Table 2 below shows the current estimates of cost by coverage level for a farmer in McLean County Illinois with a Trend Adjusted APH of 183 bu. across three price and three volatility scenarios. The table is organized with three panels associated with different volatilities of .20, .22 and .24; and three sets of columns associated with projected prices of $5.70, $5.90 and $6.10. Within each block, coverage levels of 55-85% and Unit designs for Optional, Basic and Enterprise are shown. For example, under a $5.70 projected price and .20 volatility, the cost per acre of Enterprise Unit RP insurance at an 85% coverage level would be $18.09/acre. If instead, projected prices were $6.10 and volatility were .24, the cost per acre would be $24.64, a 36% increase. The premiums can be particularly sensitive to changes in volatility.



Returning to the harvest price factor, if the average futures prices are higher in October than the projected price, then for insurance products that include the harvest price option, the higher price effectively substitutes for the projected price in establishing the guarantee levels. For example, due to the drought related short crop, 2012 harvest prices were $7.50 and $15.39, for corn and soybeans in much of the Corn Belt, effectively replacing the original projected prices of $5.68 and $12.55 for determination of guarantees and indemnities. For corn, the increase represented a price increase of 32% for corn and 23% for soybeans relative to starting prices and guarantees based on projected prices, thus improving the payouts considerably for many farmers.

 

Read the article at farmdocDaily.