January 30, 2013 Steven D. Johnson Farm & Ag Business Management Specialist (515) 957-5790 sdjohns@iastate.edu www.extension.iastate.edu/polk/farm-management Presentation Objectives Define Shallow Loss and How ARC and SCO would work with Crop Insurance Discuss What s New in Crop Insurance for 2013 Highlight the interaction of TA-Option and Unit Coverage on Final Premiums Discuss Pre-Harvest Marketing Strategies using Guaranteed Insurance Bushels Highlight Seasonal Trends and Crop Insurance Prices vs. Spring/Summer Highs Summarize 5 Crop Insurance Strategies & 5 Crop Insurance Related Web Sites 1
Next Farm Bill Proposed Commodity Program Marketing Loan Rates: $1.95/bu Corn $5.00/bu Soybeans What is Shallow Loss? Farmer Paid Crop Insurance Premium Shallow Loss Crop Insurance 175 bu/a APH 80% Level Market Receipts Actual Yield (Up to 200 bu/a) X Market Price Received ($6/bu) 2
Iowa Crop Insurance Coverage (2012) Revenue Protection (RP) = 91% to 92% of Insured Acres Source: USDA Risk Management Agency, September 2012 New in Crop Insurance for 2013 Lower premium ratings from most the Corn Belt New factors for Trend-Adjusted APH Yield Endorsement (aka TA-Option) High Risk Alternative Coverage Endorsement (HR-ACE) Destroying Cover Crops Don t forget these dates: report new insured sod busting/crp (March 15) acreage reporting deadline (July 15) crop insurance premiums due (October 1). Source: USDA Risk Management Agency, November 2012 3
Comparing ARC & SCO Programs ARC SCO Coverage Revenue Revenue or Yield % Losses Covered 11% Farm or 21% of County Guarantee Prices 5-Year Olympic Nat l Average Cash Price Yields 5-Year Olympic Average Yield (Farm or County) Payment Rate 65% Farm or 80% County of Eligible Planted Acres 10% to 21% of Coverage Level Futures: Projected vs. Harvest Price County Expected Yield 100% of Planted Acres Payment Limitations $50,000 per Entity None Cost None 30% of Expected Cost (70% Subsidy) Administration Farm Service Agency RMA/Crop Insurance Provider Source: Schnitkey, U of IL Extension Economics, May 2012 2013 Crop Insurance Corn Premiums Source: USDA Risk Management Agency, November 2012 4
2013 Crop Insurance Soybean Premiums Source: USDA Risk Management Agency, November 2012 2013 Crop Insurance Decisions Unit Coverage? (Basic, Optional or Enterprise) Deductible? TA Option? Additional Hail, Wind and/or Extra Harvest Expense Policies? Revenue Protection RP (65%-85% Levels) 5
Trend-Adjusted Yield Option Factors Source: National Crop Insurance Services, December 2012 Calculating Trend-Adjusted Yields Year Actual Yield Yield Adjustment Trend Adjusted Yield 1999 155 33.60 188.60 2000 174 31.20 205.20 2002 176 26.40 202.40 2003 175 24.00 199.00 2004 198 21.60 219.60 2005 194 19.20 213.20 2007 175 14.40 189.40 2009 148 9.60 15.60 2011 185 4.80 189.80 2012 175 2.40 177.40 Avg. Yield 175.5 194.20 Example of a Typical Central Iowa County Corn Trend Adjusted Factor = 2.4 1999: 14 years X 2.4 = 33.60 bu/a 2012: 1 year X 2.4 = 2.40 bu/a Actual Yield = 175.5 bu/a or TA Yield Option = 194.2 bu/a Source: Iowa Crop Insurance Industry, January 2013 6
Corn Coverage Comparison: #1 (Assumes $6.00/bu Projected Price) Optional Units vs. Enterprise Units 80% Level of Coverage APH 175.5 Bushel Coverage Level 80 % Guarantee 140.4 Bushel APH 175.5 Bushel Coverage Level 80 % Guarantee 140.4 Bushel 2013 Actual APH 2013 Actual APH Projected Price $6.00 Projected Price $6.00 Guarantee $842 Guarantee $842 Premium $23.60 Premium $10.67 Source: Iowa Crop Insurance Industry, January 2013 Crop Insurance Premium Subsidies Coverage Level Optional Units (Fields in Section) Enterprise Units (Fields in County) 65% 59% 80% 70% 59% 80% 75% 55% 77% 80% 48% 68% 85% 38% 53% Source: USDA Risk Management Agency, October 2009 7
Corn Coverage Comparison: #2 (Assumes $6.00/bu Projected Price) Actual APH vs. TA Yield Option Optional Units: 85% vs. 80% Level APH 175.5 Bushel Coverage Level 85 % Guarantee 149.17 Bushel APH 194.2 Bushel Coverage Level 80% Guarantee 155.36 Bushel 2013 Actual APH 2013 TA Option Projected Price $6.00 Projected Price $6.00 Guarantee $895 Guarantee $932 Premium $37.58 Premium $37.60 Source: Iowa Crop Insurance Industry, January 2013 Corn Coverage Comparison: #3 (Assumes $6.00/bu Projected Price) Actual APH vs. TA Yield Option Enterprise Units: 85% vs. 80% Level APH 175.5 Bushel Coverage Level 85% Guarantee 149.17 Bushel APH 194.2 Bushel Coverage Level 80 % Guarantee 155.36 Bushel 2013 Actual APH 2013 TA Option Projected Price $6.00 Projected Price $6.00 Guarantee $895 Guarantee $932 Premium $22.28 Premium $18.78 Source: Iowa Crop Insurance Industry, January 2013 8
