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January 30, 2013

Steven D. JohnsonFarm & Ag Business Management Specialist

(515) 957-5790sdjohns@iastate.edu

www.extension.iastate.edu/polk/farm-management

Presentation Objectives• Define Shallow Loss and How ARC and

SCO would work with Crop Insurance• Discuss What’s New in Crop Insurance for

2013 • Highlight the interaction of TA-Option and

Unit Coverage on Final Premiums• Discuss Pre-Harvest Marketing Strategies

using Guaranteed Insurance Bushels • Highlight Seasonal Trends and Crop

Insurance Prices vs. Spring/Summer Highs • Summarize 5 Crop Insurance Strategies &

5 Crop Insurance Related Web Sites

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Next Farm Bill Proposed – Commodity Program

Source: Johnson, ISU Extension, January 2013

Marketing Loan Rates:$1.95/bu Corn

$5.00/bu Soybeans

What is Shallow Loss?

Source: Johnson, ISU Extension, January 2013

Market Receipts

Actual Yield (Up to 200 bu/A) X Market Price Received

($6/bu)

Crop Insurance

175 bu/A APH80% Level

Farmer Paid Crop Insurance Premium

Shallow Loss

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Iowa Crop Insurance Coverage (2012) Revenue Protection (RP) = 91% to 92% of Insured Acres

Source: USDA Risk Management Agency, September 2012

New in Crop Insurance for 2013• Lower premium ratings from most the Corn Belt

• New factors for Trend-Adjusted APH Yield Endorsement (aka TA-Option)

• High Risk Alternative Coverage Endorsement (HR-ACE)

• Destroying Cover Crops

• Don’t forget these dates:– report new insured sod busting/CRP (March 15)

– acreage reporting deadline (July 15)

– crop insurance premiums due (October 1).

Source: USDA Risk Management Agency, November 2012

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Comparing ARC & SCO ProgramsARC SCO

Coverage Revenue Revenue or Yield

% Losses Covered 11% Farm or 21% of County Guarantee

10% to 21% of Coverage Level

Prices 5-Year Olympic Nat’l Average Cash Price

Futures: Projected vs. Harvest Price

Yields 5-Year Olympic Average Yield (Farm or County)

County Expected Yield

Payment Rate 65% Farm or 80% County of Eligible Planted Acres

100% of Planted Acres

Payment Limitations $50,000 per Entity None

Cost None 30% of Expected Cost (70% Subsidy)

Administration Farm Service Agency RMA/Crop Insurance Provider

Source: Schnitkey, U of IL Extension Economics, May 2012

Source: USDA Risk Management Agency, November 2012

2013 Crop Insurance Corn Premiums

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2013 Crop Insurance Soybean Premiums

Source: USDA Risk Management Agency, November 2012

Deductible?

Revenue Protection – RP(65%-85% Levels)

UnitCoverage?

(Basic, Optional or Enterprise)

Additional Hail, Wind

and/or Extra Harvest Expense

Policies?

TA Option?

Source: Johnson, ISU Extension, January 2013

2013 Crop Insurance Decisions

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Trend-Adjusted Yield Option Factors

Source: National Crop Insurance Services, December 2012

Calculating Trend-Adjusted Yields

Example of a Typical Central Iowa County

CornTrend Adjusted Factor = 2.4

1999: 14 years X 2.4 = 33.60 bu/A2012: 1 year X 2.4 = 2.40 bu/A

Actual Yield = 175.5 bu/A

or

TA Yield Option = 194.2 bu/A

Source: Iowa Crop Insurance Industry, January 2013

Year Actual Yield

Yield 

Adjustment

Trend‐

Adjusted Yield

1999 155 33.60 188.60

2000 174 31.20 205.20

2002 176 26.40 202.40

2003 175 24.00 199.00

2004 198 21.60 219.60

2005 194 19.20 213.20

2007 175 14.40 189.40

2009 148 9.60 15.60

2011 185 4.80 189.80

2012 175 2.40 177.40

Avg. Yield 175.5 194.20

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Corn Coverage Comparison: #1(Assumes $6.00/bu Projected Price)

