Getting a Grip on GRIP

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Getting a Grip on GRIP. Gary Schnitkey Agricultural Economist University of Illinois. Topics. Illinois versus Iowa experience How GRIP works Risks/Returns Situations where it works. GRIP. GRIP (Group Risk Income Plan) is revenue insurance based on county yields - PowerPoint PPT Presentation

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  • Getting a Grip on GRIPGary SchnitkeyAgricultural EconomistUniversity of Illinois

  • Topics

    Illinois versus Iowa experienceHow GRIP works Risks/ReturnsSituations where it works

  • GRIPGRIP (Group Risk Income Plan) is revenue insurance based on county yieldsGRIP-NoHR (No Harvest Revenue option) much like RA with base price optionGRIP-HR (Harvest Revenue option) much like CRC or RA with harvest price optionGRIP is the revenue counterpart to the county-level yield insurance GRP (Group Risk Plan)

  • Group Products Akin ToGroupAkin toInsurance Type GRP APH Yield

    GRIP-NoHRIP, RA with Revenue no base priceguarantee increase

    GRIP-HRCRC, RA with Revenue - harvest price guarantee increase

  • Introduced in I statesIntroducedGRP (Group Risk Plan) 1995GRIP-NoHR 1999 (Group Risk Income Plan -- No Harvest Revenue option)GRIP-HR 2004 (GRIP -- Harvest Revenue option)

  • Group Product Use, Corn, IllinoisGRPGRIPIowa 2005 UseGRP 1.2%GRIP 3.6%

  • Group Product Use, Soybeans, IllinoisGRIPGRPIowa 2005 UseGRP 1.9%GRIP 4.7%

  • Percent of Iowa Counties Receiving GRIP-NoHR Payments for Corn, 1999 -2004 ---------- Coverage Level ------------Year 90% 85% 80% 75% 70%1999 54% 30% 11% 4% 2%2000 66 22 2 1 02001 72 49 25 11 12002 3 3 3 1 12003 3 0 0 0 02004 82 72 41 16 1

    AVG 47% 29% 13% 6% 1%

  • Percent of Iowa Counties Receiving GRIP-NoHR Payments for Soybeans, 1999 -2004 ---------- Coverage Level ------------Year 90% 85% 80% 75% 70%1999 19% 9% 4% 2% 2%2000 69 57 31 18 62001 46 19 8 4 12002 0 0 0 0 02003 30 15 9 7 52004 95 85 71 51 23

    AVG 43% 31% 21% 14% 6%

  • How GRIP Works

    Marshall County, Iowa2005 Example

  • Parameters in 2005County: Marshall County, IaCrop: CornExpected Yield: 164.3 *Expected Price: $2.38 **

    * County specific, set by RMA** Settlement prices during February (Next year for entire month)

  • Farmer choicesProtection Level

    Choice from within rangeGRPGRIPMax$579$587Min $323$346

    Max varies by year, based on formula

    Max results in highest premiums and highest payments, when they occur

  • Farmer choicesCoverage Level

    70% to 90%

    Suggestion:Take highest coverage levelChange payment/premium by lowering protection level

  • 2005 Per Acre Premiums, Marshall County, Iowa (100% Protection Level, Corn)CoverageLevelGRP GRIP-NoHRGRIP-HR70%$3.96 $2.96 $5.5175% 4.80 4.24 7.2280% 6.17 6.90 10.5885% 6.89 10.00 13.8590% 8.60 15.92 20.25

  • Per Acre Guarantees,90% Coverage Level

    GRP GRIP-NoHR GRIP-HRType YieldRevenue Revenue Coverage level .90 .90 .90x Expected yield 164.3 164.3 164.3x Price xxx $2.38 $2.38 @ Guarantee 147.9 bu $352 $352 @@

    @ Higher of expected or harvest price@@ Will be higher when harvest price > expected price

  • Payment exampleTypical YearActual yield = 170 bu.Harvest price = $2.00Guarantees on previous slide (90% cov level)

    Shortfall = (Guarantee Actual)/Guarantee when Guarantee > Actual GRP: .000 (147.9 guarantee < 170 actual) GRIP-NoHR: ($352 - (170*2)) / $352 = .034 GRIP-HR: ($352 - (170*2)) / $352 = .034

