Transcript No Slide Title

Managing Farm Risk
with Crop Insurance
Jayson K. Harper
Professor of agricultural economics
Department of Agricultural Economics and Rural Sociology
The Pennsylvania State University
Penn State is committed to affirmative action, equal opportunity, and the diversity of
its workforce
Types of Agricultural Risks
• Production
• Marketing
• Financial
• Legal
• Human resource
• Environmental
Risk Management Strategies:
1) Retain
2) Shift
3) Reduce
4) Self-insure
5) Avoid
Crop Insurance
• Objective - provide protection options that
will make it possible to survive a disaster
and return to profitability
• USDA’s primary risk management program
• Highly subsidized by USDA
• Flexible program designed to meet the
needs of individual farming operations
Multi-Peril Crop Insurance (MPCI)
Causes of losses covered:
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Drought (~60%)
excess moisture (~15%)
excess wind
fire
freeze
hail
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tornado
insects
disease
wildlife
failure of irrigation
supply
• volcanic eruptions
and earthquakes
Crops covered by MPCI in Pennsylvania:
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apples (45)
barley (54)
processing beans (15)
cabbage (1)
corn (grain and silage) (66)
forage production (66)
forage seedling (66)
grain sorghum (57)
grapes (1)
green peas (10)
nursery (67)
oats (66)
pasture, rangeland, forage
(66)
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peaches (30)
pears (1)
potatoes (13)
soybeans (51)
fresh-mkt. sweet corn (66)
processing sweet corn (12)
tobacco (3)
fresh-market tomatoes (4)
processing tomatoes (16)
wheat (57)
Also:
– Whole farm Revenue
Protection (WFRP)
– LGM Dairy
– LRP Lamb
– Apiculture
Crop Insurance Program Basics:
1) Determine actual production history (APH) yield
minimum of 4 successive years of records
maximum of 10 successive years of records (5 years for tree
fruits)
<4 years of records: use county T-yields
Transitional yields vary by county and production practices
0 years of records: 65% of county T-yield
1 year of records: 80% of county T-yield
2 years of records: 90% of county T-yield
3 years of records: 100% of county T-yield
Crop Insurance Program Basics:
1) Determine actual production history (APH) yield
(cont.)
Trend Adjusted Yields (TA)
• Option to increase APH yields for corn and
soybean…available since 2013
• Adjustment meant to reflect increases in yields due to
use of GMO hybrids and other technologies
• Important because the APH underlies the guarantees
for both the yield and revenue protection insurance
Crop Insurance Program Basics:
2) Select type of coverage
Yield protection (YP)
Pays for yield losses below a selected coverage level at a price
determined annually by USDA’s Risk Management Agency (based
on CBOT prices if applicable)
Revenue protection (RP)
Pays for revenue losses below a selected coverage level at the
higher of the projected early season or harvest price (as set by the
CBOT futures market). Available only for corn, grain sorghum,
soybean, barley, and wheat.
Revenue protection with harvest price exclusion (RP HPE)
Pays for revenue losses below a selected coverage level at
projected early season price set by the CBOT futures market.
Available only for corn, grain sorghum, soybean, barley, and wheat.
Crop Insurance Program Basics:
3) Select desired coverage level
• 50, 55, 60, 65, 70, or 75% of APH yield
• 80 and 85% coverage levels available for corn, soybeans,
wheat, and barley
50% for catastrophic (CAT) coverage
4) Select desired price election
• From 55% to 100% of projected price
55% for catastrophic risk protection (CAT)…provides only a low
level of protection against yield losses
Crop Insurance Program Basics:
5) Select a unit structure: you have the choice of basic,
optional, or enterprise units
• You receive one basic unit for the land you own and cash
rent in a county
• Each different crop creates a separate unit
• Each crop/county can have a different type of policy
• You can divide basic units into optional units when crop is
grown under distinctly different production practices
• Optional units can also be established by FSA farm serial
number or under sectional equivalents
• An enterprise unit combines all acres of a single crop
within a county into one unit
Premium cost: Optional units > Basic units > Enterprise units
Crop insurance calculations:
Yield guarantee = APH • coverage level
Revenue guarantee = APH yield • coverage level
• applicable price based on CBOT futures price
Premium/acre = Guarantee • premium rate • price
election
Notes:
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CAT program has a $300/crop/county administrative fee (waived for beginning
and limited resource farmers).
