Risk Management Programs in the 2008 Farm Bill William Edwards, Extension Economist

Risk Management Programs in the 2008

Farm Bill

William Edwards, Extension Economist

Risk Management Tools• Direct payments. • Loan deficiency payments (LDPs) or

marketing loans• Price counter-cyclical payments• Revenue counter-cyclical payments

(ACRE)--new• Permanent disaster payments (SURE)--

new

Direct Payments

• Few changes

• Paid on 83.3% of base acres for 2009, 2010, 2011, back to 85% in 2012.

• Advance payment of 22% beginning Dec. 1 of prior year (2009-2011)

• Remainder paid after October 1.

LDPs and Marketing Loans

• Posted County Price is now a 30-day moving average.

• No change to corn and soybean loan rates.

• No payment limits, so no need to buy certificates.

Price Counter-Cyclical Payments

• Soybean target price increases from $5.80 to $6.00 in 2010-2012.

• Wheat target price increases from $3.92 to $4.17 in 2010-2012.

• Price triggers: 2009 2010– Corn $2.35 $2.35– Soybeans $5.36 $5.56– Wheat $3.40

$3.65

Supplemental Revenue Assistance (SURE)

A Permanent Disaster Program

Supplemental Revenue Assistance (SURE)

• New in the 2008 farm bill• “Add-on” coverage to crop

revenue insurance• All crops, not individual crops• Administered by Farm Service

Agency• In place through 2012

To be Eligible:• Land must be in a “disaster” county

(U.S. Secretary of Ag designation)• Or, in a contiguous county• Or, production loss on all crops on

the farm must exceed 50% of expected gross value.

• At least one crop must have a 10% or greater yield loss.

SURE is Based on All Acres Farmed by an Operator

• Aggregate guarantees and revenues across:– All crops– All counties– States

Increases Guarantees by 15%

• Adds 15% to value of crop insurance guarantee

• Maximum is 90% of expected revenue

Crop insurance guarantee

SURE guarantee

70 % 80.5 %

75 % 86.25 %

80 % 90 %

85 % 90 %

Yields Used for SURE

• Use higher of crop insurance proven yield (APH) or counter-cyclical payment base yield (93.5% of 1998-2001 yields)

• If APH yield uses “plug” yields (60% of T-yield) these years are not used for SURE.

SURE Guarantees

• For APH crop insurance, SURE yield x % guarantee.– Ex: 160 bu. x 86.25% = 138 bu.

• For revenue insurance use crop insurance indemnity price– Ex: 160 bu. x 86.25% x $5.40 =

$745.20

SURE Actual Revenue• Actual yields (same as for insurance)• USDA Marketing year average cash

price (Sept. 2008 – Aug. 2009 for 2008 crop)

• Plus crop insurance payments received• Plus 15% of FSA direct payments• Plus any other FSA or disaster payments

SURE Payment

• (Guarantee minus actual revenue) x

60%

• Limit of $100,000 per year per

producer and per spouse

• Final payment not known until

September 2009

Example (all corn)

• Crop insurance (basic RA) – 75% guarantee – 160 bu/acre APH yield – $5.40 indemnity price – $648 per acre guarantee

• SURE guarantee– $648 + 15% = $745.20 / acre

guarantee

Example• Crop insurance

– Actual yield is 140 bu. per acre– November futures price is $3.74– Actual revenue is $524 per acre– Crop insurance payment is $648 -

$524 = $124 per acre

Example--SURE• Actual yield is 140 bu. per acre• 2008 marketing year price is $4.20• Actual revenue is $588 per acre• Plus $124 crop insurance payment• Plus 15% of $20 FSA direct payment ($3)• Equals $715 SURE revenue• Shortfall = $745 - $715 = $30• Payment = 60% x $30 = $18

However,

• If 2008 corn marketing year price is above $4.42, there is no SURE payment.

