 170 bu.
 Harvest price = $2.00
 Guarantees on previous slide (90% cov level)
Shortfall = (Guarantee – Actual)/Guarantee
when Guarantee > Actual
GRP: .000 (147.9 guarantee < 170 actual)
GRIP-NoHR: ($352 - (170*2)) / $352 = .034
GRIP-HR:
($352 - (170*2)) / $352 = .034
16
Payments (Max Protection
Level, 90% Coverage Level)
Prot. level
X shortfall
X price factor
Payment
GRP
$579
.000
xxx
$0
GRIP-NoHR
$587
.034
xxx
$20
GRIP-HR
$587
.034
1.00 *
$20
* Higher of (harvest price / expected price) or 1
17
Payment example
“Drought” Year
 Actual yield = 130 bu.
 Harvest price = $3.00
Shortfall = (Guarantee – Actual)/Guarantee
when Guarantee > Actual
GRP: (147.9 – 130) / 147.8 = .121
GRIP-NoHR: .000 Guarantee < actual ($390)
GRIP-HR:
($443 - (130x3)) / $443 = .120
18
Per Acre Guarantees, Revised
90% Coverage Level
Type
Coverage level
x Expected yield
x Price
Guarantee
GRP GRIP-NoHR
Yield
Revenue
.90
.90
164.3
164.3
xxx
$2.38
147.9 bu
$352
GRIP-HR
Revenue
.90
164.3
$3.00 @
$443 @@
@ Higher of expected or harvest price
@@ Will be higher when harvest price > expected
price
19
Payments (Max Protection
Level, 90% Coverage Level)
GRP
Prot level
$579
X shortfall
.121
X price factor xxx
Payment
$70
GRIP-NoHR
$587
.000
xxx
$0
GRIP-HR
$587
.120
1.26 @
$89
@ Higher of (harvest price / expected price) or 1
(3.00 harvest price / 2.38 expected price) = 1.26
20
GRP Shortfalls, Marshall County,
Iowa, Corn (90% coverage level)
Year
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Expected
Yield
131.1
133.2
133.2
135.3
136.5
137.6
146.7
146.7
150.1
158.4
Final
Yield
133.7
139.4
136.4
144.5
153.8
144.0
150.5
181.8
175.9
183.2
GRP
Shortfall (90%)
0
0
0
0
0
0
0
0
0
0
21
200
180
160
140
120
100
80
60
40
20
0
1993
1988
20
02
19
99
19
96
19
93
19
90
19
87
19
84
19
81
19
78
1977
19
75
19
72
Bu. per Acre
Marshall County, Corn
Yields
Year
22
GRIP Shortfalls, Marshall County,
Iowa, Corn (90% coverage level)
Year
1999
2000
2001
2002
2003
2004
Expected Harvest
Price
Price
2.40
1.96
2.54
2.11
2.45
2.05
2.30
2.43
2.38
2.37
2.93
1.99
GRIP
Shortfall (90%)
0
.034
.046
0
0
.127
Shortfalls the same for GRIP-NoHR and GRIPHR.
23
GRP Shortfalls, Marshall County, Iowa,
Soybeans (90% coverage level)
Year
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Expected
Yield
45.2
46.6
46.6
47.7
51.8
52.6
53.4
52.5
53.1
53.6
Final
Yield
50.6
49.2
50.4
51.6
50.3
45.2
49.7
53.5
31.7
51.6
GRP
Shortfall (90%)
0
0
0
0
0
.045
0
0
.336
0
24
GRIP Shortfalls, Marshall County,
Iowa, Corn (90% coverage level)
Year
1999
2000
2001
2002
2003
2004
Expected
Price
4.95
5.36
4.59
4.53
5.23
7.27
Harvest GRIP
Price
Shortfall (90%)
4.85
0
4.72
.129
4.37
.013
5.45
0
7.32
.058
5.26
.183
Shortfalls the same for GRIP-NoHR and GRIPHR.
25
Risk/returns
www.farmdoc.uiuc.edu/cropins/index.html
26
Crop Insurance Evaluator:
For an example farm in each county for
corn and soybeans shows the
following for different insurance
product:
 Frequency of payments
 Premiums
 Average payments
 Net costs
 Ability to prevent disasters
27
Marshall County, Corn
 “Average” farm for county
 159 bu. APH yield, average
variability
 Evaluations shown for 2005 year
 Evaluations based on maximum
protection level
28
 Frequency of payments
 Example of tables from Evaluator
29
1% VAR
 A 1% VaR of $200 means that
1% of the time revenue will be
below $200
 Measure of risk reduction
 Want VaRs to be as high as
possible
30
1% VaR from Evaluator
$ per acre, Corn
Level
65%
75%
85%
90%
APH
203
221
243
CRC
212
231
247
GRP
198
205
213
GRIP-NoHR
205
216
223
GRIP-HR
204
217
226
 Group products lower risk less than Individual
products
 Low coverage Individual not as “good” as high
coverage Group
31
Net Costs
 Average payments over time
minus premium
 High levels indicate high costs,
negative levels mean expect
more insurance payments than
premium over time
32
Net Costs from Evaluator
$ per acre, Corn
Level
65%
75%
85%
90%
APH
1.45
1.74
3.76
CRC
2.26
2.04
4.77
GRP
.78
-4.65
-9.77
GRIP-NoHR
-3.94
-12.50
-17.13
GRIP-HR
-4.65
-17.87
-26.47
 Individual products have higher costs than Group
products
33
Marshall County, Soybeans
 “Average” farm for county
 50 bu. APH yield, average
variability
 Evaluations shown for 2005 year
 Evaluations based on maximum
protection level
34
1% VaR from Evaluator
$ per acre, Soybeans
Level
65%
75%
85%
90%
APH
166
183
203
CRC
174
192
207
GRP
GRIP-NoHR
GRIP-HR
159
165
168
162
173
179
164
175
180
 Group products lower risk less than Individual
products
 Low coverage Individual not as “good” as high
coverage Group
35
Net Costs from Evaluator
$ per acre, Soybeans
Level
65%
75%
85%
90%
APH
.57
.81
1.48
CRC
1.06
.93
2.89
GRP
GRIP-NoHR
-.56
-3.18
-5.31
-2.66
-7.96
-10.52
GRIP-HR
-2.68
-8.95
-12.60
 Individual products have higher costs than Group
products
36
Risk/Returns Summary
 Group products cost less than
individual products. Over time,
group products may average
more in payments than paid in
premiums
 Group products reduce risk less
than individual farm products
37
Situations Where Group
Products Work:

Farm-yields either:
1. Closely follow county-yields (i.e., large
farm), or
2. Are above county-yields



Farm has low APH
Farm is in relatively strong financial
position
Tend to work best in “good”
producing counties
38
Situations Where Group
Products Do Not Work as
Well:
 Highly leveraged farms
 Farms where re-planting occurs
often
 Hail is a major concern
 Farms with high-risk farmland
39
Summary
 GRIP does fit certain situations
 Represent another option in the
risk management tool kit
40