Getting a Grip on GRIP

1
Getting a Grip on GRIP

• Gary Schnitkey
• Agricultural Economist
• University of Illinois

2
Topics

• Illinois versus Iowa experience
• How GRIP works
• Risks/Returns
• Situations where it works

3
GRIP

• GRIP (Group Risk Income Plan) is revenue
  insurance based on county yields
• GRIP-NoHR (No Harvest Revenue option) much like
  RA with base price option
• GRIP-HR (Harvest Revenue option) much like CRC
  or RA with harvest price option
• GRIP is the revenue counterpart to the
  county-level yield insurance GRP (Group Risk
  Plan)

4
Group Products Akin To

• Group Akin to Insurance Type
• GRP APH Yield
• GRIP-NoHR IP, RA with Revenue no
• base price guarantee increase
• GRIP-HR CRC, RA with Revenue -
• harvest price guarantee increase

5
Introduced in I states

• Introduced
• GRP (Group Risk Plan) 1995
• GRIP-NoHR 1999
• (Group Risk Income Plan -- No Harvest Revenue
  option)
• GRIP-HR 2004
• (GRIP -- Harvest Revenue option)

6
Group Product Use, Corn, Illinois
Iowa 2005 Use GRP 1.2 GRIP 3.6
GRIP
GRP
7
Group Product Use, Soybeans, Illinois
Iowa 2005 Use GRP 1.9 GRIP 4.7
GRIP
GRP
8
Percent of Iowa Counties Receiving GRIP-NoHR
Payments for Corn, 1999 -2004

• ---------- Coverage Level
  ------------
• Year 90 85 80 75 70
• 1999 54 30 11 4 2
• 2000 66 22 2 1
  0
• 2001 72 49 25 11
  1
• 2002 3 3 3
  1 1
• 2003 3 0 0
  0 0
• 2004 82 72 41 16
  1
• AVG 47 29 13 6 1

9
Percent of Iowa Counties Receiving GRIP-NoHR
Payments for Soybeans, 1999 -2004

• ---------- Coverage Level
  ------------
• Year 90 85 80 75 70
• 1999 19 9 4 2
  2
• 2000 69 57 31 18
  6
• 2001 46 19 8 4
  1
• 2002 0 0 0
  0 0
• 2003 30 15 9 7
  5
• 2004 95 85 71 51
  23
• AVG 43 31 21 14 6

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How GRIP Works

• Marshall County, Iowa
• 2005 Example

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Parameters in 2005

• County Marshall County, Ia
• Crop Corn
• Expected Yield 164.3
• Expected Price 2.38
• County specific, set by RMA
• Settlement prices during February
• (Next year for entire month)

12
Farmer choices Protection Level

• Choice from within range
• GRP GRIP
• Max 579 587
• Min 323 346
• Max varies by year, based on formula
• Max results in highest premiums and highest
  payments, when they occur

13
Farmer choices Coverage Level

• 70 to 90
• Suggestion
• Take highest coverage level
• Change payment/premium by lowering protection
  level

14
2005 Per Acre Premiums, Marshall County, Iowa
(100 Protection Level, Corn)

• Coverage
• Level GRP GRIP-NoHR GRIP-HR
• 70 3.96 2.96 5.51
• 75 4.80 4.24 7.22
• 80 6.17 6.90 10.58
• 85 6.89 10.00 13.85
• 90 8.60 15.92 20.25

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Per Acre Guarantees,90 Coverage Level

• GRP GRIP-NoHR GRIP-HR
• Type Yield Revenue Revenue
• Coverage level .90 .90 .90
• x Expected yield 164.3 164.3 164.3
• x Price xxx 2.38 2.38 _at_
• Guarantee 147.9 bu 352 352 _at__at_
• _at_ Higher of expected or harvest price
• _at__at_ Will be higher when harvest price gt expected
  price

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Payment exampleTypical Year

• Actual yield 170 bu.
• Harvest price 2.00
• Guarantees on previous slide (90 cov level)
• Shortfall (Guarantee Actual)/Guarantee
• when Guarantee gt Actual
• GRP .000 (147.9 guarantee lt 170
  actual)
• GRIP-NoHR (352 - (1702)) / 352 .034
• GRIP-HR (352 - (1702)) / 352
  .034

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Payments (Max Protection Level, 90 Coverage
Level)

• GRP GRIP-NoHR GRIP-HR
• Prot. level 579 587
  587
• X shortfall .000 .034 .034
• X price factor xxx xxx
  1.00
• Payment 0 20 20
• Higher of (harvest price / expected price) or
  1

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Payment exampleDrought Year

• Actual yield 130 bu.
• Harvest price 3.00
• Shortfall (Guarantee Actual)/Guarantee
• when Guarantee gt Actual
• GRP (147.9 130) / 147.8 .121
• GRIP-NoHR .000 Guarantee lt actual (390)
• GRIP-HR (443 - (130x3)) / 443
  .120

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Per Acre Guarantees, Revised90 Coverage Level

• GRP GRIP-NoHR GRIP-HR
• Type Yield Revenue Revenue
• Coverage level .90 .90 .90
• x Expected yield 164.3 164.3 164.3
• x Price xxx 2.38 3.00 _at_
• Guarantee 147.9 bu 352 443 _at__at_
• _at_ Higher of expected or harvest price
• _at__at_ Will be higher when harvest price gt expected
  price

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Payments (Max Protection Level, 90 Coverage
Level)

