Department of Economics Risk Management for Crop Production Agricultural Credit School Ames, Iowa June 9, 2009 Chad Hart Assistant Professor/Grain Markets

Department of Economics

Risk Management for Crop Production

Agricultural Credit SchoolAmes, Iowa

June 9, 2009

Chad HartAssistant Professor/Grain Markets Specialist

[email protected]


Iowa Corn Prices vs. Costs

Source: USDA-NASS and Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-21.pdf

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Preliminary estimates for 2009 costs are over $4 per bushel.

2009 Futures-based Season-average Price Estimate $4.35Latest USDA U.S. 2008 Season-average Price Estimate $4.20Latest USDA Iowa 2008 Season-average Price Estimate $3.95


Iowa Soybean Prices vs. Costs

Source: USDA-NASS and Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-21.pdf

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Season-average Price Cost

Preliminary estimates for 2009 costs are nearly $10 per bushel.

2009 Futures-based Season-average Price Estimate $10.00Latest USDA U.S. 2008 Season-average Price Estimate $9.85 Latest USDA Iowa 2008 Season-average Price Estimate $9.65


Price Movements Since 2007

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Crop InsuranceOne of many risk management strategies

Traditionally set up to protect farmers in times of low crop yields

Also offers coverage for low prices

Available on over 100 commodities


Why Crops Fail

44%

4%22%

3%

6%

8%

13% DroughtHeatExcess MoistureCold Wet WeatherFreezeHailOther


Historical Crop Insurance Participation

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Crop Insurance Subsidies

Coverage Level Subsidy %50% - 55% 67%55% - 65% 64%65% - 75% 59%75% - 80% 55%80% - 85% 48%> 85% 38%


Types of Crop Insurance

Individual Yield (APH)

Area Yield (GRP)

Individual Revenue (CRC, IP, RA)

Area Yield - Individual Revenue Combination (GRIP)


Individual Yield Insurance (APH)Farmer chooses percentage of expected

yield to insure– Expected yield measured by average yield

Price at which the crop is valued is set up front and does not change

In 2008, 1.38 million acres of Iowa corn and 1.09 million acres of Iowa soybeans were covered with an APH policy


Individual Revenue Insurance(CRC, IP, RA)

Farmer chooses percentage of expected revenue to insure

– Expected revenue measured by average yield times initial crop price

Price at which the crop is valued can move with price changes in the market

Final value of the crop determined by average futures prices over harvest period


Individual Revenue Insurance(CRC, IP, RA)

CRC and RA have a “harvest price option”

If the harvest price is greater than the planting price, then the harvest price is used in all calculations

In 2008, 9.64 million acres of Iowa corn and 7.21 million acres of Iowa soybeans were covered with individual revenue policies


Iowa Crop Insurance FiguresAverage producer-paid crop insurance

premium in Iowa

- Corn $22.66/acre

- Soybeans $17.58/acre

Most typical coverage

- Both crops 75% RA


Iowa Crop Insurance FiguresAverage crop insurance liability in Iowa

- Corn $640.08/acre

- Soybeans $459.79/acre

Total Iowa crop insurance producer-paid premiums

- 2007 $279 million

- 2008 $423 million


Iowa Crop Insurance Premiums & Prices

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Producer-Paid Premiums Corn RA Price Soy RA Price


Iowa Crop Insurance Premiums & Prices

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Producer-Paid Premiums Soy RA Price 2.2*Corn Price


Average Producer-Paid Premiums

For RA, APH and CRC graphs would look similar

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Iowa Crop Insurance Payouts (As of 5/26/09)

Source: USDA-RMA, Summary of Business reports

Crop insurance indemnities for Iowa thus far = $1.09 billionEvery county in Iowa has received at least $3 million in crop insurance payments.


Farm Bill TwistStarting in 2009, farmers will need to

participate fully in crop insurance and non-insured crop assistance programs to qualify for the federal government’s new disaster assistance program (SURE)

SURE guarantees and payments are tied to crop insurance decisions


Supplemental Revenue Assistance Payments Program (SURE)

Provides payments to producers in disaster counties for crop losses

Based on crop insurance program, non-insured crop assistance program, and disaster declarations

Whole-farm revenue protection, not commodity-specific


SURE TriggersDeclared “disaster county” by Secretary of

Agriculture or contiguous to one

Farm with losses exceeding 50% of normal production in a calendar year

One crop must have at least a 10% yield loss


Iowa in 2008


SURE SettingsParticipation and revenue guarantee tied to

crop insurance (for all crops that represent at least 5% of the farm’s crop value)