MPCI has a $30/crop administrative fee.
Example of farmer paid premiums for yield protection
and revenue protection coverage by unit structure
(130 bu. APH yield, medium risk county)
Coverage
Yield Protection
Revenue Protection
Level
Optional Basic Enterprise Optional Basic Enterprise
85%
80%
75%
70%
65%
60%
55%
50%
$39.94
$28.90
$21.41
$16.54
$13.89
$10.12
$8.29
$6.14
$36.34
$25.34
$18.04
$13.38
$10.76
$7.50
$5.88
$4.14
$27.55
$15.60
$9.22
$6.53
$5.25
$4.17
$3.26
$2.51
$51.88
$37.30
$27.31
$20.82
$17.26
$12.41
$10.09
$7.44
$47.85
$33.28
$23.49
$17.19
$13.71
$9.44
$7.40
$5.23
$36.27
$20.48
$12.00
$8.39
$6.69
$5.24
$4.11
$3.17
Crop insurance calculations:
If actual yield or revenue is less than your guarantee:
Yield Loss payment = (yield guarantee – actual production) •
price election
Revenue Loss payment = (Revenue guarantee – actual revenue)
If actual yield or revenue is equal to or greater than your
guarantee:
Loss payment = 0
Other types of policies:
• Dollar Plan—provides protection against
declining value from damage that
causes a yield loss. Losses are paid
when the value of the crops is less than
the amount of insurance.
– Available in 66 counties for fresh-market
sweet corn
– Available in 66 counties for forage seeding
Other types of policies:
• LGM-Dairy—provides protection against
unexpected declines in market value of
milk minus feed costs. It uses adjusted
futures prices to determine the
difference between expected gross
margin and actual gross margin. Can
be purchased monthly with the option to
buy coverage for 1 to 11 months.
– Available in all counties in Pennsylvania
Other types of policies:
Whole farm revenue protection (WFRP)
Provides protection against loss of revenue
from natural and named causes of loss
and market fluctuations
ENROLLMENT/POLICY CHANGE DEADLINES:
March15: new applications
January 31: renewals/coverage changes
Other types of policies:
Whole farm revenue protection (WFRP)
• Insures the revenue of the entire farm
rather than individual crops by
guaranteeing a percentage of average
gross farm revenue.
• All farm raised crops, animals, and
animal products are eligible for
coverage.
• Uses information from a producer's
Schedule F tax forms to calculate the
policy revenue guarantee.
Other types of policies:
Whole farm revenue protection (WFRP)
• STAND-ALONE POLICY:
covering the
whole farming operation
or
• UMBRELLA TYPE POLICY: selected
crops can also be protected by individual crop
insurance policies.
Note: Loss payments from other insurance count towards the revenue
guarantee.
Other types of policies:
Rainfall Index Pasture and Forage Policy
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Now available statewide
Pays a loss if precipitation in your area
is less than normal minus your
deductible
Your area is a 12 x 12 mile square area
where your farm is located
Flexible: you can insure entire year or
a minimum of two 2-month time
periods, for all or part of your acreage
Enrollment deadline is November 30
Supplemental Coverage Option (SRO)
• If you have Agricultural Risk Coverage
(ARC) through FSA, you are not eligible to
purchase SRO
• Available for corn and soybean for both yield
and revenue protection policies
• Provides additional coverage for a portion of
the deductible on your crop insurance policy
Supplemental Coverage Option (SRO)
• Based on county-level risk
• Heavily subsidized; Feds pay 65% of
premium cost
• Provides the same coverage as your
underlying policy (ie. yield or revenue
protection)
• Losses are triggered by county yield or
revenue
Supplemental Coverage Option (SRO)
Covers losses between the coverage level on
your individual policy and 86% of either
expected county yield or revenue
Example:
• You chose the 75% level of coverage (YP,
RP or RP HPE)…your deductible is 25%
• You purchase the SRO endorsement
• Up to 11% of expected county yield or
revenue is now protected (86% - 75%)
Supplemental Coverage Option (SRO)
Under SRO you’ll now have both individual and
county loss triggers…
It is possible that you could have a loss
payment based on:
1) losses at both the county and farm level
2) losses only at the county level
3) losses only at the farm level
Noninsured Crop Disaster
Assistance Program (NAP)
• Eligible Crops: Agricultural
commodities for which the CAT level of
crop insurance is not available,
including controlled environment crops
(mushrooms and floriculture), industrial
crops, specialty crops (maple syrup and
honey), value loss crops (aquaculture,
Christmas trees, ginseng, ornamentals,
and turfgrass), and certain seed crops.
