July 26, 2011

Hot, Dry Weather and Crop Insurance

Recent hot, dry weather brings concerns about yield losses. Rains over the weekend alleviated concerns in many areas; however, there are some areas that are short on moisture. While it is too early to estimated 2011 yields with any degree of certainty, it is likely that crops have been under stress and yield losses may occur. In this post, yield protection offered by crop insurance is illustrated. Given current price levels that have harvest prices higher than those used to set crop insurance prices, farmers will need to have yield losses before crop insurance payments. Changes in market prices could change.

In the following three sections, crop insurance payments for corn are shown under the three plans in the COMBO product: Revenue Protection (RP), Revenue Protection with the Harvest Price Exclusion (RPwExcl), and Yield Protection (YP). Using history as a guide, more acres are insured with RP than with either RPwExcl or YP by a large margin. More details on these plans are provided here. The following sections show payments generated from the What-If" section of the Crop Insurance Decision Tool, a Microsoft Excel spreadsheet available for free download from the FAST section of farmdoc. A direct link to the tool is here. Use of the spreadsheet allows generation of payments for different APH yields, coverage levels, and crop insurance products than those shown in the following sections.

Revenue Protection: RP is a farm-level revenue product that contains a provision causing the guarantee to increase if the harvest price is above the projected price. The guarantee increase provision likely will come into play as the December Chicago Mercantile Exchange (CME) corn contract currently is trading at $6.80 per bushel, well above the $6.01 projected price. When the harvest price is above the projected price, RP makes a payment when actual yield is below the Actual Protection History (APH) yield times the coverage level. Take, for example, an APH yield of 180 bushels. When harvest price is above projected price, payments will occur when yields are below:

153 bushels for an 85 percent coverage level (180 bushels x .85),
144 bushels for an 80 percent coverage level (180 bushels x .80),
135 bushels for a 75 percent coverage level (180 bushels x .75), and
126 bushels for a 70 percent coverage level (180 bushels x .70).

Figure 1 shows RP insurance payments for different yields and harvest prices. As can be seen in Figure 1, insurance payments occur at harvest prices above the $6.01 projected price for yields below 135 bushels. These yields are below the APH yield times the coverage level (144 bushels = 180 bushels x 80 percent coverage level).

fig1.jpg

Revenue Protection with Exclusion: Unlike RP, RPwExcl does not have the guarantee increase. As a result, RPwExl's payments will be less than RP's payments when the harvest price is above the projected price (see Figure 2). At a $6.80 harvest price and a 120 bushel yield, RPwExcl makes a $49 per acre payment compared to $163 per acre payment under RP.

fig2.jpg

Yield Protection: YP will make payments when yields are below a yield guarantee. For our 180 bushel APH example, payments will occur at yields below:

153 bushels for an 85 percent coverage level (180 bushels x .85),
144 bushels for an 80 percent coverage level (180 bushels x .80),
135 bushels for a 75 percent coverage level (180 bushels x .75), and
126 bushels for a 70 percent coverage level (180 bushels x .70).

Figure 3 shows insurance payments. Note that they do not change with harvest price. YP makes payments on yield losses at $6.01, the projected price for 2011. At harvest prices above the projected price, YP will make higher payments than RPwExcl, but lower payments than RP.

fig3.jpg

Summary

Crop insurance will provide protection against yield losses. At harvest prices above projected prices, RP will make higher payment than YP which will make higher payments than RPwExcl, given the same yield and coverage level. Most policies sold under the COMBO product likely are RP.

Whether yield losses will cause widespread insurance payments is an open question. Weather over the next several weeks will determine yields, which will go a long way to determining crop insurance payments.

Issued by Gary Schnitkey
Department of Agricultural and Consumer Economics
University of Illinois

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