The 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 projected prices, volatility factors and 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.
Projected prices serve as the indemnity price per bushel for crops insured under yield, revenue and certain group products. The idea is to provide a reasonable estimate of the expected crop price at harvest, determined at a time when many production related decisions are being made – in essence a "best guess" of the price per bushel of the crop available to be grown.
To establish the projected price for a crop in a given location, rules contained in what is referred to as the Commodity Exchange Price Provision (CEPP) identify a period of time and an associated futures contract as the basis for determining the market's view of the potential value of the crop.1 For corn over the majority of the Corn Belt, the current year December futures settlement prices are averaged across all trade days during February; and for soybeans, the November contract settlement prices are averaged over the month of February to arrive at the projected prices (rounded to nearest cent). Because they are not known with certainty until the first of March each year, the bulk of final crop insurance decisions are made between that date and the sales closing date, in most cases March 15.
As today is the first day of the discovery period, current futures prices for the December corn and the November beans are the current best guesses of the projected prices for 2013. Near mid-morning, these were around $5.90 and $13.30 for corn and soybeans, respectively. For comparison, the projected prices in 2012 were $5.68 and $12.55. Thus, the indemnity prices for crop insurance are higher at this point in time than last year around this date, and all else the same, would result in higher valued insurance compared to 2012. It should be noted that one effect of the drought and shorter crops in 2012 is that starting prices available for insurance are relatively more attractive than levels likely had a large crop been produced in 2012.