Crop Insurance Decisions Gary Schnitkey, Bruce Sherrick, and Nick Paulson University of Illinois

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1 Crop Insurance Decisions 2015 Gary Schnitkey, Bruce Sherrick, and Nick Paulson University of Illinois

2 Which best describes you? o Landowner o Farmer o Both farmer and landowner o Crop insurance agent o Other

3 Where are you from? o Illinois o Other Midwest State o Other area of US o Outside of US

4 Topics Usage Tools Supplemental Coverage Option (SCO) Yield Exclusion (YE) Recommendations

5 Percent Acres Insured, U.S.

6 Percent Acres Insured, Illinois

7 Use of Farm-Level Revenue Products, Illinois, Corn, As a Percent of Insured Acres

8 Percent Acres Insured, Illinois, Corn, 2014 Coverage Level RP RPwHPE YP ARP ARPwHPE YP % 0.0% 1.2% % 0.0% 0.1% % 0.0% 0.1% % 0.0% 0.2% 0.0% % 0.1% 0.2% 0.0% 0.0% 0.0% % 0.2% 0.5% 0.0% 0.0% 0.0% % 0.4% 0.5% 0.0% 0.0% 0.0% % 0.5% 0.4% 0.1% 0.0% 0.0% % 0.2% 0.2% Total 75.4% 1.4% 3.1% 6.5% 0.2% 0.2% 87% of planted corn acres were insured

9 Percent Acres Insured, Illinois, Soybeans, 2014 Coverage Level RP RPwHPE YP GRIP-HR GRIP GRP % 0.2% 1.8% % 0.0% 0.1% % 0.0% 0.1% % 0.0% 0.4% 0.0% % 0.2% 0.3% 0.0% 0.0% 0.0% % 0.3% 0.6% 0.0% 0.0% 0.0% % 0.4% 0.5% 0.0% 0.0% 0.0% % 0.6% 0.3% 0.1% 0.0% 0.0% % 0.0% 0.8% Total 73.1% 1.8% 4.2% 3.7% 0.0% 1.2% 84% of planted soybean acres were insured

10 What insurance policy did you use on corn? o RP o RPwHPE o YP o ARP o Other

11 What coverage level did you use o 85% or 90% o 80% o 75% o 70% o 65% or lower

12 Tools Crop Insurance Decision Tool (Microsoft Excel Spreadsheet) ifarm Premium Calculator Ifarm Crop Insurance Evaluator

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14 ifarm Crop Insurance Evaluator Average Insurance Payments/Acre Sangamon Co. Illinois -- Corn Enterprise Units Coverage Election YP RP-HPE RP AYP ARP-HPE ARP 50% $0.06 $0.02 $ % $0.16 $0.11 $ % $0.34 $0.37 $ % $0.73 $1.03 $ % $1.51 $2.44 $3.34 $1.14 $4.20 $ % $2.95 $5.08 $6.76 $2.35 $8.94 $ % $5.56 $9.35 $12.32 $4.63 $16.76 $ % $9.95 $15.86 $20.88 $8.70 $28.52 $ % $15.65 $44.43 $59.37 The table above contains average annual per acre indemnity payments. For example, an entry of $7.50 would indicatethat the product would pay $7.50 per acre per year with some years being greater, some years being zero, but averaging $7.50 per acre per year through time.

15 ifarm Crop Insurance Evaluator Estimated Net Average Cost of Insurance Sangamon Co. Illinois -- Corn Enterprise Units Coverage Election YP RP-HPE RP AYP ARP-HPE ARP 50% % % % % 0.77 (0.75) (0.10) 1.05 (1.93) (2.53) 75% 0.56 (2.30) (1.37) 0.25 (5.51) (6.25) 80% 1.08 (3.61) (1.41) (0.38) (9.82) (10.98) 85% 2.19 (4.35) 0.47 (2.66) (14.22) (16.73) 90% (5.38) (18.41) (23.04) The table above contains long run average net costs of insurance by product and election level. Net cost is defined as farmer-paid premium less average payment recieved. A negative value indicates that the product pays back more on average than the farmer-paid premium for the case farm considered.

