February 13, 2006
FEFO 0602
EXPECTED YIELD INCREASES AND CHOICE BETWEEN GROUP AND FARM CROP INSURANCE
The Risk Management Agency (RMA) increased the expected yields used to calculate guarantees for
Group Risk Plan (GRP) and Group Risk Income Plan (GRIP), group insurance products that base
payments on county yields. Increases in expected yields from 2005 to 2006 averaged 7.6 bu. for corn and
1.6 bu. for soybeans across all Illinois counties. Higher expected yields result in higher guarantees.
Higher guarantees then increase chances of receiving insurance payments and increase the amount of
payments when they occur. Thus, expected yield increases make group products more attractive and may
cause some farmers to switch to group products from farm products such as Actual Production History
(APH), Crop Revenue Coverage (CRC), Income Protection (IP), and Revenue Assurance (RA).
Expected Yields and Group Product Guarantees
GRP is a yield insurance whose guarantee equals the expected yield times the coverage level. An
expected yield of 171.5 bu. and a coverage level of 90% results in a yield guarantee of 154.4 bu. (171.5 x
.90). Payments occur when county yield, as determined by the National Agricultural Statistical Service
(NASS), is less than 154.4 bu.
GRIP is revenue insurance that has two options: GRIP without the harvest revenue option (GRIPNoHR)
and GRIP with the harvest revenue option (GRIPHR). GRIPNoHR’s revenue guarantee equals the
expected price times the expected yield times the coverage level. The expected price is the average of
settlement prices of Chicago Board of Trade (CBOT) contracts during the month of February (December
contract for corn and November contract for soybeans). Given an expected price of $2.40, an expected
yield of 171.5, and a coverage level of 90%, the guarantee equals $370 ($2.40 x 171.5 x .9).
GRIPNoHR makes payments when the actual county yield times the harvest price is below the revenue
guarantee. For corn, the harvest price is the average of settlement prices during the month of October of
the December CBOT contract. The harvest price is limited to a $1.50 move from the expected price (the
harvest price can not be less than $1.50 plus the expected price or greater than $1.50 plus the expected
price). For soybeans, the harvest price is the average of settlement price during October for the
November contract. The harvest price is limited to a $3.00 move from the expected price for soybeans.
GRIPHR’s revenue guarantee differs from GRIPNoHR in that the higher of the expected price or the
harvest price is used in calculating the guarantee. GRIPHR’s guarantee will always be at least as high as
GRIPNoHR’s guarantee. Hence, payments from GRIPHR will be at least as great as from GRIPNoHR,
given that similar coverage and protection levels are chosen.
Expected Yield Increases
To put expected yield increases in perspective, county corn yields for McLean County, Illinois are shown
in Figure 1. Actual county yields as determined by NASS are shown for 1972 through 2004. The 2005
yield has not been released as of the writing of this paper. The 2005 yield was estimated based on yields
reported for the Central Crop Reporting District.
Also shown in Figure 1 are expected yields used in the calculating group product guarantees. These
expected yields are RMA’s estimate of the “mostlikely” yield in a county. If a year could be repeated a
number of times, the average of the repeated years would equal the mostlikely yield. In 2006, the
expected county yield is 171.5 bu. for McLean County. If 2006 could be repeated ten times, the average
of the ten years would be close to 171.5 bu. if RMA is correct in its estimate of the expected yield.
GRP became available in 1995 and had an expected yield of 136.9 in that year. Expected yields gradually
increased up until 2005 when the expected yield was 159.1 bu. Between 2005 and 2006, the expected
yield had a substantial increase of 12.4 bu. up to 171.5 bu. Note that the 171.5 expected yield is higher
than all county yields except two: the 2003 and 2004 yields.
The substantial increase occurred because RMA appears to place large weights on yields of recent years.
When the 2006 expected yield was calculated by RMA, yields up to 2004 were available. The 2003 yield
of 182 bu. and the 2004 yields of 185 bu. were substantially higher than any other previous yield (see
Figure 1). These recent high yields caused the expected yield to increase.
Corn yields have been increasing at a faster pace since 1995 than prior to 1995. For McLean County, the
average yearly increase in corn yields was 3.3 bu. between 1995 through 2005 compared to 1.8 bu.
between 1973 through1995. There is some argument whether these increases are due to improved
genetics and the introduction of genetically modified hybrids or whether the increases are simply due to
favorable weather. If due to favorable weather, the expected yields may overstate mostlikely yields.
APH Yields of Farm Products
Expected yield calculations stand in contrast to the way in which APH yields are calculated. The APH
yield is used to set guarantees on farm products (APH, CRC, IP, and RA) and is based on a yield history
from a farm or a unit. The yield history can be based on a minimum of four yields up to a maximum of
eleven consecutive yields. Due to yield variability, a farm’s APH yield can be substantially different
from the mostlikely yield. In some cases APH yields will be higher than expected yields and vice versa.
While the relationship may vary on individual farms, calculating the APH yield based on a yield history
will result in the average APH yield being below the mostlikely yield in an environment of increasing
yields.
To gain a feel for the downward bias, average yields for the last five years (2001 through 2005) and last
ten years (1996 through 2005) were calculated for McLean County. These would be the APH yields for a
farm that had the same yields as the county and had yields based on fiveyears of yields and tenyears of
yields, respectively. Overall, one would expect these averages to be close to the average of APH yields in
McLean County. The fiveyear average yield for McLean County was 165 bu., 6.5 bushels below the
2006 expected yield. This suggests that, on average, farms with APH yields based on 4 to 6 years of
yields will have APH yields about 6.5 bu. below mostlikely yields. The tenyear average yield was
155.6 bu., 15.9 bu. below the 2006 expected yield. This suggest that, on average, farms with APH yields
based on between 9 and 11 years of data will have APH yields about 15.9 bu. below mostlikely yields.
Relationships between expected and average yields for McLean County are not unique. Across all Illinois
counties, the 2006 expected yield for corn is 2.6 bu. higher than the fiveyear average yield (see Table 1).
The 2006 expected yields averaged 14.7 bu. higher than the tenyear average yields across all Illinois
counties.
Choice of Group or Farm Product
Having APH yields substantially below mostlikely yields greatly reduces the chances of receiving
payments from insurance products. This reduces risk reductions offered by crop insurance. Hence,
farmers may wish to compare their APH yields to what they would consider mostlikely yields. If APH
yields are below mostlikely yields, group products become more attractive compared to farm products.
Conversely, farm products will be more attractive than group products when APH yields are above mostlikely
yields.
The comparison of mostlikely to APH yields should be only one consideration in the crop insurance
choice decision. Another should be the financial position of the farm. Farms in vulnerable financial
position will find farm products more attractive because farm products use farm yields in calculating
insurance payments. Another criterion should be how well farm yields track county yields. Farms who
have yields that closely track the county will find group products more attractive.
Summary
The increase in 2006 expected yields increases the attractiveness of group products. Farmers may want to
compare there APH yield to the mostlikely yield. Group products become more attractive as the APH
yield declines relative to the expected yield.
Increases in expected yields may be a short lived phenomenon. Expected yields can decrease if county
yields are below average in future years.
Issued by: Gary Schnitkey, Department of Agricultural and Consumer Economics
