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Crop insurance policies in 2014

pdf fileAgDM Newsletter
October 2014

The 2014 Farm Bill left the farm-level COMBO products introduced by the Risk Management Agency in 2011 unchanged, but released the Area Risk Protection Insurance (ARPI) to overhaul the county-level or Group products. This article describes COMBO and ARPI products and illustrates each of them with numerical examples.

Farm-level COMBO products

The Common Crop Insurance policy provides three choices of buy-up plans: 1) insuring yields with the Yield Protection plan, or revenue with either; 2) the Revenue Protection plan, or; 3) the Revenue Protection with Harvest Price Exclusion plan. A fourth choice is to choose Catastrophic coverage, which is only available under the Yield Protection plan.

The basic practical difference between yield and revenue protection is that while the former only triggers indemnities when yields are low, the latter can trigger indemnities even with high yields if prices are sufficiently low, or it can fail to trigger indemnities with low yields if prices are sufficiently high.

The four plans are multi-peril insurance plans, and protect against a) adverse weather conditions (hail, frost, drought, excess moisture, etc.); b) failure of irrigation water supply if caused by an insured peril during the insurance period; c) fire, if due to natural causes; d) plant disease and insects, but not damage due to insufficient or improper application of pest or disease control measures; and e) wildlife damage.

Insurable corn includes yellow dent or white corn; mixed yellow and white, high amylase, waxy or high-lysine corn; high-oil corn blends containing mixtures of at least 90 percent high yielding yellow dent female plants with high-oil male pollinator plants; or commercial varieties of high-protein hybrids.

Insurable soybeans include both “commodity” type soybeans and the following “specialty” types: all other food grades, large seeded food grade, small seeded food grade, low linolenic acid, low saturated fat, and high protein.

Corn and soybeans may be insurable if: a) grown in the county on insurable acreage; b) premium rates are provided; c) farmer has a share; and d) corn is planted for harvest as grain, and soybeans are planted for harvest as beans.

table 1The insurance period for both crops starts on the later of the date the Risk Management Agency accepts the application or the date when the crop is planted, and it ends with the earliest occurrence of one of the following: a) total destruction of the crop; b) harvest of the unit; c) final adjustment of a loss; d) abandonment of the crop; or e) December 10, 2014. Table 1 lists the most important dates for COMBO products. A detailed description of all important dates for crop insurance can be found in Ag Decision Maker File A1-50/FM-1858, Important Crop Insurance Dates.

Crop insurance costs paid by farmers are the result of the interplay of acreage insured, premiums per acre, and administrative fees per crop per county. The premiums for all types of multi-peril crop insurance are subsidized by the Federal Crop Insurance Corporation. The administrative fees are $30 per crop per county for coverage levels above catastrophic coverage, and $300 per crop per county for catastrophic coverage.

Insurance policies offer an array of coverage levels (be it of yield or revenue) ranging from 50 percent to 85 percent in 5 percent increments. Farmers can also choose how to split their insurable acreage according to basic unit, optional unit, and enterprise unit for yield and revenue insurance. A fourth option, whole farm unit, is available for revenue insurance. A basic unit includes all of a farmer’s insurable crop acreage (either corn or soybeans) in the county by share arrangement. If a basic unit consists of two or more sections of land, and certain recordkeeping requirements are met, a farmer may apply for optional units by section. An enterprise unit is generally all the insured crop acreage (either corn or soybeans) in a county. A whole farm unit includes all the insured crops (corn and soybeans) in the county that are covered by the insurance plan.

table 2

Table 2 shows the coverage levels and premium subsidies currently available for corn and soybeans according to the units chosen. For basic and optional units, premium subsidies decline from 67 percent for a 50 percent buy-up coverage level to 38 percent for an 85 percent coverage level. But that is not the case for enterprise and whole farm units, for which premium subsidies are flat at 80 percent for coverage levels, 50 percent-70 percent, and 50 percent-75 percent, respectively, and only decline slightly for higher coverage levels, remaining at 53 percent and 56 percent, respectively, at the 85 percent coverage level.

By choosing enterprise or whole farm units instead of basic or optional units, farmers get higher premium subsidies for all coverage levels. These enterprise or whole farm unit “discounts” increase with the coverage level up to the 75 percent coverage level, reaching a maximum of 22 percentage points for the enterprise unit discount and 25 percentage points for the whole farm unit discount. The discounts for the 80 percent and 85 percent coverage levels are 2 and 7 percentage points lower, respectively, than their corresponding maximums.

Finally, farmers can choose to have their Actual Production History (APH) yields adjusted upward based on their county’s historical yield by paying higher premiums for their insurance policies. As a result, farms with yields below county averages can increase the likelihood of triggering indemnity payments while also increasing the potential amount of the gross indemnity. For example, the APH corn yield in Wright County, Iowa, for 2014 is 174 bushels per acre, while the Trend-Adjusted APH yield is 186 bushels per acre. One caveat is that Trend-Adjusted APH yields cannot be used with catastrophic coverage.

Yield Protection (YP)
The YP plan offers a production guarantee based on individual APH yield, which is an average of up to ten years of actual and/or assigned yields. An explanation of how the individual APH yield is determined can be found in Ag Decision Maker File A1-55/FM-1860, Proven Yields and Insurance Units for Crop Insurance.