Crop Insurance Premium Strategies Use the TA Option to Increase Revenue Guarantee Compare Savings of Enterprise Units vs. Optional Units (use of TA Option) Consider Appropriate Coverage Level along with TA Option and Revenue Guarantee Consider Adding Hail, Wind/Greensnap and/or Delayed Harvest Expense Policies: especially when electing Enterprise Units considering committing Delivery Bushels. Source: Johnson, ISU Extension, February 2013 Persistent Drought, El Niño (ENSO) Neutral During winter months, El Niño Southern Oscillation (ENSO) Neutral forecast: 1) Good growing conditions in Argentina, more variable in Brazil. 2) Warm and dry winter conditions in much of the Corn Belt. 3) Likely March or April before Northern Hemisphere weather forecast for the 2013. 4) Rare for Corn Belt droughts to occur in back to back years. Source: NOAA Climate Prediction Center, Jan. 17 th, 2013 9
Elwynn Taylor s 2013 Risk Wheel La Niña Summer = 70% risk of below trend line corn yield Neutral Summer = 53% risk of above trend line corn yield El Niño Summer = 70% risk of above trend line corn yield Source: Taylor, ISU Extension Climatologist, January 2013 Marketing Revenue Protection (RP) Guaranteed Insurance Bushels 10
Delivery of Corn Bushels with Revenue Protection (RP) 180 Bu/A Actual Production History (APH) Deductible 20% = 36 Bu/A RP @ 80% Level of Coverage 144 Bu/A Guarantee X $6.00/bu Projected Price = $864/A Revenue Guarantee Marketing Strategy Pre-Harvest Sell for Delivery up to 144 Bu/A Price Guarantee is Higher of the Projected Price vs. Harvest Price Slight Basis Risk Must Plant the Crop (Prevented Planting = 60%) Separate Bushels: Delivery vs. Non-Delivery Revenue Protection = Insurance Bushels that can be committed to Delivery Insurance Bushels = APH X Level of Coverage X Higher of Projected vs. Harvest Price (ie. Acts like a subsidized Put Option) Combine Insurance Bushels sold for Delivery along with the use of Futures and Options Strategies for Non-Delivery bushels. 11
Comparing 2013 Revenue Guarantees APH= 180 bu/a Corn, 50 bu/a Soybeans Projected Prices = $6.25/bu Corn, $13/bu Soybeans Corn Revenue Protection @ 80% Final Yield: 100 bu/a vs. 200 bu/a Yield Price: $6.25/bu Projected, $4.50/bu vs. $7.50/bu Harvest Pre-Harvest Sales 100 bu/a @ $6.00/bu Unpriced Bushels = Harvest Price - $.50/bu $1,300 $875 $930 $1,000 12
Corn Insurance Prices vs. Seasonal Highs Source: USDA Risk Management Agency & CME Group, Nov. 2012 December Corn Futures Seasonals 2003-07 Average High $2.92 2008-12 Average High $5.90 Source: www.cmegroup.com, October 2012 13
Soybean Revenue Protection @ 80% Final Yield: 30 bu/a vs. 60 bu/a Price: $13/bu Projected, $11/bu vs. $14/bu Harvest Pre-Harvest Sales 30 bu/a @ $12.50/bu Unpriced Bushels = Harvest Price - $.50/bu $690 $780 $505 $515 Pre-Harvest Marketing Thoughts Revenue Protection preferred for sale of Crop Insurance Bushels = Delivery Bushels (Guaranteed Higher of Projected vs. Harvest Price) New Barometer on March 1 st : the Projected Price (February average) for Delivery Bushels Generate adequate Cash Flow Needs for Fall 2013 through the Winter of 2013-14 Use Futures and Options Strategies for Non- Delivery Bushels. 14
Soybean Insurance Prices vs. Seasonal Highs Source: USDA Risk Management Agency & CME Group, Nov. 2012 November Soybean Futures Seasonals 2003-07 Average High $6.96 2008-12 Average High $13.10 Source: www.cmegroup.com, October 2012 15
5 Crop Insurance Strategies Consider Pre- Harvest Marketing: Selling Portion of Insurance Bushels for Delivery Prove your APH yields annually by Farm Level (Optional Units) Lower 2013 Premium Understand Unit Ratings; but Coverage & Plan Higher to Take the TA- Revenue Option Risks Choose Revenue Protection (RP) (Consider Adding Hail, Wind and/or Extra Harvest) Source: Johnson, ISUE Farm Mgt., Sept. 2008. 5 Crop Insurance Web Sites Ag Decision Maker ISU Extension Econ (Decision Tools, Newsletters, Publications, Voiced Media, Monthly e- Newsletter) www.extension.iastate.edu/agdm USDA Risk Management Agency (RMA) www.rma.usda.gov Farm Doc U. of Illinois Extension Econ www.farmdoc.illinois.edu Ag Manager K-State Extension Econ www.agmanager.info Crop Risk Management - ISU Polk County (Crop Marketing Newsletter & Crop Insurance Updates, Webcasts) www.extension.iastate.edu/polk/farm-management 16