publication archive: Bruce Sherrick
May 3, 2013
A Historical Perspective on Illinois Farmland SalesFarmland prices have soared in recent years, leading to increased interest in farmland markets and in factors affecting farmland prices. Sales records from the Illinois Department of Revenue (IDOR) allow for detailed comparisons of parcel-level information through time and for the construction of summary price trends and other descriptive statistics.
March 29, 2013
Illinois Farmland Assessments - Current Issues and ConsiderationsFor property tax purposes, Illinois assesses farmland on the basis of its "agricultural use" value rather than its "auction block" or market value. The agricultural use value is affected by the expected income from farming. The income potential in turn varies by soil productivity, productivity, and also changes as costs and prices evolve through time. To help dampen the impact of changes in farm incomes, the law "caps" the annual rate at which farmland assessments can change from year to year at 10% of its previous value. However, there is an emerging technical problem in the way the 10% cap functions, given the special historical context of farmland assessments in Illinois. A reasonable legislative solution would be to retain the "10% cap" but to provide a different answer to the question ... "10% of what?". The following paragraphs elaborate the purposes of the farmland assessment act, the calculation of agricultural use value, how the 10% cap currently works, the historical context that has created an unintended consequence of the 10% cap, and how the problem could be fixed by amending the farmland assessment law.
March 14, 2013
TIAA-CREF and the University of Illinois Launch TIAA-CREF Center for Farmland ResearchTIAA-CREF, a leading financial services provider, today launched the TIAA-CREF Center for Farmland Research at the University of Illinois. The new center will enhance the university's research and educational initiatives for its students and the agricultural community, including investors, farmers, researchers and businesses.
March 1, 2013
Evaluating Your Crop Insurance Options in 2013The Risk Management Agency (RMA) has now concluded its price discovery period used to determined final prices and volatility factors for federally sponsored corn and soybean crop insurance products for 2013. For the majority of the midwest, the Projected Price for corn is $5.65 and the volatility factor relating to the price risk is anticipated to be .20. For soybeans, the Projected Price is $12.87 and the volatility factor is likely to be .17. For comparison, the 2012 prices (volatility factors) were $5.68 (.22) and $12.55 (.18) for corn and soybeans respectively. The Projected Prices are used to determine the guarantee revenue indexes based on futures prices and do not reflect local basis. The Projected Price for corn is determined by averaging the closing December futures price during the trading days of February, and for soybeans by averaging the November Futures closing prices. The volatility factors are determined by an average of the most recent five trading days' implied volatility estimates, scaled for the interval of time from now until the middle of October -- the month during which average prices are used to determine Harvest Prices. For both corn and soybeans, the volatility factors are considerably lower than in both 2011 and 2012 which has important implications for premiums and for the value of the Harvest Price options embedded in many products.
February 1, 2013
2013 Crop Insurance Projected Prices, Volatilities, and Harvest Price ImpactsThe Risk Management Agency (RMA) "resets" various features of the crop insurance programs annually to reflect the market's estimate of the value of crops intended for production in the current year. Among the most important factors are (1) projected prices, (2) volatility factors, and (3) harvest prices. Projected prices directly determine the insurable value of production, and thus impact premiums as well. The volatility factor is a measure of the price risk the market associates with potential price changes in the production year, and thus directly impacts the calculated costs of insurance. Finally, the harvest price has the potential to increase the amount of insurance coverage in effect if prices increase between the end of the projected price discovery period and the harvest price determination period. The purpose of this article is to describe the processes used to establish each of these features and to discuss important implications for crop insurance in 2013.
January 3, 2013
IFES 2012: Crop Insurance - 2012 Performance and Updates for 2013Listen to MP3 podcast
Though final numbers will not be known until early 2013, crop insurance policies resulted in very large indemnity payments over a large region of the Corn Belt for both corn and soybeans for the 2012 crop. Policies that included the harvest price option benefitted significantly from the increased harvest prices (corn = $7.50 and soybeans = $15.39) relative to March projected prices (corn of $5.68 and soybeans of $12.55), and the resulting increased guarantees. Producers without claims benefitted from the higher market prices that accompanied the lower production due to drought. The Risk Management Agency has announced several important changes to available crop insurance programs for the 2013 crop year as well and these will be identified and discussed including substantial changes to group policies, extensions and expansions of the Trend Adjusted APH endorsement, impacts of rerating, and the likely impact of the payouts from this year's policies.
November 29, 2012
Farmland Turnover in IllinoisThere have been several very notable land sales in Illinois and surrounding states setting new high per acre sales prices in many areas, and leading to increased interest by others in evaluating both potential sales and purchasing opportunities. This year, there again seems to be a flurry of end-of-year farmland auctions and new listings of farm properties. Recently, at two separate meetings I have heard reports by professional appraisers that new requests are "flooding in" for farmland appraisals supporting end of year decisions about trust creation or sale. Casual explanations of the turnover activity include elevated concern about tax and estate law changes, efforts to take advantage of market momentum, strong balance sheets and derived demand from recent high income years, and continuing strong investor demand. Others have suggested that the level of activity in the farmland market is not that unusual and that there are often peaks in the 4th and 1st quarters each year -- and that this year is thus not abnormal at all. And on the other side of the argument, farmers and investors seeking additional land to continue to cite thin market conditions; neighbor bidding wars are noted as explanations of high sales prices; numerous reports occur of auctions that fail to meet reserve requirements; and there remains low interest by absentee owners in selling in the majority of cases.