80% Level of Coverage

Optional Units vs. Enterprise Units

Source: Iowa Crop Insurance Industry, January 2013

APH 175.5 Bushel

Coverage Level 80 %

Guarantee 140.4 Bushel

2013 Actual APH

$6.00Projected Price

$842Guarantee

$23.60Premium

APH 175.5 Bushel

Coverage Level 80 %

Guarantee 140.4 Bushel

2013 Actual APH

$6.00Projected Price

$842Guarantee

$10.67Premium

Coverage Level Optional Units(Fields in Section)

Enterprise Units(Fields in County)

65% 59% 80%

70% 59% 80%

75% 55% 77%

80% 48% 68%

85% 38% 53%

Crop Insurance Premium Subsidies

Source: USDA Risk Management Agency, October 2009

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Corn Coverage Comparison: #2(Assumes $6.00/bu Projected Price)

Source: Iowa Crop Insurance Industry, January 2013

Optional Units: 85% vs. 80% Level

Actual APH vs. TA Yield Option

APH 175.5 Bushel

Coverage Level 85 %

Guarantee 149.17 Bushel

2013 Actual APH

$6.00Projected Price

$895Guarantee

$37.58Premium

APH 194.2 Bushel

Coverage Level 80%

Guarantee 155.36 Bushel

2013 TA Option

$6.00Projected Price

$932Guarantee

$37.60Premium

Corn Coverage Comparison: #3(Assumes $6.00/bu Projected Price)

Source: Iowa Crop Insurance Industry, January 2013

Enterprise Units: 85% vs. 80% Level

Actual APH vs. TA Yield Option

APH 175.5 Bushel

Coverage Level 85%

Guarantee 149.17 Bushel

2013 Actual APH

$6.00Projected Price

$895Guarantee

$22.28Premium

APH 194.2 Bushel

Coverage Level 80 %

Guarantee 155.36 Bushel

2013 TA Option

$6.00Projected Price

$932Guarantee

$18.78Premium

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Crop Insurance Premium Strategies• Use the TA Option to Increase Revenue

Guarantee

• Compare Savings of Enterprise Units vs. Optional Units (use of TA Option)

• Consider Appropriate Coverage Level along with TA Option and Revenue Guarantee

• Consider Adding Hail, Wind/Greensnap and/or Delayed Harvest Expense Policies:– especially when electing Enterprise Units

– considering committing Delivery Bushels.

Source: Johnson, ISU Extension, February 2013

Persistent Drought, El Niño (ENSO) Neutral

Source: NOAA Climate Prediction Center, Jan. 17th, 2013

During winter months, El Niño Southern Oscillation (ENSO) Neutral forecast:1) Good growing conditions in Argentina, more variable in Brazil. 2) Warm and dry winter conditions in much of the Corn Belt.3) Likely March or April before Northern Hemisphere weather forecast for the 2013.4) Rare for Corn Belt droughts to occur in back to back years.

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Elwynn Taylor’s 2013 Risk Wheel

Neutral Summer = 53% risk of above trend line corn yield

La Niña Summer = 70% risk of below trend line corn yield

El Niño Summer = 70% risk of above trend line corn yield

Source: Taylor, ISU Extension Climatologist, January 2013

Marketing Revenue Protection (RP) Guaranteed Insurance Bushels

Source: Johnson, ISU Extension, January 2013

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Delivery of Corn Bushels with Revenue Protection (RP)

Marketing Strategy

• Pre-Harvest Sell for Delivery up to 144 Bu/A

• Price Guarantee is Higher of the Projected Price vs. Harvest Price

• Slight Basis Risk

• Must Plant the Crop

(Prevented Planting = 60%)

180 Bu/AActual

Production History(APH)