NAP Program (cont.)
• Eligible producers: a landowner, tenant, or
sharecropper who shares in the risk of
producing an eligible crop (<$900,000 gross
revenue)
• Eligible natural disaster (before or during
harvest):
– Damaging weather (drought, excess moisture)
– Natural occurrence (earthquake, flood)
– Excessive heat, insect infestation, plant disease
NAP Program
Coverage Levels
• Losses of more than 50% expected production
are paid based on a farmers crop acreage,
approved yield, and net production at 55% of
the average market price established by the
FSA state committee (CAT)
• Additional coverage levels of 50, 55, 60 and
65% paid at 100% of the average market price
are available to additional premium
NAP Program Cost
• Must apply to FSA for coverage by state
closing date and pay applicable service
fee ($250/crop/county, max $750/county
and $1,875 multiple counties) Note:
Limited-resource farmers can request waiver of fees
• For higher levels of coverage, 5.25%
premium based on maximum payment
limitation (max $6,525.50 per producer)
NAP Program Reporting
• To remain eligible for NAP assistance
farmers must report crop acreage
information, production practices used,
and the disposition of the harvested
crop (ie., how much was marketable)
Do I need crop insurance?
• Yield variability
• Cash flow requirements
• Self insurance
• CAT coverage
• Premium discounts for higher
levels of coverage
• Whole-farm coverage
(WFRP)
Sales closing dates
JANUARY 31– existing WFRP policies
MARCH 15-- spring seeded crops, new WFRP policies
MAY 31– nursery crops
JULY 31– fall forage seeding
SEPTEMBER 30-- fall seeded crops, forage production,
rainfall index policies
NOVEMBER 20-- fruit crops
NOVEMBER 30– area risk forage production
For more information, visit the
Penn State Crop Insurance Education Web Site:
http://extension.psu.edu/business/crop-insurance
Ag Marketing Issues for 2015
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Continuing low commodity prices
High beef and pork prices
Falling dairy prices
Russia
Strong dollar
Corn Usage
Crop
2004
2010
2013
2014
Feed
57.8% 36.7% 38.2% 38.8%
Food
12.8% 10.8% 10.3% 10.3%
Exports
17.1% 14.0% 14.2% 12.9%
Ethanol
12.4% 38.5% 37.3% 38.0%
World Corn Exports
2009 Crop Year
Brazil
9%
Other
4%
World Corn Exports
2014 Crop Year
US
39%
Argentina
22%
US
65%
Other
31%
Source: USDA
Brazil
18%
Source: USDA
Other mostly Russia and Ukraine
Argentina
12%
Dec ’15: $4.14
Corn Futures Price (CBOT)
Market data is the property of Chicago Mercantile Exchange (CME).Access to this website and use of this market data is subject to the following: (a) Market data is for the recipients own persona
Soybean Notes
• China’s objection to GMO beans is over
• South American crop is huge – up 23%
from last year
Soybean Carryout & Price
Year
Carryout
mil. bu.
Price
Days Use
of carryout
2009
151
$9.59
16
2010
215
$11.30
23
2011
175
$12.50
19
2012
141
$14.40
16
2013
92
$13.00
15
2014
450
$10.20
40.3
Nov ‘15: $9.74
Soybean Futures Price (CBOT)