  • Payments (Max Protection Level, 90% Coverage Level)

    GRP GRIP-NoHR GRIP-HRProt. level $579 $587 $587X shortfall .000 .034 .034X price factor xxx xxx 1.00 *Payment $0 $20 $20

    * Higher of (harvest price / expected price) or 1

  • Payment exampleDrought YearActual yield = 130 bu.Harvest price = $3.00

    Shortfall = (Guarantee Actual)/Guarantee when Guarantee > Actual GRP: (147.9 130) / 147.8 = .121 GRIP-NoHR: .000 Guarantee < actual ($390) GRIP-HR: ($443 - (130x3)) / $443 = .120

  • Per Acre Guarantees, Revised90% Coverage Level

    GRP GRIP-NoHR GRIP-HRType YieldRevenue Revenue Coverage level .90 .90 .90x Expected yield 164.3 164.3 164.3x Price xxx $2.38 $3.00 @ Guarantee 147.9 bu $352 $443 @@

    @ Higher of expected or harvest price@@ Will be higher when harvest price > expected price

  • Payments (Max Protection Level, 90% Coverage Level)

    GRP GRIP-NoHR GRIP-HRProt level $579 $587 $587X shortfall .121 .000 .120X price factor xxx xxx 1.26 @Payment $70 $0 $89

    @ Higher of (harvest price / expected price) or 1(3.00 harvest price / 2.38 expected price) = 1.26

  • GRP Shortfalls, Marshall County, Iowa, Corn (90% coverage level) Expected Final GRPYear Yield Yield Shortfall (90%)1995 131.1 133.7 01996133.2 139.4 01997133.2 136.4 01998135.3 144.5 01999136.5 153.8 02000137.6 144.0 02001146.7 150.5 02002146.7 181.8 02003150.1 175.9 02004158.4 183.2 0

  • Marshall County, Corn Yields197719881993

    Chart1

    124.995.7771836007

    115.597.843192959

    104.399.9092023173

    104.1101.9752116756

    104.8104.0412210339

    42.5106.1072303922

    111108.1732397504

    132.1110.2392491087

    119.3112.305258467

    120.9114.3712678253

    129.4116.4372771836

    109.8118.5032865419

    122.7120.5692959002

    131.7122.6353052585

    133.7124.7013146168

    143.2126.767323975

    70.5128.8333333333

    121.5130.8993426916

    127.1132.9653520499

    127.4135.0313614082

    154.3137.0973707665

    85.7139.1633801248

    151.7141.2293894831

    134.8143.2953988414

    140.6145.3614081996

    139.2147.4274175579

    146.2149.4934269162

    155.8151.5594362745

    145.2153.6254456328

    152.9155.6914549911

    184157.7574643494

    179.6159.8234737077

    185.1161.889483066

    Year

    Bu. per Acre

    Sheet1

    -3978.3932709447

    2.0660093583

    1972124.995.7771836007

    1973115.597.843192959

    1974104.399.9092023173

    1975104.1101.9752116756

    1976104.8104.0412210339

    197742.5106.1072303922

    1978111108.1732397504

    1979132.1110.2392491087

    1980119.3112.305258467

    1981120.9114.3712678253

    1982129.4116.4372771836

    1983109.8118.5032865419

    1984122.7120.5692959002

    1985131.7122.6353052585

    1986133.7124.7013146168

    1987143.2126.767323975

    198870.5128.8333333333

    1989121.5130.8993426916

    1990127.1132.9653520499

    1991127.4135.0313614082

    1992154.3137.0973707665

    199385.7139.1633801248

    1994151.7141.2293894831

    1995134.8143.2953988414

    1996140.6145.3614081996

    1997139.2147.4274175579

    1998146.2149.4934269162

    1999155.8151.5594362745

    2000145.2153.6254456328

    2001152.9155.6914549911

    2002184157.7574643494

    2003179.6159.8234737077

    2004185.1161.889483066

    Sheet1

    Year

    Bu. per Acre

    Sheet2

    Sheet3

  • GRIP Shortfalls, Marshall County, Iowa, Corn (90% coverage level) Expected Harvest GRIPYear Price Price Shortfall (90%)1999 2.40 1.96 02000 2.54 2.11 .0342001 2.45 2.05 .0462002 2.30 2.43 0 2.38 2.37 0 2.93 1.99 .127

    Shortfalls the same for GRIP-NoHR and GRIP-HR.

