Evaluating crop insurance options for 2014
The Risk Management Agency (RMA) has now concluded its price discovery period used to determined final prices and volatility factors for federally sponsored corn and soybean crop insurance products for 2014. For the majority of the cornbelt, the approved Projected Price (PP) for corn is $4.62 and the volatility factor is .19. For soybeans, the projected price is $11.36 with a volatility factor of .13. For comparison, the 2013 prices (volatility factors) were $5.65 (.20) and $12.87 (.17) for corn and soybeans respectively. The Projected Prices are used to determine the guarantee revenue indexes based on futures prices, and do not reflect local basis.
The Projected Price for corn is determined by averaging the closing December futures price during the trading days of February, and for soybeans by averaging the November Futures closing prices during February. The volatility factors are determined by an average of the most recent five trading days' implied volatility estimates, scaled for the interval of time from now until the middle of October -- the month during which average prices are used to determine Harvest Prices. For both corn and soybeans, the volatility factors have trended downward, and relative to popularly interpreted measures of volatility are considered very low for soybeans in particular. The volatility factor summarizes the market's estimates of the likelihood for price movements of various magnitudes, and has corresponding impacts on premiums paid for Revenue and Harvest Price related products.
In 2014, the Projected Prices for soybeans are close to current futures market prices, while corn traded around $.14 higher than the projected price on the first sales date for crop insurance. When actual futures prices are below the projected price, there is a somewhat increased likelihood for experiencing an insured revenue shortfall, and when actual futures prices are higher than the projected price, there is an increased likelihood that products with the harvest price option embedded will have an increase in guarantee value. Beginning with the 2014 crop, the projected prices and volatilities, where relevant, are now common over both farm-level and area-revenue and area-yield policies.
The perennial question faced at this point in the year is: How can one sensibly evaluate their crop insurance options for their own case, reflecting current insurance information, current price expectations, and their own farm's operating conditions? The following materials provide one approach for evaluating the most important crop insurance product and election choices facing corn and soybean producers using the University of Illinois iFARM crop insurance evaluator.
The case presented is for McLean Co., a large and high yielding county in central Illinois (this case, and similar analyses for approximately 750 other counties throughout the midwest for both corn and soybeans under both basic and enterprise elections are available at the farmdoc website in the crop insurance section).
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