October 12, 2012
Relative Importance of Price vs. Yield variability in Crop Revenue RiskManaging crop revenue risk is of critical importance for financial success by agricultural producers and a central theme of many government commodity and insurance programs. Debate surrounding the farm bill for example, includes various programs intended to limit revenue variability that arises from low crop prices, production declines as might happen under a drought, and so forth. Crop insurance is critical for most commercial scale producers to protect against the consequences of poor relative crop performance or price declines, but is remains debated whether price risk or yield risk is more likely to influence insurance payments. In general, farm-level crop revenue risk results from price variability, yield variability, relationships between prices and yields, and relationships among the crops produced. It is important to first understand the underlying causes of crop revenue risk to better assess the effectiveness of various strategies and programs that might be used to mitigate crop revenue risk. Improving the understanding of the relative influences of price and yield risk is the intent of this farmdoc daily post.
August 7, 2012
Initial Perspectives of Crop Insurance Underwriting Losses due to the 2012 DroughtThere is growing interest in understanding the magnitude of losses in the Federal crop insurance program, and how those losses are to be shared between the Federal government and the crop insurance companies and their reinsurers. At this point, it is difficult to precisely estimate the size of the eventual losses; however, it is safe to assume that losses will be relatively large. Given Federal regulation and restrictions on crop insurance companies' retained exposure, it is highly likely that there are sufficient funds to cover 2012 losses. Additional context and perspective on 2012 losses are provided below.
July 19, 2012
Current Expectations of Future Corn Prices, and Ghosts of Prices PastIt is generally regarded that futures markets provide the best aggregated beliefs about future prices by market participants, given all currently available information; and thus that current prices are also the best estimate of future prices. Changes in futures prices thus reflect changes in information, or resolution of uncertainty prior to expiration. Even if price levels do not change, market participants generally become more certain about the production and demand as time progresses, and the uncertainty around the prices usually declines with time as well. The prices of options on futures reflect the degree of uncertainty about the futures prices and provide a means to recover additional probabilistic information about price uncertainty, or the probability of prices moving to various other levels, either higher or lower than the current futures price.
July 6, 2012
Some Interest(ing) Rate DataThe U.S. Treasury debt market is not only the largest and most widely tracked "commodity" market, it also provides a basis against which almost all other "rates" in the world are measured. The past decade has witnessed rate shocks of previously unexperienced magnitudes; and these have been met with newly envisioned and implemented government policy responses to both private and public sector financial market participants. What follows is a simplified depiction of the history of interest rates, to highlight periods of large movements, associated government actions, and implications for borrowing spreads for the agricultural sector. As the topics just listed could easily fill a four-year undergraduate curriculum with interesting and challenging courses, the version provided herein is cast with a nod to Hawking, as a brief history of interest rates - or the cost of time through time. It is long on pictures, and brief on details at some points, but hopefully provides an interesting presentation of interest rate markets over one of the most interesting periods in recent history.
March 1, 2012
Crop Insurance Decisions in 2012 - Some Final ThoughtsThe Risk Management Agency (RMA) has now concluded its price discovery period used to determined final prices and volatility factors for federally sponsored corn and soybean crop insurance products for 2012. For the majority of the midwest, the Projected Price for corn is $5.68 and the volatility factor relating to the price risk is anticipated to be .22. For soybeans, the Projected Price is $12.55 and the volatility factor is likely to be .18. For comparison, the 2011 prices (volatility factors) were $6.01 (.29) and $13.49 (.23) for corn and soybeans respectively. The Projected Prices are used to determine the guarantee revenue indexes based on futures prices and do not reflect local basis. The Projected Price for corn is determined by averaging the closing December futures price during the trading days of February, and for soybeans by averaging the November Futures closing prices. The volatility factors are determined by an average of the most recent five trading days' implied volatility estimates, scaled for the interval of time from now until the middle of October -- the month during which average prices are used to determine Harvest Prices. For both corn and soybeans, the volatility factors are considerably lower than in 2011 which has important implications for premiums and for the value of the Harvest Price options.
February 7, 2012
Premiums on Trend-Adjusted APH EndorsementsThe Trend-Adjusted Actual Production History (TA-APH) allows farmers to increase yields used in calculating guarantees for plans within the COMBO product. For the same guarantee level, farmer-paid premiums will almost always be the same or lower using the TA-APH yield endorsement than without the endorsement. This occurs because of differences in subsidy levels across coverage levels.