The gross indemnity is calculated as the bushels per acre loss (production guarantee minus actual yields) times the projected price. The projected prices for corn and soybeans are, respectively, the averages of December and November CBOT futures contract prices during February. The Risk Management Agency (RMA) announces projected prices in March, and in 2014 they are $4.62 and $11.36 for corn and soybeans, respectively.

Revenue Protection (RP)
The RP plan offers a revenue guarantee based on individual APH yield and the highest of Projected and Harvest Price. The Projected Prices are the same ones used for the YP plan. The Harvest Prices for corn and soybeans are, respectively, the average of December and November CBOT futures contract prices during October. The RMA announces Harvest Prices in November.

Revenue Protection with Harvest Price Exclusion (RPHPE)
The RPHPE plan is similar to RP but carries a lower premium because the revenue guarantee is determined by the projected price only and excludes the possibility of benefiting from higher Harvest Prices.

Catastrophic Coverage (CAT)
The CAT plan is offered under the YP plan at 50 percent of the APH yield and 55 percent of the projected price. It is not possible to use Trend-Adjusted APH yields with the CAT plan.

Additional examples and discussion of other provisions affecting COMBO products (prevented planting and replanting, coverage units and discounts, maximum price movements, etc.) can be found in Ag Decision Maker File A1-54/FM-1853, Revenue Protection Crop Insurance.

County-level ARPI products

Area Risk Protection Insurance (ARPI) is a risk management tool to insure against widespread loss of yield or revenue in a county resulting from natural causes that cause the final county yield or the final county revenue to be less than the trigger yield or revenue. It was developed on the basis that when an entire county’s crop yield is low, most farmers in that county would also have low yields. ARPI has less paperwork and generally lower premium costs than individual farm level insurance. However, a farmer may have low yield or low revenue on his/her acreage and still not receive a payment. Also, lenders may not accept ARPI coverage as collateral. In general, ARPI would be more attractive to farmers with low APH yields with respect to their expected yields and to those with expected yields similar to county yields seeking a higher price protection than offered by RP.

ARPI provides four plan choices: Area Yield Protection, Area Revenue Protection, Area Revenue Protection with Harvest Price Exclusion, and Catastrophic Coverage (which is only available under Area Yield Protection).

The ARPI policy replaces the Group Risk Plan (GRP) and Group Risk Income Protection (GRIP) plan policies that were available in the past. Schnitkey (2014) provides a detailed comparison of ARPI to the GRP/GRIP policies.

The requisites for corn and soybeans to be insurable under ARPI are similar to those to be insurable under the COMBO products. The main differences reside in that corn planted for seed may be insurable under ARPI but not under the COMBO products, and specialty soybeans are not insurable under ARPI.

The insurance period and most important dates for ARPI are identical to COMBO products. The only important date that differs is the production reporting date for both corn and soybeans: February 15, 2015 under ARPI and April 29, 2015 under COMBO products.
As with the COMBO products, crop insurance costs paid by farmers depend on area insured, premiums per acre, and administrative fees per crop per county. The administrative fees are $30 per crop per county for coverage levels above catastrophic coverage, and $300 per crop per county for catastrophic coverage.

table 3Insurance policies offer coverage levels ranging from 70 percent to 90 percent in 5 percent increments, but are only available for basic units. Table 3 shows the coverage levels and premium subsidies currently available for corn and soybeans through the Federal Crop Insurance Corporation.

Area Yield Protection (AYP)
The AYP plan offers protection against loss of yield due to a county level production loss. AYP offers similar protection to the COMBO’s YP plan, except that AYP uses county yields instead of unit yields for indemnity calculation.

The expected county yield is determined using historical National Agricultural Statistics Service county average yields, as adjusted by the Federal Crop Insurance Corporation, and published by the Risk Management Agency annually.

The calculation of the net indemnity follows a similar procedure to the COMBO’s YP plan, but two new elements must be accounted for in AYP: the protection factor and the loss limit factor.

The protection factor is chosen by the farmer and used to increase or reduce the dollar amount of insurance per acre and policy protection, and it goes from 0.8 to 1.2. Policy premiums are higher for higher protection factors.

The loss limit factor represents the percentage of the expected county yield at which no additional indemnity amount is payable, and it is currently set at 0.18. For example, if the expected county yield is 100 bushels and the final county yield is 18 bushels, then no additional indemnity is due even if the yield falls below 18 bushels.

Area Revenue Protection (ARP)
The ARP plan offers protection against loss of revenue due to a county level production loss, price decline, or a combination of both, and includes upside harvest price protection. ARP offers similar protection to the COMBO’s RP plan, except that ARP uses county revenue instead of unit revenue for indemnity calculation.

Area Revenue Protection with Harvest Price Exclusion (ARPHPE)
The ARPHPE is similar to the ARP but excludes upside Harvest Price protection. ARPHPE offers similar protection to the COMBO’s RPHPE plan, except that ARPHPE uses county revenue instead of unit revenue for indemnity calculation.

Area Catastrophic Coverage (ACAT)
The ACAT coverage is available at 65 percent of the yield coverage and 45 percent of the price coverage. The total cost for ACAT coverage is an administrative fee of $300, since its premium is fully subsidized.

More information

Ag Decision Maker Information File A1-48, Current Crop Insurance Policies, includes more detail and examples on the programs described in this article.

Schnitkey, Gary. 2014. Area Risk Protection Insurance Policy: Comparison to Group Plans. Accessed on 07/18/2014.

 

Alejandro Plastina, extension economist, 515-294-6160, plastina@iastate.edu