• GRP GRIP-NoHR GRIP-HR
• Prot level 579 587
  587
• X shortfall .121 .000 .120
• X price factor xxx xxx
  1.26 _at_
• Payment 70 0 89
• _at_ Higher of (harvest price / expected price) or
  1
• (3.00 harvest price / 2.38 expected price) 1.26

21
GRP Shortfalls, Marshall County, Iowa, Corn (90
coverage level)

• Expected Final GRP
• Year Yield Yield Shortfall
  (90)
• 1995 131.1 133.7 0
• 1996 133.2 139.4 0
• 1997 133.2 136.4 0
• 1998 135.3 144.5 0
• 1999 136.5 153.8 0
• 2000 137.6 144.0 0
• 2001 146.7 150.5 0
• 2002 146.7 181.8 0
• 2003 150.1 175.9 0
• 2004 158.4 183.2 0

22
Marshall County, Corn Yields
1993
1988
1977
23
GRIP Shortfalls, Marshall County, Iowa, Corn (90
coverage level)

• Expected Harvest GRIP
• Year Price Price Shortfall
  (90)
• 1999 2.40 1.96 0
• 2000 2.54 2.11 .034
• 2001 2.45 2.05 .046
• 2002 2.30 2.43 0
• 2.38 2.37 0
• 2.93 1.99 .127
• Shortfalls the same for GRIP-NoHR and GRIP-HR.

24
GRP Shortfalls, Marshall County, Iowa, Soybeans
(90 coverage level)

• Expected Final GRP
• Year Yield Yield Shortfall
  (90)
• 1995 45.2 50.6 0
• 1996 46.6 49.2 0
• 1997 46.6 50.4 0
• 1998 47.7 51.6 0
• 1999 51.8 50.3 0
• 2000 52.6 45.2 .045
• 2001 53.4 49.7 0
• 2002 52.5 53.5 0
• 2003 53.1 31.7 .336
• 2004 53.6 51.6 0

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GRIP Shortfalls, Marshall County, Iowa, Corn (90
coverage level)

• Expected Harvest GRIP
• Year Price Price Shortfall
  (90)
• 1999 4.95 4.85 0
• 2000 5.36 4.72 .129
• 2001 4.59 4.37 .013
• 2002 4.53 5.45 0
• 5.23 7.32 .058
• 7.27 5.26 .183
• Shortfalls the same for GRIP-NoHR and GRIP-HR.

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Risk/returns www.farmdoc.uiuc.edu/cropins/index.h
tml

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Crop Insurance Evaluator

• For an example farm in each county for corn and
  soybeans shows the following for different
  insurance product
• Frequency of payments
• Premiums
• Average payments
• Net costs
• Ability to prevent disasters

28
Marshall County, Corn

• Average farm for county
• 159 bu. APH yield, average variability
• Evaluations shown for 2005 year
• Evaluations based on maximum protection level

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• Frequency of payments
• Example of tables from Evaluator

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1 VAR

• A 1 VaR of 200 means that 1 of the time
  revenue will be below 200
• Measure of risk reduction
• Want VaRs to be as high as possible

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1 VaR from Evaluator per acre, Corn

• Level APH CRC GRP GRIP-NoHR
  GRIP-HR
• 65 203 212
• 75 221 231 198 205
  204
• 85 243 247 205 216
  217
• 90 213 223
  226
• Group products lower risk less than Individual
  products
• Low coverage Individual not as good as high
  coverage Group

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Net Costs

• Average payments over time minus premium
• High levels indicate high costs, negative levels
  mean expect more insurance payments than premium
  over time

33
Net Costs from Evaluator per acre, Corn

• Level APH CRC GRP GRIP-NoHR
  GRIP-HR
• 65 1.45 2.26
• 75 1.74 2.04 .78 -3.94
  -4.65
• 85 3.76 4.77 -4.65 -12.50
  -17.87
• 90 -9.77 -17.13
  -26.47
• Individual products have higher costs than Group
  products

34
Marshall County, Soybeans

• Average farm for county
• 50 bu. APH yield, average variability
• Evaluations shown for 2005 year
• Evaluations based on maximum protection level

35
1 VaR from Evaluator per acre, Soybeans

• Level APH CRC GRP GRIP-NoHR
  GRIP-HR
• 65 166 174
• 75 183 192 159 162
  164
• 85 203 207 165 173
  175
• 90 168 179
  180
• Group products lower risk less than Individual
  products
• Low coverage Individual not as good as high
  coverage Group

36
Net Costs from Evaluator per acre, Soybeans

• Level APH CRC GRP GRIP-NoHR
  GRIP-HR
• 65 .57 1.06
• 75 .81 .93 -.56
  -2.66 -2.68
• 85 1.48 2.89 -3.18 -7.96
  -8.95
• 90 -5.31 -10.52
  -12.60
• Individual products have higher costs than Group
  products

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Risk/Returns Summary

• Group products cost less than individual
  products. Over time, group products may average
  more in payments than paid in premiums
• Group products reduce risk less than individual
  farm products

38
Situations Where Group Products Work

• Farm-yields either
• Closely follow county-yields (i.e., large farm),
  or
• Are above county-yields
• Farm has low APH
• Farm is in relatively strong financial position
• Tend to work best in good producing counties

39
Situations Where Group Products Do Not Work as
Well

• Highly leveraged farms
• Farms where re-planting occurs often
• Hail is a major concern
• Farms with high-risk farmland

40
Summary

• GRIP does fit certain situations
• Represent another option in the risk management
  tool kit