  • GRP Shortfalls, Marshall County, Iowa, Soybeans (90% coverage level) Expected Final GRPYear Yield Yield Shortfall (90%)1995 45.2 50.6 01996 46.6 49.2 01997 46.6 50.4 01998 47.7 51.6 01999 51.8 50.3 02000 52.6 45.2 .0452001 53.4 49.7 02002 52.5 53.5 02003 53.1 31.7 .3362004 53.6 51.6 0

  • GRIP Shortfalls, Marshall County, Iowa, Corn (90% coverage level) Expected Harvest GRIPYear Price Price Shortfall (90%)1999 4.95 4.85 02000 5.36 4.72 .1292001 4.59 4.37 .0132002 4.53 5.45 0 5.23 7.32 .058 7.27 5.26 .183

    Shortfalls the same for GRIP-NoHR and GRIP-HR.

  • Risk/returns www.farmdoc.uiuc.edu/cropins/index.html

  • Crop Insurance Evaluator:For an example farm in each county for corn and soybeans shows the following for different insurance product:Frequency of paymentsPremiumsAverage paymentsNet costsAbility to prevent disasters

  • Marshall County, Corn

    Average farm for county159 bu. APH yield, average variabilityEvaluations shown for 2005 yearEvaluations based on maximum protection level

  • Frequency of payments

    Example of tables from Evaluator

  • 1% VARA 1% VaR of $200 means that 1% of the time revenue will be below $200

    Measure of risk reduction

    Want VaRs to be as high as possible

  • 1% VaR from Evaluator$ per acre, CornLevel APH CRCGRP GRIP-NoHR GRIP-HR65% 203 21275% 221 231 198 205 20485% 243 247 205 216 21790% 213 223 226

    Group products lower risk less than Individual productsLow coverage Individual not as good as high coverage Group

  • Net CostsAverage payments over time minus premium

    High levels indicate high costs, negative levels mean expect more insurance payments than premium over time

  • Net Costs from Evaluator$ per acre, CornLevel APH CRCGRP GRIP-NoHR GRIP-HR65% 1.45 2.2675% 1.74 2.04 .78 -3.94 -4.6585% 3.76 4.77 -4.65 -12.50 -17.8790% -9.77 -17.13 -26.47

    Individual products have higher costs than Group products

  • Marshall County, Soybeans

    Average farm for county50 bu. APH yield, average variabilityEvaluations shown for 2005 yearEvaluations based on maximum protection level

  • 1% VaR from Evaluator$ per acre, SoybeansLevel APH CRCGRP GRIP-NoHR GRIP-HR65% 166 17475% 183 192 159 162 16485% 203 207 165 173 17590% 168 179 180

    Group products lower risk less than Individual productsLow coverage Individual not as good as high coverage Group

  • Net Costs from Evaluator$ per acre, SoybeansLevel APH CRCGRP GRIP-NoHR GRIP-HR65% .57 1.0675% .81 .93 -.56 -2.66 -2.6885% 1.48 2.89 -3.18 -7.96 -8.9590% -5.31 -10.52 -12.60

    Individual products have higher costs than Group products

  • Risk/Returns SummaryGroup products cost less than individual products. Over time, group products may average more in payments than paid in premiums

    Group products reduce risk less than individual farm products

  • Situations Where Group Products Work:Farm-yields either:Closely follow county-yields (i.e., large farm), orAre above county-yieldsFarm has low APHFarm is in relatively strong financial positionTend to work best in good producing counties

  • Situations Where Group Products Do Not Work as Well:Highly leveraged farms

    Farms where re-planting occurs often

    Hail is a major concern

    Farms with high-risk farmland

  • SummaryGRIP does fit certain situations

    Represent another option in the risk management tool kit