Farm revenue, including some government payments, used to determine payment

Payments set as 60% of the difference between guarantee and actual revenueLimited to $100,000 per producerPayments not known or paid until the end of the

marketing year


SURE GuaranteeFarm guarantee is the sum of

115%*Crop insurance price election*Crop insurance coverage level*Planted acres* Max(APH or CCP yield), for insurable commodities

120%*NCAP price election*Planted acres* Max(NCAP or CCP yield), for non-insurable commodities

For an individual crop, the guarantee can not be greater than 90% of the crop’s expected revenue


SURE Expected Farm Revenues

Expected farm revenue is the sum ofMax(APH or CCP yield)*Planted acres*100% of

the crop insurance price for insurable commodities

100% of NCAP yield*100% of NCAP price*Planted acres for non-insurable commodities


SURE Actual Farm Revenues

Actual farm revenue is the sum ofHarvested acres*Farm yield*National season-

average price for all commodities15% of direct paymentsAll CCP or ACRE paymentsAll marketing loan benefitsAll crop insurance or NCAP paymentsAny other disaster assistance payments


SURE CalculatorUSDA has created a calculator for SURE http://www.fsa.usda.gov/Internet/FSA_File/sure_calculator.xls http://www.fsa.usda.gov/Internet/FSA_File/calculator_instructions.pdf

ISU Extension information on SURE http://www.extension.iastate.edu/agdm/crops/html/a1-44.html http://www.extension.iastate.edu/agdm/crops/xls/a1-44surecalculator.xls


Average Crop Revenue Election (ACRE)

ACRE is a revenue-based counter-cyclical payment programBased on state and farm-level yields per planted acre

and national prices

Producers choose between the current price-based counter-cyclical payment (CCP) program and ACRE


Farmer Choice Starting in 2009, producers will be given the

option of choosing ACRE or notCan choose to start ACRE in 2009, 2010, or beyondOnce you’re in ACRE, you stay in ACRE until the next

farm bill If you sign up for ACRE, you must do so for all eligible

cropsDeadline for sign-up, Aug. 14 (this year)

Producers choosing ACRE agree to 20% decline in direct payments and 30% decline in loan rates


ACRE Settings

ACRE is based on planted acres

Total acres eligible for ACRE payments limited to total number of base acres on the farm

Farmers may choose which planted acres are enrolled in ACRE when total base area is exceeded


Loan Rates under ACRE

Corn $1.365 Soybeans $3.50

Current Loan Rates

Corn $1.95 Soybeans $5.00


Average Direct Payments Per Payment Acre for Iowa

Crop Current Program

ACRE Difference

Corn 32.51 26.01 6.50

Soybeans 15.71 12.57 3.14

Please note the 83.3 or 85% rule has not been yet to these payments.


ACRE Program has state and farm trigger levels, both

must be met before payments are made

Expected state and farm yield based on 5 year Olympic average yields per planted acre

ACRE price guarantee is the 2 year average of the national season-average price


ACRE Set-up for Iowa CornYear Yield per Planted Acre

(bu./acre)

2004 181.0

2005 173.0

2006 166.0

2007 171.0

2008 169.0

Olympic Average 171.0

Year Season-average Price ($/bu.)

2007 4.20

2008 4.20

Average 4.20

The 2008 yield and price are USDA’s May 2009 estimates.

So the expected state yield would be 171.0 bushels per acre and the ACRE price guarantee would be $4.20 per bushel.


ACRE StructureACRE revenue guarantee = 90% * ACRE price

guarantee * Expected state yieldFor our example, the ACRE revenue guarantee is

90% * $4.20/bu. * 171.0 bu./acre

$646.38/acre

ACRE actual revenue = Max(Season-average price, ACRE Loan rate) * Actual state yield per planted acre


ACRE StructureACRE Farm revenue trigger = Expected farm

yield * ACRE price guarantee + Producer-paid crop insurance premiumLet’s assume farm yields equal to state yields and

use the average producer-paid crop insurance premium for 2008

171.0 bu./acre * $4.20/bu. + $22.66/acre

$740.86/acre


ACRE Payment TriggersACRE actual farm revenue = Max(Season-

average price, ACRE Loan rate) * Actual farm yield per planted acre

Given our example, ACRE payments are triggered when ACRE actual revenue is below $646.38/acre and ACRE actual farm revenue is below $740.86/acre


