Evaluating crop insurance options for 2014
click image to zoom Importantly, there can be large differences in premiums even over short distances or among contiguous counties, and over the choice of unit and APH endorsement. Thus, while the case farm information provided is helpful in understanding the relationships among choices, it is important to compare to conditions that most closely match your own case. It is also important to carefully discuss final options and decisions with a qualified insurance agent to insure accurate information about the specific costs. The case farm information from McLean County, Illinois and starting price conditions are shown in the table below. It is assumed that the farm qualifies for the Trend Adjusted APH endorsement which takes its average Corn APH from 169 to 178. The county standard deviation of yields is estimated to be about 24.6 bu./acre and the farm yield risk is about 4 bu./acre higher. Some basic risk information is given related to yield risk (e.g., 1 in 10 years the farm yield will be below 137.8, 1 in 5 years the county will be less than 158.77 and so on), and the average gross revenue with no insurance is calculated at $768/acre. The gross revenue calculation reflects the negative correlation between the yield and prices, as well as simulated local basis conditions and starting prices. Importantly, the lower current futures prices have substantially reduced the beginning guaranteed revenue value compared to 2013 values. The average futures price is a result of the process used to model the price distribution implied by the options markets for the settlement period and can differ from current futures prices at any point in time. Consistent with RMA rules, the APH and Trend APH are rounded to nearest whole bushels, and other features of the indemnity calculations are maintained to comply within RMA rules and procedures.
click image to zoom The next table shows approximate premiums and guarantee values for the available products, unit decisions, and coverage levels in this county for the case farm shown. The area products are calculated assuming maximum protection levels in all cases, and maximum protection factor of 1.2 for Area products. Importantly, the revenue guarantee levels are calculated with reference to the underlying Projected Price which does not account for local basis.
As is the case across the majority of the corn production region, the Enterprise policy is often considerably less expensive than Basic or Optional coverage under each of the policy options, both because of the lower risk represented, and the higher subsidy rates associated with Enterprise coverage. Moreover, the policies with the Harvest Price Exclusion are also considerably less expensive. Under Revenue Protection Harvest Price Exclusion (RP-HPE), the guarantee level is dependent on current projected prices and does not increase if harvest prices are higher. Under traditional Revenue Protection (RP), if the Harvest price is higher than the projected price, the guarantee increases to reflect the higher price. Currently, December corn futures prices are slightly above the projected price, thereby increasing the relative attractiveness of RP relative to RP-HPE at the time of signup due to the partial increase in expected revenue implied by that difference. Given the experience in 2012 where harvest prices were significantly elevated due to the drought effects on yield, the RP products continue to be far more popular than HPE products, even if the a priori actuarial features are roughly identical. The Area Risk Protection Products have some differences from their predecessors of GRIP and GRP, but have similar general designs. The Area Yield Protection policy is triggered directly by the county yield shortfall from its guaranteed fraction of the county's expected yield, but paid as a limited fraction of the shortfall. ARP or Area Risk Protection policies can result in very high payments, but also carry fairly high initial premiums as a result. The lower section of the table shows the revenue or yield level guarantee associated with each possible coverage election level. These values reflect RMA's definition of insured yield and revenue and do not translate exactly to minimum receipts for the producer (more detailed price quoting information is also available here at the farmdoc website).