February 2, 2005
GROUP RISK INCOME PLANS LIKELY TO PAY IN MANY COUNTIES FOR 2004 CROPS
Some people have asked whether group products
will make payments for the 2004 cropping year. Group products base
insurance payments on county yields calculated by the National Agricultural
Statistical Service (NASS), an agency of the U.S. Department of
Agriculture. NASS will not release 2004 county yields until March
or April of 2005. Hence, payments from group products will not be
known until March or April.
While not certain, it is highly likely that the
revenue-based Group Risk Income Plans (GRIPs) will pay in many Illinois
counties because prices fell dramatically between the spring and
the fall, causing county revenues to be less than guaranteed revenues
(also called trigger revenues). On the other hand, yield-based Group
Risk Plans (GRPs) likely will not pay in any Illinois counties because
yields in most counties will be above average.
Payment Triggers on Group Policies
There are three group plans: Group Risk Plan
is yield insurance, Group Risk Income Plan without the harvest revenue
(GRIP-NoHR) is revenue insurance, and Group Risk Income Plan with
a harvest revenue option (GRIP-HR) is revenue insurance. GRIP-NoHR
does not have a revenue guarantee increase while GRIP-HR does have
an increase provision. More detail on these products is provided
i in "Group Crop Insurance Plans" , a paper in the crop insurance
section of farmdoc.
Group Risk Plan (GRP) is a yield insurance that
pays when county yield falls below trigger yield. The trigger yield
is expected yield (a yield set for each county in Illinois by the
Risk Management Agency) times the coverage level (set by the person
purchasing the insurance product and can be 70%, 75%, 80%, 85%,
or 90%). Yields for most counties will be well above average, causing
GRP not to make payments.
GRIP-NoHR pays when county revenue is below trigger
revenue. Trigger revenue is the expected yield times the expected
price times the coverage level. The expected price is based on settlement
prices on Chicago Board of Trade (CBOT) contracts during the last
five days of February. County revenue is based on the c ounty yield
times the harvest price. The harvest price is based on settlement
price of CBOT contracts during the month of October for soybeans
and the month of November for corn.
Expected and harvest prices for the 2004 crop
are already known and are shown in Table 1. For both corn and soybeans,
harvest prices are considerably below expected prices. For corn,
the harvest price is 68% of the expected price. For soybeans, the
harvest price is 72% of the expected price.
GRIP-HR also makes payments when county revenue is below trigger revenue.
County revenue under GRIP-HR is the same as GRIP-NoHR. Trigger revenue may be different.
Under GRIP-HR, trigger revenue equals expect yield times the higher of expected price or
harvest price times coverage level. GRIP-HR has different trigger revenue from GRIP-NoHR
when harvest price is above expected price. When harvest price is below expected price,
trigger revenue is the same under both GRIP-NoHR and GRIP-HR. In 2004, harvest prices for
both corn and soybeans are below expected prices. Hence, GRIP-NoHR and GRIP-HR have the same
trigger revenue for a given coverage level. Given that coverage and protection level choices
are the same, GRIP-NoHR and GRIP-HR will make the same payments in 2004.
Likely Areas in Illinois Receiving Payments
The only items that are not known yet to calculate
GRIP payments are county yields. NASS has not released county yields.
However, NASS has released Crop Reporting District (CRD) yields.
These yields will be used to calculate the following equation for
each CRD in Illinois:
(Trigger revenue - CRD revenue) / trigger revenue (1)
Equation (1) gives percent revenue shortfalls. Positive numbers
indicate that a CRD would get a payment if GRIP payments were based
on CRD yields. If positive, some or all of the counties within the
CRD will receive GRIP payments. Negative numbers indicate that most,
if not all, counties within that CRD will not receive payments.
NASS estimated yields by CRD for 2004 are shown in Table 2. Also
shown are "expected CRD yields". Expected yields are estimated
using a methodology similar to that used by the Risk Management
Agency in calculating expected county yields.
Equation (1) is estimated for corn using the $2.93 expected price,
$1.93 harvest price, and yields from Table 2. Results for corn are
reported in Table 3. At a 90% coverage level, all CRDs have positive
values, except for the Southwest CRD. Five of the CRDs have positive
values at an 85% coverage level. This indicates that many counties
will have GRIP payments for corn in 2004.
Equation 1 values for soybeans are shown in Table 4 based on a
$7.27 expected price, $5.26 harvest price, and yields from Table
2. At a 90% coverage level, all CRDs have positive values. This
indicates that some counties in all CRDs will receive payments.
At an 85% coverage level, values are positive for all CRDs except
the southwest and southeast CRDs.
Values in Table 3 and 4 do not represent payments from the insurance
product. The formula for calculating payments equals percent revenue
shortfall times protection level. Protection levels are chosen by
the individual purchasing the GRIP product. Maximum protection levels
vary by county. For corn, maximum levels range from a low $410 per
acre up to the $735 per acre. At maximum protection levels, corn
payments will be up to $60 and $70 per acre for some counties. Some
counties will receive considerably less than that. Maximum protection
levels for soybeans range from $325 up to $610 per acre. At maximum
protection levels, soybean payments will be around $70 per acre.
Payments from GRIP-NoHR and GRIP-HR are likely
to be widespread in Illinois for 2004. More counties will likely
receive soybean payments than corn payments. More counties in the
northern and central portions of the state will receive payments
than in southern Illinois.
Issued by: Gary Schnitkey, Department of Agricultural
and Consumer Economics