(Issued by Gary Schnitkey, Department of Agricultural and Consumer Economics, University of Illinois. Click here to read the original post on the farmdocdaily website.)
Harvest prices will have a large impact on the size of crop insurance payments for corn and soybeans. Current futures prices suggest that crop insurance policies on corn will make payments on some farms, particularly on those farms that purchased revenue policies at high coverage levels. There is less of a chance for crop insurance payments on soybeans.
Corn Crop Insurance Payments
The 2013 projected price for corn is $5.65 per bushel. The projected price is used to set crop insurance guarantees. The harvest price is used to calculate revenue on which crop insurance payments are based. The harvest price for corn equals the average of settlement prices of the December Chicago Mercantile Exchange (CME) corn contract during the month of October. Settlement prices during the first two days of October suggest a harvest price of $4.40 per bushel. Obviously, the final harvest price can vary from $4.40. However, $4.40 provides a good starting point for evaluating corn payments.
A $4.40 harvest price is 78% of the $5.65 projected price (i.e., .78 = $4.40 harvest price / $5.65 projected price). If actual yield equals guarantee yield (i.e., the Trend-Adjusted APH yield), revenue polices with 80% and higher coverage levels will make payments. In Illinois, recently released Crop Reporting District (CRD) yields suggest that harvest yields will be close to guarantee yields (see here for more detail). Projected 2013 CRD yield for Iowa suggest lower yields, resulting in higher chance of crop insurance payments, particularly in the northwest corner of Iowa.
Since yields will vary across farms, insurance payments also will vary. Table 1 shows payments for a Revenue Protection (RP) policy at 75%, 80%, and 85% coverage levels, the most commonly used product and coverage levels in Illinois. Payments in Table 1 are based on a guarantee yield of 180 bushels per acre.
Below are several observations from Table 1 given that the harvest price is $4.40:
- At a 75% coverage level, insurance payments will not occur unless the yield is below the guarantee yield.
- At an 80% coverage level, crop insurance payments occur at the guarantee yield. Generally, payments at the guarantee level will be small (i.e., $22 per acre for a 180 bushel per acre harvest yield given a $4.40 harvest price). Insurance payments become larger at lower yields.
- At an 85% coverage level, crop insurance payments will occur if the actual yield equals the guarantee yield. In the example shown in Table 1, a $72 per acre payment results for a $4.40 harvest price and a 180 bushel per acre actual yield. Higher yields are needed before crop insurance payments do not occur.
Larger payments are likely under the Group Risk Income Plan (GRIP). Most farmers who purchase GRIP do so at a 90% coverage level. To illustrate the size of payments, take a McLean County GRIP policy with an actual yield equal to the expected yield of 183.3 bushels per acre. A $4.40 harvest price results in a $209 payment given that the highest protection level was chosen. The lowest protection level results in a $126 per acre payment. The 90% coverage level for GRIP causes the larger payments for GRIP compared to RP.
Soybean Crop Insurance Payments
The projected price for soybeans is $12.87 per bushel. The harvest price equals the settlement price of the November CME soybean contract during the month of October. The first two days of settlement prices during October suggest a harvest price of $12.70 per bushel. Similar to corn, soybean harvest price may vary from $12.70, but $12.70 is a useful starting point for evaluating insurance payments.
A $12.70 harvest price is 99% of the $12.87 projected price (.99 = $12.70 / $12.87). Because 98% is above coverage levels offered by crop insurance products, a yield loss has to occur before crop insurance policies makes payments. In Illinois, projected CRD yields suggest that most farms will not have yield losses large enough to trigger insurance payments (see here for more detail). Because of lower projected yields, crop insurance payments are more likely in Iowa.
There will be some farms with soybean yields low enough to trigger insurance payments. Table 2 shows payments for a Revenue Protection (RP) policy at 75%, 80%, and 85% coverage levels. The guarantee yield is 50 bushels per acre. As can be seen, yields below the guarantee level are required before crop insurance payments occur. Crop insurance payments on GRIP are unlikely in Illinois.
In Illinois, crop insurance payments for corn will occur on some farms, particularly on those who purchased RP policies at higher coverage levels. GRIP at the 90% coverage level likely will make payments. Soybean payments are less likely. In aggregate, 2013 crop insurance payments in Illinois will be much lower than in 2012.