ECON 337: Agricultural Marketing

ECON 337:Agricultural Marketing

Chad HartAssociate [email protected]

Lee SchulzAssistant [email protected]

Crop InsuranceOne 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

Why Crops Fail

44%

4%22%

3%

6%

8%

13% DroughtHeatExcess MoistureCold Wet WeatherFreezeHailOther

Federal Crop Insurance

Federal Crop Insurance:Total Acres Insured

Types of Crop InsuranceIndividual Yield (YP)

Area Yield (GRP)

Individual Revenue (RP and RPE)

Area Yield - Individual Revenue Combination (GRIP)

Example FarmA 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: $4.62/bu (average of Feb. prices for Dec. corn futures)

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 $161.70 per acre = $4.62/bu * (75% * 180 bu/ac - 100 bu/ac)

0

50

100

150

200

250

Price ($ per bushel)

Yie

ld (B

ushe

ls p

er a

cre)

Yield Insurance Payout Graph

No Payout

Payout

Yield Insurance is like an Option

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

In our example, the farmer has insured $623.70 of revenue per acre

(75% * $4.62/bu * 180 bu/ac)

Final value of the crop determined by average futures prices over harvest period

Individual Revenue Insurance(RP or RPE)

If yields are 100 bushels per acre and harvest prices average $4.50, the farmer receives $173.70 per acre

=0.75*$4.62/bu.*180 bu./acre - $4.50/bu.*100

bu./acre

Individual Revenue Insurance(RP or RPE)

RPE Payout Graph

Payout

No Payout

Rev. Insurance is like an Option

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

Harvest Price Option

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*$ 4.62/bu.*180 bu./acre - $7.50/bu.*100 bu./acre

7.50

RPE PaysNeither Pay

Both PayYP Pays

RP Payout Graph

RP Pays

No Payment

Corn Insurance PricesHarvest prices have been higher 5 out of last 14 years

Soy Insurance PricesHarvest prices have been higher 7 out of last 14 years

What Units to Choose?

Optional Units: Each farm is separateBasic Units: Combine owned and cash

rented acres in same countyEnterprise Units: Combine all acres of

the same crop in same countyWhole Farm: Combine all crops in county

Current Subsidy RatesCoverage

levelBasic Units

Optional UnitsEnterprise

UnitsWhole 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%

2014 Insurance Premiums Per Acre Premiums ($ per acre)

Cov. Level YP RPHPE RP_ 50% 0.74 0.62 0.83 55% 1.09 0.93 1.33 60% 1.54 1.29 2.02 65% 2.37 2.01 3.30 70% 2.91 2.62 4.60 75% 4.14 4.19 7.50 80% 6.23 7.04 12.67 85% 9.50 11.61 20.97

For our example farm in Story County, Iowa for corn

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

Iowa Corn Acres Insured in 2013

97% of all Iowacorn acres areinsured

Iowa Soy Acres Insured in 2013

94% of all Iowasoybean acresare insured

2013 Corn and Soy Coverage Levels

Coverage Levels for YP

Coverage Levels for RPHPE

Coverage Levels for RP

Class web site:http://www.econ.iastate.edu/~chart/Classes/econ337/Spring2014/

See you in lab.