16 ifarm Crop Insurance Evaluator VAR at 0.01 Sangamon Co. Illinois -- Enterprise Units Coverage Election YP RP-HPE RP AYP ARP-HPE ARP 50% $ $ $ % $ $ $ % $ $ $ % $ $ $ % $ $ $ % $ $ $ % $ $ $ % $ $ $ % % Value at risk without insurance

17 ifarm Premium Calculator

18 Supplemental Coverage Option Crop insurance program introduced in 2014 Farm Bill (run by RMA, not by FSA) Underlying combo product required SCO covers a portion of the underlying policy deductible range County-triggered (86%), coverage down to individual policy coverage level Farms/commodities enrolled in ARC program are not eligible for SCO Payments on planted acreage, no payment limit on indemnities received

19 Supplemental Coverage Option Example: SCO with a 75% RP crop insurance policy SCO range from 86% to 75% County trigger applied to individual deductible 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Coverage Overview CROP INSURANCE Deductible SCO Individual

20 Supplemental Coverage Option Yield component Same county trend/expected yields used for existing area products (i.e. GRIP/GRP, or ARPI) Price component Same futures prices used for existing products Premium Set by RMA Subsidy rate of 65% Indemnity Max payment per acre: Insurance price x APH yield Percentage loss at county multiplied by max farm payment

21 Supplemental Coverage Option Available for corn and soybeans in all IL counties for Same sales closing date as other insurance products (March 15) FSA program election deadline of March 31 If acreage/crop with SCO coverage is enrolled in ARC, SCO will be cancelled and producer may have to forfeit 20% of premium cost

22 Do you plan to use SCO in 2015 or future crop years? o Yes o No o Unsure

23 Yield Exclusion Allows specific years to be dropped from calculation of APH Years are determined by RMA In Illinois: 1995, 2002, 2005, 2012 See farmdocdaily, January 13, 2015

24 Example of YE calculation 2012 can be excluded TA-APH goes from 186 bu. to 194 bu.

25 With exclusion, get a higher guarantee at the same coverage level Take YE if raises TA-APH

26 Are you taking YE for corn? o Yes o No

27 Young Farmer Discount 10% reduction in premium if you qualify for discount

28 Did you receive crop insurance payments in 2014? o Yes o No

29 Projected and Harvest Prices (Midwest States) Corn Projected Price $4.15 Harvest Price Soybeans Projected Price $9.64 Harvest Price Projected price average of Dec. (corn) of Nov. (beans) CME futures contract in February, used to set insurance guarantees. Harvest price average of Dec. (corn) Nov. (beans) CME futures contract in October, used to calculate insurance revenue.

30 Revenue Guarantees per Acre by Year Year Projected Price $/bu RP Minimum Guarantee $/acre P Corn, 180 bu TA-APH, 85% coverage lelvel

31 RP Insurance Premiums & Guarantees Coverage Level Premiums Per Acre Guarantees % % % % % % Revenue Protection premium in Sangamon County, enterprise units Based on a 86 TA-APH yield

32 Basic Insurance Product Revenue Protection 75%, 80% and 85% Enterprise Units With Trend Adjustment Actual Production History (TA-APH) Yield Endorsement Yield Exclusion if available and increases the TA-APH yield USE THIS: Unless have some characteristics of products listed below Do not lower coverage level from last year

33 RP Premium Costs From 2015 Crop Insurance Decision Tool available on Farmdoc website in FAST or crop insurance sections For a 186 TA-APH and a 176 APH yield, 100 acres, Sangamon County

34 Who Should Use RPwHPE One who does not pre-harvest hedge One who is very cost conscious Willing to take the drought year risk of getting no or low payments Corn, Illinois, 2012, 85% Coverage Level Acre Insured Farmer-Paid Premium $/acre Payment $/acre RP 2,708,000 $29 $326 RPwHPE 315,000 $15 $128

35 RP Premium Costs From Crop Insurance Decision Tool available on Farmdoc website in FAST or crop insurance sections For a 190 TA-APH yield, 178 APH yield,

36 Difference in Drought Year From 2015 Crop Insurance Decision Tool available on Farmdoc website in FAST or crop insurance sections

37 Who Should Take ARP? 90% coverage level Vary protection factor (80% to 120%) Characteristics More concerned about price risk protection Can only take basic units APH yield lower than expected yield

38 ARP Premium Costs From Crop Insurance Decision Tool available on Farmdoc website in FAST or crop insurance sections Macon County in 2014

39 Summary RP and ARP Major Use Good Place to be YE use if available and increases yield SCO