Crop Insurance plus SURE Payment

$-

$50

$100

$150

$200

$250

$300

160 155 150 145 140 135 130 125 120 115 110 105 100 95 90 85 80

Corn Yield-bu/acre

$ per acre

SURE pmt.

Crop Ins. Pmt

Remember---

• SURE payments are based on:– All crops and all counties together– Marketing year cash price instead of

harvest futures price– 60% of loss

All Major Crops Must be Insured.Exceptions:

• Pasture• Crops whose expected value is less

than 10% of the total for the farm.• Expected value is:

crop insurance proven yield (or default) x

crop insurance indemnity price

Insurance Choices• Standard multiple peril policies

(yield, revenue, individual or group)

• Catastrophic (CAT): 50% guarantee @ 55% of the indemnity price

• Noninsured Assistance Program (NAP) for non-insurable crops, including pasture

Insurable CropsRMA website, Actuarial Documents

• Corn• Soybeans• Oats for grain• Alfalfa (60% stand, 5 years old or less)• Red clover (60% stand or more)• Mixed forage (25-59% alfalfa stand,

5 years old or less)• Others?

Noninsurable Crops (NAP)

• Alfalfa (older than 5 years)• Mixed forages (older than 5 years)• Rye, wheat, barley?• Sorghum?• Horticultural crops

For 2009 - 2012• NAP fee limits are $250 per crop, $750

per county, $1,875 per producer.• CAT fee limits are $300 per crop, $900

per county, $2,250 per producer

• Insurable forages must be covered by September 30 (CAT or regular)

• NAP crops by December 1

Questions About SURE• How is the SURE guarantee affected by:

– Increasing insurance guarantee (CRC, RA-HPO)?

– Decreased insurance guarantee (late planting)?

– Group policies (GRP, GRIP)?

What to do?

• Find out if you are in an eligible county for 2008

• Estimate potential payments– Ag Decision Maker calculator at

www.extension.iastate.edu/agdm/• Watch for FSA announcements• Insure all required crops for 2009

Average Crop Revenue Election (ACRE)

• USDA counter-cyclical program based on gross revenue

• Replaces price counter-cyclical payment (CCP) in 2003 farm bill (optional)

What do you give up?

• 20 % of your current direct payments

Iowa averages.

Crop Current Payment

ACRE Payment

Difference

Corn $28.67 $22.94 $5.73

Soybeans $13.55 $10.84 $2.71

USDA loan rate lowered by 30%.

• Loan Deficiency Payments (LDPs) are available when market price is below the loan rate

• Will it matter?

Current Loan Rate

ACRE Loan Rate

Corn $1.95 $1.365

Soybeans $5.00 $3.50

• Give up price counter-cyclical payment

• These are available when the marketing year price is below:– $2.35 for corn– $5.36 for soybeans

• Will it matter?

What do you gain?

• Possible payment if both state level revenue and farm level revenue are below the triggers.

• Payments are for each crop.• Decision is for each FSA farm unit.

State Trigger• Average US cash marketing price for

last 2 years (September through August)

• Average of last 5 years of state yields, excluding high and low years (Olympic)

• x 90%

State Triggers for IowaYear Iowa Yield per Planted

A. Corn Soybeans

Average Price Corn Soybeans

2004 176.7 bu. 49.0 bu.

2005 168.9 bu. 52.5 bu.

2006 162.7 bu. 50.5 bu.

2007 166.8 bu. 51.5 bu. $4.20 $10.10

2008 161.7 bu. est. 46 bu. est.

$4.40 est. $ 9.85 est.

Average 166.1 bu 50.3 bu. $4.30 $ 9.98

Corn: 166.1 bu. x $4.30 x 90% = $643 per acre

Soybeans: 50.3 bu. x $9.98 x 90% = $452 per acre

State Triggers cannot change by more than 10% each year

(up or down)

$0$100$200$300$400$500$600$700$800$900

2009 2010 2011 2012

Corn max

Corn min

Beans max

Beans min

Actual Revenue

• State: 2009 state yield x current marketing year price (Sept.- Aug.)

