February 28, 2005
CROP INSURANCE DECISIONS IN 2005
Farmers and share-rent landlords have until
March 15th to make changes to their crop insurance programs. This
article provides an update for making 2005 decisions. Three topics
are covered: 1) changes in crop insurance programs in 2005, 2) group
product update, and 3) crop insurance considerations given the possibility
on soybean rust.
Crop Insurance Changes in 2005
When making crop insurance decisions, farmers
have the same products to choose from in 2005 as in 2004. Moreover,
there have been no major changes in provisions of the existing crop
Base Prices: While provisions have not changed, base prices are
lower in 2005. These base prices are used to set guarantees on revenue
products and are based on settlement prices of Chicago Board of
Trade futures contacts. The average of settlement prices during
February of the December corn contract is used to determine the
corn base price while the November contract is used for the soybean
base price. In 2004, base prices were $2.83 for corn and $6.72 for
soybeans. In 2005, base prices are likely to be around $2.30 for
corn and $5.50 for soybeans.
Base prices are used to calculate revenue guarantees. The revenue
guarantee equals the base price times the Actual Production History
(APH) yield times the coverage level. Since base prices have declined,
per acre revenue guarantees also will be lower in 2005 as compared
Premiums: In 2005, premiums on most crop
insurance products will be lower than in 2004. Base prices and price
volatilities enter into the calculation of premiums, with lower
base prices and lower volatilities leading to lower premiums. As
described above, base prices in 2005 will be lower than 2004, leading
to lower premiums. In addition, price volatilities are likely to
be lower in 2005, again leading to lower premiums.
The largest declines occur for revenue products with guarantee
increases. For Crop Revenue Coverage (CRC) and Revenue Assurance
with the harvest price option (RA-HP) products, premiums on higher
coverage levels are $4 to $7 per acre lower in 2005 as compared
to 2004. Premiums on Group Risk Income Plan with the harvest revenue
option (GRIP-HR) at the 90% coverage level are $4 to $7 lower in
2005 than in 2004. Premium reductions are less for lower coverage
levels and for revenue products without guarantee increases (i.e.,
GRIP without the harvest revenue option (GRIP-NoHR) and Revenue
Assurance with the base price option (RA-BP).
These changes suggest reconsidering coverage levels. Higher coverage
levels may be warranted to counter the decline in revenue guarantees.
Moreover, premiums costs will be lower, leading to some incentive
to increase coverage levels.
Considerable interest has been expressed in group
products, primarily because group revenue products will make large
payments in many Illinois counties in 2004. Within the group product
class, the three options are:
1. Group Risk Plan - a yield insurance,
2. Group Risk Income Plan without a harvest revenue option (GRIP-NoHR)
- revenue insurance without a guarantee increase, and
3. Group Risk Income Plan with the Harvest Revenue option (GRIP-HR)
- revenue insurance with a guarantee increase.
More detail on these products, along with premium
and expected payout comparisons for these products are provide in
the crop insurance section of farmdoc (www.farmdoc.uiuc.edu).
We have calculated the net costs, equaling farmer-paid premiums
minus payments, for these products (see calculators in http://www.farmdoc.uiuc.edu/cropins/group_crop_products.html).
Our estimates suggest that net costs are negative, meaning that
over time payments from these products exceed farmer-paid premiums.
Generally, net costs are the lowest for GRIP-HR followed by GRIP-NoHR,
followed by GRP. If the largest return is desired, GRIP-HR is the
logical choice in most Illinois counties. However, premiums follow
the reverse pattern. GRIP-HR has the highest premiums followed by
GRIP-NoHR, followed by GRP.
A general rule of thumb is that GRP pays in years of low yields,
GRIP-NoHR pays in years of low prices, while GRIP-HR pays in both
years of low yields and low prices. One could base the product choice
on the belief of what will happen during the upcoming production
There may be reasons to favor GRIP-HR in 2005. Expected prices
used to set revenue guarantees are lower this year which may suggest
that there is more possibility of price increases during the fall.
Moreover, soybean rust may cause widespread yield declines which
could result in a supply induced price increase. This would result
in GRIP-HR having larger payouts than GRP or GRIP-NoHR.
Soybean Rust and Crop Insurance
The occurrence of soybean rust could cause declines
in yields that trigger insurance payments. Given that soybean rust
is a possibility, farmers may wish to re-consider there soybean
rust insurance policies. Three suggestions are:
1. Increase coverage levels. In general, farmers have used lower
coverage levels for soybeans than for corn. In fact, many farmers
have not insured soybean acres. In 2004, 44% of the soybean acres
in Illinois were either not insured or were insured using CAT coverage.
In most years, using higher coverage levels on corn is prudent because
corn revenue is more variable than soybean revenue. The possibility
of soybean rust suggests that possibility of low soybean revenues
has increased. One way of mitigating this risk is to increase coverage
levels on soybean crop insurance products.
2. Purchase either revenue products with guarantee increase provisions
(i.e., RA-HP, CRC, or GRIP-HR) or yield products (APH or GRP). Soybean
rust could cause lower yields, suggesting that farmers face additional
downside yield risk. Revenue products with guarantee increases and
yield products provide more yield protection than revenue products
without guarantee increases (RA-BP or Income Protection (IP)). Moreover,
soybean rust could be widespread in the Midwest. If widespread,
soybean production may decline leading to higher prices. Higher
prices could counter lower yields, causing revenue products without
guarantee increases (RA-BP and IP) to not make payments. This suggests
purchasing either yield insurance or revenue insurance with a guarantee
3. Purchase GRIP-HR or GRP. Soybean rust is likely to be widespread
in a county, causing the average county yield to decline. This suggests
that group products will make payments is soybean rust occurs. The
added benefit of using group products is that farmers can expect
to receive more in payments over time than are paid into the product
Coverage Concerns with Soybean Rust: Soybean rust may cause yield
losses resulting in insurance payments. Rust-induced losses are
covered by multi-peril products as long as good farming practices
are used. The Risk Management Agency (RMA), the agency regulating
crop insurance, may question whether good farming practices are
being followed if a farmer chooses not to spray a fungicide when
soybean rust is in an area.
Situations may arise when a farmer may choose
not to spray for soybean rust even if rust is known to be in an
area. Several possibilities are:
1. Fungicides are not available
for application. If this occurs, documenting attempts to purchase
fungicide may provide evidence that fungicides were not available.
A log of calls to suppliers could provide this evidence for RMA.
2. Custom applicators are too busy to apply fungicide in a timely
fashion. Documenting that attempts were made to engage custom applicators
seems warranted to provide RMA with information that good farming
practices are being followed.
3. Weather conditions may prevent application. Again, documentation
of prohibiting weather conditions seems warranted.
Good farming practice concerns are not likely to arise in most
cases. Hence, this concern should not be over-estimated. Documenting
actions to control rust seems to be a prudent idea. A farmer may
also wish to keep a log of soybean rust scouting activities. This
record could prove beneficial if good farming practice concerns
Further information on crop insurance products
is available in the crop insurance section of farmdoc. This
information includes premiums by county, evaluations of risk reduction
by county under different crop insurance products, and descriptions
of crop insurance products.
Issued by: Gary Schnitkey, Department of Agricultural
and Consumer Economics