2012 Crop Insurance Update Overview

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% Basic 0.59 0.59 0.55 Optional Enterprise GRP 0.59 0.80 NA 0.59 0.80 0.55 0.80 0.59 0.59 GRIP NA 0.59 0.59 80% 0.48 85% 0.38 0.48 0.38 0.68 0.55 0.55 0.55 0.49 90% NA NA NA 0.51 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, 1965-07 180 160 140 120 100 80 60 40 20 0 1965 1970 1975 1980 1985

Year

1990 1995 2000 2005 Actual

Figure 2. Actual and Trend Corn Yields in Bu./Acre Randolph County 1965-07 (trend 1.7 bu/year) 180 160 140 120 100 80 60 40 20 0 1965 1970 1975 1980 1985

Year

1990 1995 2000 2005 Actual Trend

Figure 3. Actual Corn Yields as a Percent of Trend, Randolph County 1965-07 140 130 120 110 100 90 80 70 60 50 40 1965 1970 1975 1980 1985

Year

1990 1995 2000 2005 Actual Trend

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 2005 2006 2007 2008 2009 2010 2011 Average Actual Yield 144 158 168 183 164 194 183 170.0

Increase in APH Yield Adjustment 2 X 7 = 14 2 X 6 = 12 2 X 5 = 10 2 X 4 = 8 2 X 3 = 6 2 X 2 = 4 1 X 2 = 2 8 bu. or 4.7% TA Yield 158 170 178 191 170 198 185 178.0

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 APH CRC IP RA GRP GRIP COMBO TOTAL ACRES (1,000) Corn % of insured acres ’06 ’11 11.9 5.8

28.6 NA 0.6 NA 27.7 NA 3.8 1.8

27.4 13.1

NA 81.7

Soybeans % of insured acres ’06 ‘11 13.4 6.6

20.9 NA 0.7 NA 2.6 NA 6.8 3.2

23.8 11.2

NA 79.1

3,747.9 3839.5

4,383.4 3,833.1