• Farm: 2009 farm yield x current marketing year price

• Both must be below the respective trigger level for a payment to be made.

Payment

• State trigger minus state actual revenue

• Not more than 25% of the state trigger

• X ratio of average farm yield to average state yield

• Paid on 83.3 % of planted acres (but not more than USDA base acres)

State trigger is 166 bu. x $4.10 = $681 (corn)Farm trigger is 180 bu. X $4.10 = $738

+ $20 crop insurance premium = $7582009 state yield is 160 bu.2009 farm yield is 200 bu.2009 marketing year price is $3.502009 state revenue is 160 bu. x $3.50 = $5602009 farm revenue is 200 bu. x $3.50 = $700 ACRE payment = ($681 - $560) x 83.3% x 180 bu. /

166 bu. = $109

Looking Beyond

• Can elect into ACRE in 2009, 2010, 2011, or 2012.

• Once elected you cannot opt out.• Average prices and yields will be

updated each year.• Triggers cannot change more than

10 %.

Decision• Give up 20% of direct payments

– Maybe some LDP or CCP payment

• May get an ACRE payment if:– Prices trend downward from 2007/2008– State and farm have low yields

• Probably won’t get an ACRE payment if:– Prices rise or are steady– No low yield years occur

Resource Material on Ag Decision Maker

• Fact sheets• SURE calculator• ACRE estimator• www.extension.iastate.edu/agdm/

0.00

0.10

0.20

0.30

0.40

0.50

0.60

9/1/2005 10/21/2005 12/10/2005 1/29/2006 3/20/2006 5/9/2006 6/28/2006 8/17/2006

LDP Rate Month LDP 30 Day LDP

Example of New Grain PCP Calculations vs Example of New Grain PCP Calculations vs Actual LDP Rates for 05/06 Corn, Webster Actual LDP Rates for 05/06 Corn, Webster

County, IACounty, IA

Month LDP uses an average of 25 reporting days per month

30 Day LDP uses the previous 30 reported prices

LDP Rate is the rate reported by FSA

Decision Points for SURE• If all crops will be insured anyway,

there is no added cost for SURE.• If additional crops have to be insured,

there is an added cost.– $300 per crop for catastrophic coverage– $250 per crop for NAP coverage– Standard APH or revenue insurance at a

low level could be cheaper for small areas

Determine if you are eligible for a SURE

payment.• Secretarial declared disaster county, or• Contiguous county, or• At least 50% loss of gross revenue

– APH yield x crop insurance prices x acres, summed over all crops (SURE expected revenue), compared to:

– Actual yield x USDA marketing year price x acres, summed over all crops (SURE actual revenue)

– Unlikely in Iowa

Information Needed

• Yields submitted for crop insurance, for all land farmed.

• Crop insurance payments received.• USDA commodity payments

received.

Will I get a SURE payment?

• If you got a crop insurance payment for 2008, “probably.”

• Unless:– One insurance unit had a big yield loss and

the rest did not. Price loss affects all units.– Grain prices trend upward through August

(so USDA marketing year price is significantly higher than the harvest insurance price).

Maximum USDA marketing year prices to trigger SURE

paymentRA Insurance CRC Insurance

Corn Soybeans

Corn Soybeans

Harv. price

$3.74 $9.22 $4.13 $10.36

Guarantee

85% $4.01 $ 9.93 $4.43 $10.97

80% $4.31 $10.67 $4.73 $11.71

75% $4.39 $10.86 $4.81 $11.90

70% $4.34 $10.75 $4.76 $11.79

65% $4.30 $10.64 $4.46 $11.05

Assumes harvested yield is 10% less than APH yield.

SURE Payment Calculator (Supplemental Revenue Assistance)Ag Decision Maker -- Iowa State University Extension

Enter your input values in shaded cells.

Name of farm or producer

Corn Soybeans Other Crop Other CropPlanted acres 500 500 1,000

Type of crop insurance* 2 2 6 5APH yield for crop insurance 160 50Counter-cyclical payment base yield 100 40Crop insurance indemnity price 5.40$ 13.36$ Crop insurance guarantee % 75% 75%Crop insurance guarantee 324,000$ 250,500$ -$ -$ 574,500$

Harvested acres 500 500 1,000 Actual or expected yield on harvested acres 150 41 Harvest crop insurance price 3.74$ 9.22$ 2008 marketing year price 3.90$ 9.00$ Crop insurance final guarantee 324,000$ 250,500$ -$ -$ Crop insurance actual revenue 280,500$ 189,010$ -$ -$ Crop insurance indemnity payment 43,500$ 61,490$ -$ -$ 104,990$

SURE APH yield if different than insurance APHSURE guarantee before cap 372,600$ 288,075$ -$ -$ 660,675$ SURE cap (maximum guarantee) 689,400$ SURE guarantee in effect 660,675$

SURE actual revenue 292,500$ 184,500$ -$ -$ 477,000$ Crop insurance indemnity payment 43,500$ 61,490$ -$ -$ 104,990$ Prevented planting payment received -$ FSA direct payment 12,500$ 5,000$ 2,625$ Other FSA commodity payments received -$ Other federal disaster payments received -$

Total crop revenue, including insurance payment, 15% of direct payments and other disaster payments 584,615$ SURE guarantee minus SURE actual revenue 76,060$ SURE payment (60% of difference, maximum of $100,000) 45,636$

630,251$

Maximum marketing year prices to trigger pymt. 4.16$ 11.76$

For more information on calculating SURE payments see file A1-44. Calculations are based on information available at the time of publication. Procedures are subject to change, however. Actual payments may differ from estimates shown below.

Total for All Crops

Place the cursor over cells with red triangles to read comments.

Total crop revenue including SURE payment

Example Farm

RA basic RA basic NAP CAT

How will SURE affect my crop insurance decision?

• Higher or lower levels of crop insurance give a higher or lower SURE trigger.

• Producers who insure at the 80% or 85% level get less additional coverage due to 90% cap.

• SURE is for all crops and all acres together

• Sure pays only 60% of the revenue loss

RA insurance versus SURE (20% yield loss, 2008 prices)Insurance level

Insurance

payment

SURE payment

Insurance

premium

Net Payment

85% $447 $65 $38 $474

80% $371 $85 $23 $433

75% $294 $96 $14 $376

70% $217 $89 $8 $298

65% $141 $82 $5 $218

Crop Insurance plus SURE Payment

$-

$50

$100

$150

$200

$250

$300

160 155 150 145 140 135 130 125 120 115 110 105 100 95 90 85 80

Corn Yield-bu/acre

$ per acre

SURE pmt.

Crop Ins. Pmt

ACRE Decision Points

Choices:1. Stay with current program2. Enroll in ACRE in 20093. Enroll in ACRE in a later year

ACRE Advantages• Revenue guarantee instead of price guarantee• Guarantee based on higher prices

– CCP: trigger prices are $2.35 and $5.36– ACRE: initial prices about $4.00 and $9.50

• Guarantee based on 2004 to 2008 yields instead of 1998 to 2001 yields

• Guarantee based on actual crop acres each year (CCP is on base acres)

• Guarantee can’t decrease more than 10% / yr.• Separate coverage for each crop and FSA unit

ACRE Disadvantages• Lose 20% of direct payment for 4 years

• USDA loan rate is 30% lower

– Price must be lower to trigger LDPs– CCC market loan per bushel is lower

CropCurrent Payment

ACRE Payment Difference

Corn (IA avg.) $28.67 $22.94 $5.73

Soybeans (IA avg.)

