What is in this article?:
- 2012 Crop Insurance Decisions with Final Prices
- Enterprise units
The Risk Management Agency (RMA) has now concluded its price discovery period used to determine 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.
Adding to the complexity this year, the enterprise discount was modified, and several other specific ratings changes were implemented with differential cost impacts by location and across products (especially divergent in some cases between group and farm products). Additionally, the Trend Adjusted APH Endorsement has the potential to significantly increase the guarantee coverage available to many famers. The result is a dizzying array of choices across products and election levels using newly established rates, and in many cases expanded effective coverage options for crop insurance in 2012.
So how can one sensibly evaluate their 2012 crop insurance options for their own case? The following materials provide one approach for evaluating the most important crop insurance product and election choices facing corn and soybean producers using the University of Illinois iFARM crop insurance evaluator.
The case presented is for McLean County, Illinois for corn (this case, and similar analyses for approximately 600 other counties throughout the Midwest for both corn and soybeans under both basic and enterprise elections are available at the farmdoc website).
The case farm information and starting price conditions are shown in the table below. It is assumed that the farm qualifies for the Trend Adjusted APH endorsement, which takes its average APH from 174 to 183. The county standard deviation of yields is estimated to be about 22 bu./acre and the farm yield risk is about 5 bu./acre higher. Some basic risk information is given related to yield risk (e.g., 1 in 10 years the farm yield will be below 147), and the average gross revenue with no insurance is calculated at $960/acre. The gross revenue calculation reflects the negative correlation between the yield and prices, as well as simulated local basis conditions. The average futures price is a result of the process used to model the price distribution implied by the options markets for the settlement period and can differ from current futures prices at any point in time. Consistent with RMA rules, the APH and Trend APH are rounded to nearest whole bushels, and other features of the indemnity calculations are maintained to comply within RMA rules and procedures.
The next table shows approximate premiums and guarantee values for the available products, unit decisions and coverage levels in this county for the case farm shown. The group products are calculated assuming 100% liability price elections. Importantly, the revenue guarantee levels are calculated with reference to the underlying Projected Price, which does not account for local basis.
As is the case across the majority of the corn production region, the Enterprise policy is much less expensive than Basic or Optional coverage, both because of the lower risk represented, and the higher subsidy rates associated with Enterprise coverage. Moreover, the policies with the Harvest Price Exclusion are also considerably less expensive. Under RP-HPE, the guarantee level is dependent on current projected prices and does not increase if harvest prices are higher. Under RP, if the Harvest price is higher than the projected price, the guarantee increases to reflect the higher price. Currently, December corn futures prices and the projected price are nearly identical. In soybeans, however, the current November futures price is above the Projected Price thereby increasing the relative attractiveness of RP compared to RP-HPE. More detailed price quoting information is also available.