January 18, 2012
COMBO Crop Insurance Premium Changes in 2012Listen to MP3 podcast
The Risk Management Agency (RMA) undertook a study of corn and soybean premiums and found that insurance premiums were too high relative to insurance payments. As a result, RMA adjusted corn and soybean premiums. In addition, RMA implemented other adjustments that changed premiums, with one of those adjustments relating to enterprise units. In this article, 2011 Revenue Protection (RP) farmer-paid premium are compared to 2012 premium for corn and soybean policies in Illinois.
December 23, 2011
2011 IFES: Crop Insurance - New Features, Programs & PerformanceListen to MP3 podcast
The Risk Management Agency has announced several important changes to available crop insurance programs for the 2012 crop year. Among the most important changes are the approval of the Trend Adjusted APH Yield Endorsement, major base rate revisions, and updates to several technical components in the rating system. Additionally, there are a number of important new private market "Add-on" products, while other features including the BE endorsement and Monsanto's BYA program have been retired. This session is intended to improve your understanding of new programs and features, and help develop an accurate understanding crop insurance alternatives to best manage relevant risks. Additionally, tools available at the farmdoc website that are available to better evaluate your crop insurance options are introduced and demonstrated in this session.
October 19, 2011
Important Trends in Crop Insurance Coverage Options for 2012The Risk Management Agency (RMA) recently announced the approval of the Trend Adjusted APH Yield Endorsement for corn and soybean insurance policies for most counties in the major crop production regions beginning with the 2012 crop. The Endorsement was originally proposed by the Illinois Corn Marketing Board, and developed in conjunction with researchers at the University of Illinois and the integrated Financial Analytics and Research (iFAR) consulting group. It is available for all APH-based yield and revenue options in the Combo policy and is elected and applied on a county/crop basis. The endorsement will be available over 820 counties for corn and over 880 counties for soybean policies. The intent of the Policy Endorsement is to improve the accuracy of the estimate of future insured yields, and to allow accurate coverage elections to be made against expected crop production.
September 9, 2011
Illinois Farmland Investment Performance,... Revisited,... Again...USDA recently released the 2011 version of its annual summary of farmland values and rental rates, with final values for cropland in Illinois of $5,800/acre representing an 18% increase. Cash rent serves as a proxy for current income, and averaged about 3.2% for the same period. Total farm real estate values increased by roughly 16.3% for the year. Except for 2009, the past seven years have each seen double digit capital gains, and 3-4% annual current income. This performance during a period of unprecedented equity market volatility has resulted in substantially increased attention to the asset class, with an attendant increase in visibility of institutional investors, and resulted in some highly notable sales. Some have begun to question the sustainability or rationality of the current levels, and have used phrases including "bubble" and "overheated". At the same time, there is little evidence to suggest that income values and capitalization costs are anything but rational given the current low interest rates and high relative incomes. But all of these descriptors -- annual returns, capitalized values, volatility through time -- are best viewed as relative indicators -- if the equity markets had been returning 30% annually, the performance of farmland might look relatively poor, for example.
July 7, 2011
Some "Random" Thoughts About Corn PricesThis season has witnessed fairly high prices and volatile corn price movements, driven at different times and degrees by a late and wet planting season, slow planting progress, acreage expectation slippages and offsetting later gains, surprises in stocks reports, the recent (and upcoming) WASDE releases, and uncertainty surrounding implications of removal of the ethanol blend credit but retention of the RFS mandate -- and ever important future weather uncertainties. With the possible exception of the summer of 2008, the importance of understanding and managing future price risk likewise seems to be at an all time high, and the importance of forming accurate expectations about future random prices equally important.
May 18, 2011
Will Hedging 2011 Corn Now Reduce Downside Revenue Risk?Listen to MP3 podcast
In this paper, graphs show how hedging different proportions of expected corn production impact the chance of having revenue below three benchmarks. Four analyses are presented: one for no insurance and three for Revenue Protection (RP) crop insurance policies with 65, 75, and 85 percent coverage levels. With no insurance, the chance of revenue below $850 per acre is minimized when 71 percent of expected production is hedged. Use of crop insurance lowers the amount hedged needed to minimize risk. Chance of revenue below $850 per acre is minimized with 61 percent hedged for a 65 percent RP policy, 42 percent with a 75 percent RP policy, and 7 percent for an 85 percent RP policy.
February 23, 2011
Higher 2011 GRIP Premiums Still Below Expected PaymentsListen to MP3
Group Risk Income Plan with the harvest price option (GRIP-HR) will have higher premiums in 2011 as compared to 2010. Premiums were estimated for corn using a projected price of $6.00 and a volatility of .29. This price and volatility will not be final until the end of February. Hence, actual premium could vary from estimates shown in this paper. Over all counties in Illinois, GRIP-HR premiums will be about 75% higher in 2011 as compared to 2010. Even with these increased premiums, the estimated expected payments exceed farmer-paid premium in most counties of Illinois.