$13.55 $10.84 $2.71

Current Loan Rate ACRE Loan Rate

Corn $1.95 $1.365

Soybeans $5.00 $3.50

ACRE Disadvantages

• No price counter-cyclical payments

• Must document yields for 2004 to 2008, by FSA unit

ACRE DecisionSteady to rising prices, no yield disasters:

Neither ACRE nor CCP will pay. Stay with CCP and get full direct

payment.

Very low prices and high yields: CCP will pay more than ACRE.

Falling prices and/or a yield disaster: ACRE will pay more than CCP.

Enroll in ACRE in 2009 rather than wait

ACRE Payment Estimator (Average Crop Revenue Election)Ag Decision Maker -- Iowa State University Extension

Enter your input values in shaded cells.

Farm Information

Name of operator or farm

FSA farm numberYield Data Corn Soybeans

Assumed annual yield increase, % 2.0% 1.0% % per year

Farm level harvested yields, bu. per acre:

2004 210 55 bu. per acre

2005 175 46 bu. per acre

2006 183 51 bu. per acre2007 165 48 bu. per acre

2008 150 42 bu. per acre

Estimated 2009 180 49 bu. per acre

Estimated 2010 184 49 bu. per acre

Estimated 2011 187 50 bu. per acre

Estimated 2012 191 50 bu. per acreOlympic Average Yields

2009 174 48.3 bu. per acre

2010 173 47.6 bu. per acre

2011 176 48.8 bu. per acre

2012 176 48.8 bu. per acre

Olympic Average Farm Yields

For additional information, see Information File A1-45, Average Crop Revenue Election (ACRE)

Example Farm

123456

Place the cursor over cells with red triangles to read comments.

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

2009 2010 2011 2012

$-

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

Price per Bu.

Enrolled in ACRE Not enrolled in ACRE

Corn Price Soybeans Price

Year Corn Soybeans Corn Soybeans

2004 176.7 48.8 2.06$ 5.74$ 100

2005 168.9 52.2 2.00$ 5.66$

2006 162.7 50.3 3.04$ 6.43$ 2007 167.4 51.9 4.20$ 10.10$

Estimated 2008 164.6 45.6 3.90$ 9.00$

Estimated 2009 171 50 3.90$ 9.00$ 100%

Estimated 2010 174 51 3.90$ 9.00$ 100%

Estimated 2011 178 51 3.90$ 9.00$ 100%

Estimated 2012 185 52 3.90$ 9.00$ 100%Olympic Average State Yields

2009 167 50.3 4.05$ 9.55$ 0.356

2010 167 50.8 3.90$ 9.00$ 0.062

2011 168 50.5 3.90$ 9.00$ 0.034

2012 171 50.9 3.90$ 9.00$ 0.155

2-year Average Prices

Price trend, % of 2008 prices

U.S. Marketing Year PriceIowa Average Yield per Planted Acre

Iowa and U. S. Yield and Price Data

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

2009 2010 2011 2012

$-

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

Yield assumption (click on the desired button)

Assume 5-year average yield plus annual increase.

Assume random high, medium and low yields. 1

(Press the F9 key repeatedly for random yields.)Current Payment Information Corn Soybeans

Counter-cyclical payment base yields 150 42 bu. per acre

Counter-cyclical payment base acres 100 100 acres

Planted acres expected 2009 100 100 acres

Planted acres expected 2010 80 120 acres

Planted acres expected 2011 120 80 acres

Planted acres expected 2012 80 120 acres

Crop insurance premium paid in 2008, per acre 20.00$ 10.00$ $ per acre

USDA loan rate in county 1.95$ 5.00$ $ per bu.

Adjusted loan rate if enrolled in ACRE (70 %) 1.37$ 3.50$ $ per bu.

USDA target price 2.63$ 5.80$ $ per bu.

Direct payment from FSA, total $ for farm in 2008 total $

Number of payment limitations for USDA payments

Direct payment limit if in ACRE

ACRE payment limit

39,200$

65,800$

1

4,000$ $-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

2009 2010 2011 2012

$-

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

Price per Bu.

