February 20, 2001
CROP INSURANCE AND MARKETING
The deadline for signing up for crop insurance is March 15th. By this date,
farmers must choose between one of the six crop insurance products available in
Illinois: Actual Production History (APH), Revenue Assurance (RA), Income Protection
(IP), Crop Revenue Coverage (CRC), Group Risk Plan (GRP), and Group Risk Income
Two factors should influence the crop insurance decision. The first is the
type of marketing strategies a farmer engages in prior to harvest. The second
is the financial position of the farm, which influences the choice between "farm"
level policies and county level policies.
Marketing and Crop Insurance
Generally, a farmer must protect against both price declines and yield losses
to provide effective protection against low gross revenues. This can either be
accomplished by 1) purchasing yield insurance and also engaging in some pre-harvest
hedging, or by 2) purchasing revenue insurance. Pre-harvest hedging includes contracting
for forward delivery, selling futures contracts, contracting using hedge-to-arrive
contracts, or buying put options.
The pre-harvest hedging portion of the above general recommendation becomes
less important when prices are below loan rates, as is the case with soybeans
this year. When prices are below loan rates, the Loan Deficiency Payment (LDP)
and Marketing Loan Programs already provide protection against lower prices. Hence,
it is not critical to have the price protection offered by pre-harvest hedging.
Revenue Insurance and Marketing
Pre-harvest marketing also influences the type of revenue insurance a farmer
should purchase. There are two general types of revenue insurance:
1. Revenue insurance without a guarantee increase (i.e., Income Protection
(IP) and Revenue Assurance with the base price option (RA-BP)). These insurance
should be used by producers who do not aggressively hedge by selling futures contracts
or by forward contracting. As a guideline, aggressive hedging means contracting
more than 30 percent of expected production prior to harvest.
2. Revenue insurance with a guarantee increase (i.e., Crop Revenue Coverage
(CRC) and Revenue Assurance with the harvest price option (RA-HP)). Theses insurances
should be used by producers who aggressively hedge.
The guarantee increase offered by CRC and RA-HP causes the revenue guarantee
to increase when harvest prices are above base prices (set in February). When
prices rise, farmers who hedge are losing money on their hedges. The guarantee
increase causes the insurance policies to make payments in cases when yields decline.
These payments can cover hedging losses.
The policies without the guarantee increase do not offer this protection. Not
having this protection can cause pre-harvest hedging to eliminate the risk protection
offered by IP and RA-BP.
Farm or County Level Products
Two insurance products provide protection at the county level. Group Risk Plan
(GRP) makes payments when county yields fall below a yield guarantee. Group Risk
Income Plan (GRIP) makes payments when county revenues falls below a revenue guarantee.
GRP and GRIP's net costs -- per acre costs of the product minus expected payments
from the insurance products - are lower than products that provide protection
at the farm level (APH, IP, RA, and CRC). Often, expected payments from GRP and
GRIP exceed the premiums paid for the products.
However, GRP and GRIP often offer less risk protection than the farm level
products. Therefore, GRP and GRIP should only be used by farmers in strong financial
positions where one adverse year does not cause irreversible harm to the farm
business. GRP and GRIP also works best for farms whose yields closely track county
Below are the insurance policies and characteristics of farmers who should
select those insurance products:
APH -- use pre-harvest hedging, moderate to vulnerable financial position
IP -- limited use pre-harvest hedging, moderate to vulnerable financial position
RA-BP -- limited use pre-harvest hedging, moderate to vulnerable financial
RA-HP -- aggressively use pre-harvest hedging, moderate to vulnerable financial
CRC -- aggressively use pre-harvest hedging, moderate to vulnerable financial
GRP -- use pre-harvest hedging, strong financial position
GRIP -- limited use of pre-harvest hedging, strong financial position
More information on crop insurance products is available at farmdoc (www.farmdoc.uiuc.edu).
Issued by: Gary Schnitkey,
Department of Agricultural and Consumer Economics