ACRE PaymentsPayment rate = Min(ACRE revenue guarantee –

ACRE actual revenue, 25% * ACRE revenue guarantee)

Payments made on 83.3% of planted acres in 2009-11, 85% in 2012 (up to total base)

ACRE payment adjustment: Payment multiplied by ratio of Expected farm yield to Expected state yield


ACRE Payment TimingPayments can begin as soon as practicable

possible after the end of the marketing yearSo 2009 ACRE payments could start to be paid

out in October 2010There are no provisions for advance payments


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Looking Beyond 2009The ACRE revenue guarantee is updated each

year using the same rules5 year Olympic average for yields2 year average for prices

But the ACRE revenue guarantee can not change by more than 10 percent (up or down) from year to yearSo if the 2009 ACRE revenue guarantee is $646.38, then

the 2010 ACRE revenue guarantee must be between $581.74 and $711.02


An Example for 2009 To start, we need the expected state and farm

yields and the ACRE price guarantee

Expected state yield 171 bu/acre Expected farm yield 180 bu/acre

2004-08 Olympic average of yields per planted acre

ACRE price guarantee $4.20/buAverage of 2007 and 2008 season-average prices

ACRE Revenue Guarantee $646.3890% * $4.20/bu * 171 bu/acre

ACRE Farm Revenue Guarantee $776.00$4.20 * 180 bu/acre + $20/acre


Example (continued) For 2009, we need the actual state yield, the

actual farm yield , and the season-average price

Actual state yield 165 bu/acre Actual farm yield 190 bu/acre Season-Average Price $3.50/bu

ACRE Actual Revenue $577.50$3.50/bu * 165 bu/acre

ACRE Farm Actual Revenue $665.00$3.50/bu * 190 bu/acre


Example (continued)State Trigger

ACRE Revenue Guarantee $646.38ACRE Actual Revenue $577.50

So we’ve met the state trigger

Farm TriggerACRE Farm Revenue Guarantee $776.00ACRE Farm Actual Revenue $665.00

So we’ve met the farm trigger


Example (continued)

ACRE Payment $60.40Min(25%*$646.38, $646.38 – $577.50)

* (180 bu/acre / 171 bu/acre)* 83.3%


Farmer’s ChoiceIn deciding about ACRE, farmers must

weigh:

The loss of 20% of their direct payments, a 30% drop in the marketing loan rate, and no access to CCP payments versus

The potential for payments under ACRE


Comparing Program ParametersFor Iowa Corn

Under the current CCP programCCP Yield Average = 122.1 bushels per acreCCP Effective Target Price = $2.35/bushel

In our example, for ACREACRE Yield Guarantee = 171.0 bushels per acreACRE Price Guarantee = $4.20/bushel

20% of average Iowa corn direct payment = $6.50 per acre


Farmers Have Some Time to DecideACRE signup started in April, will end in

August

Preliminary ACRE information and tools are available at: http://www.extension.iastate.edu/agdm/crops/html/a1-45.htmlhttp://www.fsa.usda.gov/FSA/webapp?area=home&subject=dccp&topic=landing

http://www.farmdoc.uiuc.edu/fasttools/index.asp

http://www.extension.iastate.edu/agdm/crops/html/a1-45.html

http://www.fsa.usda.gov/FSA/webapp?area=home&subject=dccp&topic=landing




Forms and Records Forms

Election: CCC-509 ACRE (fill out once) Enrollment: CCC-509 (fill out each year) If you do not fill out the enrollment paperwork, you are not in the

program All producers, including landowners, must sign the election form

Records Must annually report acreage and production to FSA In proving historical farm yields, producers must present

production records for continuous years (no gaps are allowed)


Forms and RecordsRecords

The farm yields will be the higher of the proven farm yield or 95% of the county average yield determined by FSA (NASS county production/FSA county acreage)

Zero production reports are allowedCrop insurance and NAP production reports will workCommercial receipts, settlement sheets, warehouse

ledger sheets that are reliable and/or verifiable will workLoan and LDP records will work


All producers and owners must sign.


This form must be filled out each year.


Thank you for your time!

Any questions?

My web site:http://www.econ.iastate.edu/faculty/hart/

Documents

Department of Economics Risk Management for Crop Production Agricultural Credit School Ames, Iowa June 9, 2009 Chad Hart Assistant Professor/Grain Markets