Enrolled in ACRE Not enrolled in ACRE

Corn Price Soybeans Price

Assume trend line yields

Assume random yields, inverse prices

Potential ACRE guarantees, revenues and paymentsCorn 2009 2010 2011 2012 TotalFarm level ACRE trigger, $ per acre 726$ 696$ 707$ 708$ Farm level ACRE revenue, $ per acre 703$ 717$ 731$ 746$

State level ACRE trigger, $ per acre 609$ 586$ 589$ 600$ State level ACRE revenue, $ per acre 669$ 678$ 695$ 722$

Projected ACRE payment per acre -$ -$ -$ -$ Projected ACRE payment for all acres -$ -$ -$ -$ -$ Potential loan deficiency payments under ACRE -$ -$ -$ -$ -$

Soybeans 2009 2010 2011 2012 TotalFarm level ACRE trigger, $ per acre 472$ 439$ 449$ 449$ Farm level ACRE revenue, $ per acre 440$ 444$ 449$ 453$

State level ACRE trigger, $ per acre 433$ 412$ 409$ 412$ State level ACRE revenue, $ per acre 452$ 460$ 462$ 469$

Projected ACRE payment per acre -$ -$ -$ -$ Projected ACRE payment for all acres -$ -$ -$ -$ -$ Potential loan deficiency payments under ACRE -$ -$ -$ -$ -$

Corn and soybeans combined, enrolled in ACRE 2009 2010 2011 2012 TotalTotal ACRE payment for corn and soybeans -$ -$ -$ -$ -$ Total loan deficiency payments (LDPs) -$ -$ -$ -$ -$ Total direct payments (80%) 3,136$ 3,136$ 3,136$ 3,200$ 12,608$

Total payments if enrolled in ACRE 3,136$ 3,136$ 3,136$ 3,200$ 12,608$

Potential payments if not enrolled in ACRE 2009 2010 2011 2012 TotalTotal price counter cyclical payments -$ -$ -$ -$ -$ Total loan deficiency payments (LDPs) -$ -$ -$ -$ -$ Total direct payments 3,920$ 3,920$ 3,920$ 4,000$ 15,760$

Total payments if not enrolled in ACRE 3,920$ 3,920$ 3,920$ 4,000$ 15,760$

$3.90 $3.90 $3.90 $3.90

$9.00 $9.00 $9.00 $9.00

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

2009 2010 2011 2012

Total USDA Payments

$-

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

Price per Bu.

Enrolled in ACRE Not enrolled in ACRE

Corn Price Soybeans Price

$8.10

$7.20

$6.30

$2.34

$2.73$3.12$3.51

$5.40

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

2009 2010 2011 2012

Total USDA Payments

$-

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

Price per Bu.

Enrolled in ACRE Not enrolled in ACRE

Corn Price Soybeans Price

$2.36$2.67

$3.66$3.18

$6.03$6.65

$8.63

$7.67

$-

$5,000

$10,000

$15,000

$20,000

$25,000

2009 2010 2011 2012

Total USDA Payments

$-

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

Price per Bu.

Enrolled in ACRE Not enrolled in ACRE

Corn Price Soybeans Price

How will ACRE affect my crop insurance decision?

• Insurance premium is added to farm level trigger revenue. No other interaction.

• ACRE is a longer term risk tool (5-year average yield, 2-year average price).

• One trigger and final payment are based on state average yields.

• ACRE price is 12-month average, not harvest.

• Based on FSA units not insurance units.

Payment Limitations (per individual)

• Loan Deficiency Payments no limit • Marketing Loan Gains no limit• SURE $100,000• ACRE $ 65,000 (plus direct pmt. given up for ACRE)• Direct Payment $ 40,000

(minus direct pmt. given up for ACRE)

• CCP $ 65,000