Will a price decline cause a tragic reduction in ag’s safety net?
It is clear that the current major safety net for production agriculture is the crop insurance program. In 2012, 88% of the insured corn acres were covered with some type of revenue insurance. Over 86% of the insured soybean acres, 83% of the insured wheat acres, and 70% of the insured sorghum acres were also covered with some type of revenue insurance. Most of the insured acres (over 82%) were covered with Revenue Protection (RP) that includes the harvest price. The Group Risk Income Protection (GRIP), GRIP with harvest price option, and RP with the harvest price excluded accounted for the remaining acres with revenue insurance coverage.
Many farmers and policy makers agree that the current revenue insurance contract provides an “adequate” safety net, but a concern is that the price risk is covered only within the growing season. The argument is that the base price set at planting time for revenue insurance guarantees could fall below the “cost of production”.
Table 1 shows how often the base price changes from the prior year’s base price. RP provides price/revenue protection within the year, but not across years. A “large” decline in base price from the prior year will cause a large decline in the current year’s revenue guarantee.
The average decline in the base price between years was 10.8% and would cause the revenue guarantee to decline by 10.8% from the prior year’s guarantee. However, this also assumes that the APH does not change. If the APH is higher than the prior year, then the reduction in the revenue guarantee will be less than the 10.8% caused by price alone.
The extremes are more important than the average. The largest reduction for the corn base crop insurance price was in 2009 with a 25.2% reduction from 2008. Soybeans suffered a 34.1% decline in the base price in 2009. Wheat had a 38.2% decline in price in 2010 from the prior year. These “large” price declines lower the revenue coverage, but fortunately these are rare events. There were three years when corn and wheat had a price decline of 20% or more from the prior year, and two years for soybeans.
Base prices can also increase from the prior year: on average 17.5% for corn and wheat, and 21.2% for soybeans. The largest base price increase for corn was 109% in 1974, following the 1973 Russian grain sale (100% for wheat), but more recently the largest increase base price for corn was 56.8% in 2007, 65.1% for soybeans in 2008, and 49.1% for wheat in 2009. When there is a large base price increase over the prior years, normally this will also cause significantly higher premium costs because of the higher price election and likely higher option price volatility.