July 25, 2005
INSURANCE PAYMENT ESTIMATES FOR 2005
Rains during middle July have reduced dry and droughty conditions over some areas of Illinois . Other areas, however, received little or no rain and crop yields likely are still being reduced. Even areas that received significant rains have had yield reductions due to little rain during May and June.
Low yields may result in crop insurance payments on some farms in Illinois . An insurance payment calculator has been developed and is available under the 2005 iFarm Insurance Payment Calculator link in the crop insurance section of farmdoc ( www.farmdoc.uiuc.edu/cropins ). A user of this program enters the crop, county, and Actual Production History (APH) yield for the situation of interest. Then, insurance payments are generated for user-specified yields and harvest prices.
Table 1 shows an example output for a Lee county farm growing corn in 2005. These payments are based on a 158 bu. Actual Production History (APH) yield. Insurance payments are calculated given a 100 bu. corn yield for both the farm and county.
This year is a fairly typical drought year, except that the drought is not as wide spread as in some years. In drought years, yields are lower because of dry weather and harvest prices often are higher than base prices. Base and harvest prices are used to determine insurance payments and are averages of settlement prices of Chicago Board of Trade futures contracts (December contact for corn and November contract for soybeans). The base price is determined by averaging settlement prices during February while harvest prices are based on averages during a harvest month (November for corn having Revenue Assurance (RA), October for corn having Crop Revenue Coverage (CRC), and October for soybeans). Generally during short crop years, futures prices are higher in the fall than in February. Hence, one would expect harvest prices to be higher than base prices this year.
The base price for corn is $2.32 in 2005. Currently, the December corn contract is trading around $2.50. If the December contract continues to trade higher than $2.32 during the fall price determination period, the harvest price will be higher than the base price. Similarly, the soybean base price is $5.53 per bu. and the November contract is trading in the $6.70 to $6.80 range. The harvest price for soybeans likely will be higher than the base price.
Having higher harvest prices than base prices can cause some revenue products to have higher insurance payments than other revenue products. Revenue products with guarantee increases will have higher payments than those products without guarantee increases. For farm-level products, this means Revenue Assurance with the harvest price option (RA-HR) and Crop Revenue Coverage (CRC) will have higher payments than RA with the base price option (RA-BP). For county level products, the Group Risk Income Plan with the harvest revenue option (GRIP-HR) will have higher payments than GRIP without the harvest revenue option (GRIP-NoHR). These relationships are illustrated in Table 1.
This year, supply shortfalls will not be as large as in some years in which droughts were more widespread. Hence, harvest prices may not be above base prices as much as in some years. In 1988, for example, the harvest price was $.52 higher than the base price for corn. For a similar increase to happen in 2005, the harvest price would have to be $2.84. At this point, a harvest price of $2.84 or above seems unlikely. Similarly, the soybean harvest price was $1.50 higher than the base price. This type of increase in 2005 would mean that the harvest price for soybeans would be $7.03.
Both harvest prices and yields are not known because we are only partially through the growing season. Indication of harvest prices can be obtained from futures prices. To provide some perspective on yields, Table 2 shows corn yields as a percent of trend-line county yields for some of the worst yielding years in Illinois . Trend-line yields represent a projection of county yield. Roughly half the time, yields will be above the trend-line yield and half the time yields will be below the trend-line yield.
In 1988, Lee County 's county yield was 52% of its trend line yield (see Table 2). For Lee County , the trend-line yield in 1988 was 129 bu. per acre while actual yield in 1988 was 67 bu. The 52% percent of trend-line yields equals (67 actual yield /129 trend-line yield).
These percents can be used to estimate 2005 yields. For example, 1988 yield conditions can be estimated by multiply the 1988 percent shortfall by 2005 trend-line yield. The trend-line yield for Lee county in 2005 is 158.4 (see Table 3). If 1988 conditions happen in 2005, Lee County 's yield will be 82 bu. per acre (52% x 158.4). Using percentages in Table 3 for alternative years, one can gain a perspective of more severe shortfalls that have occurred in the past.
Trend-line yields in 2005 for Illinois counties are reported in Table 3. These yields also are used to set expected yields for the Group products. The iFARM Payment Calculator reports expected yields by crop and county.
A similar process to that illustrated above for corn can be used for soybeans. Table 4 shows the percent of trend-line county yields for some of the worst overall yield years for soybeans in Illinois .
Use of county yields may not represent an individual farm yield. Farm yields are more variable than county yields. Hence, percents in Tables 2 and 4 may be higher or lower than that experienced on an individual farm.
Crop insurance payments could be large on some farms and will partially make up for shortfalls in income. As yield and price estimates become more certain, the iFARM Insurance Payment Calculator on farmdoc can be used to estimate payments.
Issued by: Gary Schnitkey, Department of Agricultural and Consumer Economics