ECON 337:

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ECON 337 Agricultural Marketing

Chad Hart Associate Professor chart_at_iastate.edu 51
5-294-9911
Lee Schulz Assistant Professor lschulz_at_iastate.edu
515-294-3356
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Crop Insurance

• One of many risk management strategies
• Traditionally set up to protect farmers in times
  of low crop yields
• Now offers coverage for low prices
• Available on over 100 commodities

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Why Crops Fail
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Federal Crop Insurance
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Federal Crop InsuranceTotal Acres Insured
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Types of Crop Insurance

• Individual Yield (YP)
• Area Yield (GRP)
• Individual Revenue (RP and RPE)
• Area Yield - Individual Revenue Combination
  (GRIP)

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Example Farm
A 100 acre corn farm in Story County, Iowa with a
5-year average yield of 180 bu/acre Purchases
insurance at the 75 coverage level Spring price
5.65/bu (average of Feb. prices for Dec.
corn futures)
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Individual Yield Insurance (YP)

• Farmer chooses percentage of expected yield to
  insure
• Expected yield measured by average yield
• Price at which the crop is valued is set up front
  and does not change
• If yields are 100 bushels per acre, the farmer
  receives 197.75 per acre
  5.65/bu (75 180 bu/ac - 100 bu/ac)

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Yield Insurance Payout Graph
No Payout
Payout
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Yield Insurance is like an Option
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Individual Revenue Insurance(RP or RPE)

• Farmer chooses percentage of expected revenue
  to insure
• Expected revenue measured by average yield
  times initial crop price
• Price at which the crop is valued can move with
  price changes in the market

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Individual Revenue Insurance(RP or RPE)
In our example, the farmer has insured 762.75 of
revenue per acre (75 5.65/bu 180
bu/ac) Final value of the crop determined by
average futures prices over harvest period
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Individual Revenue Insurance(RP or RPE)

• If yields are 100 bushels per acre and harvest
  prices average 4.50, the farmer receives 312.75
  per acre
• 0.755.65/bu.180 bu./acre - 4.50/bu.100
  bu./acre

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RPE Payout Graph
No Payout
Payout
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Rev. Insurance is like an Option
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Individual Revenue Insurance (RP)
This policy has a harvest price option If the
harvest price is greater than the planting price,
then the harvest price is used in all
calculations In essence, the policy is giving you
a put option with the strike price at the
planting price
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Harvest Price Option
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Individual Revenue Insurance (RP)

• If yields are 100 bushels per acre and harvest
  prices average 7.50, the farmer receives
  262.50 per acre
• 0.75 5.65/bu.180 bu./acre -
  7.50/bu.100 bu./acre

7.50
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RP Payout Graph
No Payment
Neither Pay
RPE Pays
YP Pays
Both Pay
RP Pays
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Corn Insurance Prices
Harvest prices have been higher 5 out of last 13
years
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Soy Insurance Prices
Harvest prices have been higher 7 out of last 13
years
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What Units to Choose?

• Optional Units Each farm is separate
• Basic Units Combine owned and cash rented acres
  in same county
• Enterprise Units Combine all acres of the same
  crop in same county
• Whole Farm Combine all crops in county

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Current Subsidy Rates
Coverage level Basic Units Optional Units Enterprise Units Whole Farm Units
60 64 80 not avail.
65 59 80 80
70 59 80 80
75 55 77 80
80 48 68 71
85 38 53 56
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2013 Insurance Premiums
Per Acre Premiums ( per acre) Cov. Level
YP RPHPE RP_ 50 0.92 0.78
1.08 55 1.52 1.30 1.89 60
2.14 1.81 2.85 65 3.29 2.87
4.63 70 4.30 4.08 6.78 75
6.30 6.59 11.06 80 9.47 10.87 18.33
85 14.45 17.63 29.89
For our example farm in Story County, Iowa for
corn
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Choosing Insurance Policy
Choice depends on several factors Type of farm
and crop mix How well the county average yield
represents your farm Your marketing strategy
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Iowa Corn Acres Insured in 2012
91 of all Iowa corn acres are insured
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Iowa Soy Acres Insured in 2012
91 of all Iowa soybean acres are insured
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2012 Corn and Soy Coverage Levels
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Coverage Levels for YP
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Coverage Levels for RPHPE
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Coverage Levels for RP
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• Class web site
• http//www.econ.iastate.edu/chart/Classes/econ337
  /Spring2013/
• See you in lab.