RP @ 80% Level of Coverage

144 Bu/AGuarantee X

$6.00/bu Projected Price

Deductible20% = 36 Bu/A

= $864/A Revenue Guarantee

Source: Johnson, ISU Extension, January 2013

Source: Johnson, ISU Extension, January 2013

Separate Bushels: Delivery vs. Non-Delivery

• Revenue Protection = Insurance Bushels that can be committed to Delivery

• Insurance Bushels = APH X Level of Coverage X Higher of Projected vs. Harvest Price (ie. Acts like a subsidized Put Option)

• Combine Insurance Bushels sold for Delivery along with the use of Futures and Options Strategies for Non-Deliverybushels.

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Comparing 2013 Revenue GuaranteesAPH= 180 bu/A Corn, 50 bu/A Soybeans

Projected Prices = $6.25/bu Corn, $13/bu Soybeans

Source: Johnson, ISU Extension, January 2013

Corn Revenue Protection @ 80%Final Yield: 100 bu/A vs. 200 bu/A Yield

Price: $6.25/bu Projected, $4.50/bu vs. $7.50/bu Harvest Pre-Harvest Sales 100 bu/A @ $6.00/bu

Unpriced Bushels = Harvest Price - $.50/bu

$875$930

$1,000

$1,300

Source: Johnson, ISU Extension, January 2013

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Source: USDA Risk Management Agency & CME Group, Nov. 2012

Corn Insurance Prices vs. Seasonal Highs

December Corn Futures Seasonals

Source: www.cmegroup.com, October 2012

2008-12 Average High $5.90

2003-07 Average High $2.92

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Soybean Revenue Protection @ 80%Final Yield: 30 bu/A vs. 60 bu/A

Price: $13/bu Projected, $11/bu vs. $14/bu Harvest Pre-Harvest Sales 30 bu/A @ $12.50/bu

Unpriced Bushels = Harvest Price - $.50/bu

$505 $515

$690

$780

Source: Johnson, ISU Extension, January 2013

Source: Johnson, ISU Extension, January 2013

Pre-Harvest Marketing Thoughts• Revenue Protection preferred for sale of Crop

Insurance Bushels = Delivery Bushels(Guaranteed Higher of Projected vs. Harvest Price)

• New Barometer on March 1st: the Projected Price (February average) for Delivery Bushels

• Generate adequate Cash Flow Needs for Fall 2013 through the Winter of 2013-14

• Use Futures and Options Strategies for Non-Delivery Bushels.

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Soybean Insurance Prices vs. Seasonal Highs

Source: USDA Risk Management Agency & CME Group, Nov. 2012

November Soybean Futures Seasonals

Source: www.cmegroup.com, October 2012

2003-07 Average High $6.96

2008-12 Average High $13.10

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Source: Johnson, ISUE Farm Mgt., Sept. 2008.

Consider Pre-Harvest Marketing: Selling Portion of Insurance Bushels for Delivery

Prove your APH yields annually by Farm Level

(Optional Units)

Lower 2013 Premium

Ratings; but Higher

Revenue Risks

Choose Revenue Protection (RP) (Consider Adding Hail, Wind and/or Extra Harvest)

5 Crop Insurance Strategies

Understand Unit Coverage & Plan to Take the TA-Option

Source: Johnson, ISU Extension, January 2013

5 Crop Insurance Web Sites

• Ag Decision Maker – ISU Extension Econ(Decision Tools, Newsletters, Publications, Voiced Media, Monthly e-Newsletter)www.extension.iastate.edu/agdm

• USDA Risk Management Agency (RMA)www.rma.usda.gov

• Farm Doc – U. of Illinois Extension Econwww.farmdoc.illinois.edu

• Ag Manager – K-State Extension Econwww.agmanager.info

• Crop Risk Management - ISU Polk County(Crop Marketing Newsletter & Crop Insurance Updates, Webcasts)www.extension.iastate.edu/polk/farm-management

Source: Johnson, ISU Extension, January 2013