1. Econ 339X, Spring 2010 ECON 339X: Agricultural Marketing Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911

2. Econ 339X, Spring 2010 Today’s Topics Yesterday’s Reports Risk Management Tools Yield and Revenue Insurance

3. Econ 339X, Spring 2010 Anticipated vs. Actual Source: USDA-NASS % Planted

4. Econ 339X, Spring 2010 Principal Crop Area Source: USDA-NASS Million acres

5. Econ 339X, Spring 2010 Corn Area Source: USDA-NASS Units: 1,000 acres

6. Econ 339X, Spring 2010 Soybean Area Source: USDA-NASS Units: 1,000 acres

7. Econ 339X, Spring 2010 Corn Stocks Source: USDA-NASS Billion bushels

8. Econ 339X, Spring 2010 Soybean Stocks Source: USDA-NASS Billion bushels

9. Econ 339X, Spring 2010 Wheat Stocks Source: USDA-NASS Billion bushels

10. Econ 339X, Spring 2010 Crop Insurance  One of many risk management strategies  Traditionally set up to protect farmers in times of low crop yields  Now offers coverage for low prices  Available on over 100 commodities

11. Econ 339X, Spring 2010 Why Crops Fail

12. Econ 339X, Spring 2010 Types of Crop Insurance  Individual Yield (APH)  Area Yield (GRP)  Individual Revenue (CRC, IP, RA)  Area Yield - Individual Revenue Combination (GRIP)

13. Econ 339X, Spring 2010 Example Farm A 100 acre corn farm in Story County, Iowa with a 5-year average yield of 180 bu/acre Purchases insurance at the 75% coverage level Initial prices: $3.90/bu for Individual Yield Ins. $3.99/bu for Individual Rev. Ins.

14. Econ 339X, Spring 2010 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 If yields are 100 bushels per acre, the farmer receives $136.50 per acre = $3.90/bu * (75% * 180 bu/ac - 100 bu/ac)

15. Econ 339X, Spring 2010 Yield Insurance Payout Graph No Payout Payout

16. Econ 339X, Spring 2010 Yield Insurance is like an Option

17. Econ 339X, Spring 2010 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

18. Econ 339X, Spring 2010 In our example, the farmer has insured $538.65 of revenue per acre (75% * $3.99/bu * 180 bu/ac) Final value of the crop determined by average futures prices over harvest period Individual Revenue Insurance (CRC, IP, RA)

19. Econ 339X, Spring 2010 If yields are 100 bushels per acre and harvest prices average $3.50, the farmer receives $188.65 per acre =0.75*$3.99/bu.*180 bu./acre - $3.50/bu.*100 bu./acre Individual Revenue Insurance (CRC, IP, RA)

20. Econ 339X, Spring 2010 Revenue Insurance Payout Graph Payout No Payout

21. Econ 339X, Spring 2010 Rev. Insurance is like an Option

22. Econ 339X, Spring 2010 Individual Revenue Insurance (CRC and RA) These policies 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 essence, the policy is giving you a put option with the strike price at the planting price

23. Econ 339X, Spring 2010 Harvest Price Option

24. Econ 339X, Spring 2010 Individual Revenue Insurance (CRC and RA) If yields are 100 bushels per acre and harvest prices average $5.00, the farmer receives $175.00 per acre =0.75*$5.00/bu.*180 bu./acre - $5.00/bu.*100 bu./acre

25. Econ 339X, Spring 2010 Only RI Pays Neither Pay Both Pay Only YI Pays Insurance Payout Graph

26. Econ 339X, Spring 2010 Crop Insurance Subsidies Coverage Level Subsidy % 50%67% 55% & 60%64% 65% & 70%59% 75%55% 80%48% 85%38%

27. Econ 339X, Spring 2010 Insurance Premiums Per Acre Premiums ($ per acre) Cov. LevelYield RARA w/ HPOCRC 50% 0.97 2.24 55% 1.50 3.36 60% 2.12 4.59 65% 3.26 2.80 6.08 6.93 70% 4.46 5.91 10.84 9.46 75% 6.52 11.04 18.6513.93 80% 9.81 19.64 31.4321.35 85%14.95 33.78 52.1133.53 For our example farm in Story County, Iowa for corn

28. Econ 339X, Spring 2010 Choosing Insurance Policy Choice depends on several factors Type of farm and crop mix How well the county average yield represents your farm Your marketing strategy

29. Econ 339X, Spring 2010 Changes to the Program Starting in 2011, RMA will offer the “Combo” product, combining APH, RA, and CRC Brings consistency to crop insurance premium rates (will no longer have different rates for the same basic coverage)

30. Econ 339X, Spring 2010 Class web site: http://www.econ.iastate.edu/classes/econ339/hart- lawrence/ http://www.econ.iastate.edu/classes/econ339/hart- lawrence/