1. Crop Insurance (Guest Lecture)
Dr. Alejandro Plastina
March 29, 2017

2. 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

3. Why Crops Fail

4. Federal Crop Insurance
Federal Crop Insurance Corporation – 1938
Government’s initial move in crop insurance
Federal Crop Insurance Act of 1980
Premium subsidies
Federal Crop Insurance Reform Act of 1994
Catastrophic coverage and higher subsidies
Agricultural Risk Protection Act of 2000
The 2008 and 2014 Farm Bills

5. Federal Crop Insurance: A Public/Private Partnership
The Federal Government works with private insurance companies to offer crop insurance.
Since 1998, all federal crop insurance products are sold and serviced by private companies.
The Federal Government sets and/or approves premium rates and insurance terms.
Both entities share risks and returns from crop insurance.

6. Federal Crop Insurance

7. Federal Crop Insurance: Total Acres Insured

8. Types of Crop Insurance
Yield Protection: insurance against unusually low yields due to “acts of God”
Revenue Protection: insurance against unusually low revenues (=price x yields)
Margin Protection (New 2015): insurance against unusually low profit margin (=price x yields – index of variable costs)
Supplemental Coverage Option (Farm Bill)
Private products: hail, fire, price buy-ups, etc.

9. Federally Sponsored Crop Insurance Policies
At the Farm-level:
Individual Yield Protection (Catastrophic policy available)
Individual Revenue Protection
Individual Revenue Protection with Harvest Price Exclusion
At the county level:
Area Risk Protection (Catastrophic policy available)
Area Revenue Protection
Area Revenue Protection with Harvest Price Exclusion
Supplemental Coverage Option (endorsement)
Margin Protection (endorsement or stand-alone)

10. Sponsored = Subsidized
The federal government:
sets total premium rates (at actuarially fair levels) and subsidizes about 60% of those rates.
and pays all costs related to insurance policy sales and services (operating costs of crop insurance agencies).

11. Crop Insurance in Iowa: Corn & Soy Insured Acres as % of Planted Acres
Plastina, Alejandro and Hart, Chad (2014) "Crop Insurance in Iowa," Agricultural Policy Review: Vol : Iss. 3 , Article 3.

12. Corn in Iowa: Insured Acres as % of Planted Acres by Type of Plan
Farm revenue plans

13. Corn in Iowa: Revenue Protection Plans by coverage levels
Million Acres
1st 85%
2nd 80%
3rd 75%

14. Soy in Iowa: Participation Insured Acres as % of Planted Acres
Farm revenue plans

15. Soy in Iowa : Revenue Protection Plans by coverage levels
Million Acres
1st 85%
2nd 80%
3rd 75%

16. 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 80% coverage level
Spring price: $3.96/bu (average of Feb. prices for Dec. corn futures)

17. Individual Yield Insurance (YP)
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 $ per acre = $3.96/bu * (80% * 180 bu/ac bu/ac)

18. Yield Insurance Payout Graph
No Payout
Payout

19. Yield Insurance is like an Option

20. Individual Revenue Insurance (RP or RPE)
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

21. Individual Revenue Insurance (RP or RPHPE)
In our example, the farmer has insured $ of revenue per acre (80% * $3.96/bu * 180 bu/ac)
Final value of the crop determined by average futures prices over harvest period

22. Individual Revenue Insurance (RP or RPHPE)
If yields are 100 bushels per acre and harvest prices average $3.50, the farmer receives $ per acre
0.80*$3.96/bu.*180 bu./acre $3.50/bu.*100 bu./acre

23. RPHPE Payout Graph
No Payout
Payout

24. Rev. Insurance is like an Option

25. Individual Revenue Insurance (RP)
This policy has 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

26. Harvest Price Option

27. Individual Revenue Insurance (RP)
If yields are 100 bushels per acre and harvest prices average $5.50, the farmer receives $ per acre
0.80*$5.50/bu.*180 bu./acre $5.50/bu.*100 bu./acre

28. RP Payout Graph No Payment Neither Pay RPHPE Pays YP Pays Both Pay
RP Pays

29. Important Crop Insurance Dates in Iowa

30. Suggested readings AgDM File A1-54: Revenue Protection Crop Insurance
AgDM File A1-48: Current Crop Insurance Policies
Selling your crop insurance bushels: