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February 27, 2006
FEFO 06-03

GRP AND GRIP PAYMENTS: PRELIMINARY 2005 ESTIMATES AND HISTORICAL GRIP PAYMENTS

The Illinois Agricultural Statistical Service (IASS) recently released yields that will be used to calculate payments on Group insurance products. This publication contains tables of information that can be used to estimate 2005 payments for corn and soybeans in all Illinois counties. In addition, historical payments on Group Risk Income Plan (GRIP) insurance polices are provided.

2005 Estimated Payments on Group Corn Policies

Tables 1a and 1b shows information for corn:

  • Expected yield – this is the yield used to calculate guarantees for 2005 policies. For Adams County, the expected yield is 154.8 bu. (see Table 1a)

  • Actual yield – this is the 2005 yield for the county. The actual yield for Adams County is 126.0 bu. For insurance purposes, a county’s actual yield equals total production divided by planted acres. IASS reports a yield equal to total production divided by harvested acres. This yield often is reported in the popular press. It, however, is not the yield used to calculate Group insurance payments.

  • GRP shortfalls – These are the shortfalls for Group Risk Plan (GRP), the county yield insurance. Shortfalls are reported for coverage levels from 90% down to 75%. GRP could also be purchased at a 70% coverage level. The 70% shortfalls are not reported in Tables 1a and 1b as they are all zero. For Adams County, the shortfall given a 90% coverage level is .0956 (see Table 1a). The insurance payment equals shortfall times the dollar protection level. The dollar protection level equals:

  • Expected yield x $2.35 x 1.5 x protection level percent

    where the protection level percent is chosen by the farmer from 60% up to 100%. For Adams County, a farmer choosing a 100% protection level will have a dollar protection of $545.67 (154.8 x 2.35 x 1.5 x 1). In 2005, the 100% protection level is estimate to have a $52 payment (.0956 shortfall x $545.67 protection level). Lower coverage levels result in lower payments.

  • GRIP shortfalls – These are the shortfalls for Group Risk Income Plan (GRIP), the county revenue insurance. GRIP has two options: GRIP with the harvest revenue option (GRIP-HR) allows the guarantee to increase when the harvest price is greater than the expected price) and GRIP without the harvest revenue option (GRIP-NoHR) does not allow the guarantee to increase. Both options have the same shortfalls in 2005 because the harvest price is below the expected price. For Adams County, the shortfall given a 90% coverage level is .2666 (see Table 1a). The payment equals the shortfall time the dollar protection level which equals:

  • Expected yield x $2.38 x 1.5 x protection level percent

    where the protection level percent is chosen by the farmer from 60% up to 100%. For Adams County, a farmer choosing a 100% protection level will have a dollar protection of $552.64 (154.8 expected yield x 2.38 x 1.5 x 1). In 2005, the 100% protection level yields an estimated payment of $147 payment (.2666 shortfall x $552.64 protection level). Lower protection levels result in lower payments.

    GRP at the 90% coverage level is estimated to have payments in 35% of Illinois counties in 2005. At a 90% coverage level and a 100% protection level, the average payment for GRP across all Illinois counties is $13.84 while the average premium for these polices is $8.20 per acre.

    GRIP at the 90% coverage level is estimate to make payments in 88% of Illinois counties in 2005. At a 90% coverage level and a 100% protection level, the average payment for GRIP across all Illinois counties is $75 per acre. The average premium for these polices was $13.00 for GRIP-NoHR and $19.49 for GRIP-HR.

    2005 Estimated Payments on Group Soybean Policies

    Tables 2a and 2b have formats similar to Tables 1a and 1b. Tables 2 give information for soybeans.

    GRP payments can be calculated by multiplying the GRP shortfall by the dollar protection level. For Boone County at the 90% coverage level, the GRP shortfall is .0939 (see Table 2a). The dollar protection level is

    Expected yield x $5.45 x 1.5 x protection level percent

    where the protection level percent is chosen by the farmer from 60% up to 100%. For Boone County, a farmer choosing a 100% protection level will have a dollar protection of $358.88 (43.9 expected yield x $5.45 x 1.5 x 1). In 2005, the 100% protection level results in a $34 payment (.0939 shortfall x $552.64 dollar protection level). Lower protection levels result in lower payments.

    GRIP payments will not vary whether the GRIP-NoHR or GRIP-HR option was selected as harvest price was below the base price. GRIP payments equal the GRIP shortfall times the dollar protection level. For Boone County at the 90% coverage level, the GRP shortfall is .1302 (see Table 2a). The dollar protection level is:

    Expected yield x $5.99 x 1.5 x protection level percent

    where the protection level percent is chosen by the farmer from 60% up to 100%. For Boone County, a farmer choosing a 100% protection level will have a dollar protection of $394.44 (43.9 expected yield x $5.99 x 1.5 x 1). In 2005, the 100% protection level results in a $51 payment (.1302 shortfall x $394.44 dollar protection level). Lower protection levels result in lower payments.

    GRP at the 90% coverage level made payments in 4% of the Illinois Counties. At a 90% coverage level and a 100% protection level, the average payments across all Illinois counties was $.45 per acre while the average premium was $4.27.

    GRIP at the 90% coverage level is estimated to make payments in 8% of Illinois counties in 2005. At a 90% coverage level and a 100% protection level, the average payments across Illinois counties is $1.55 while the average premium is $10.13 for GRIP-NoHR and $13.15 for GRIP-HR.

    Historical GRIP-NoHR Payments for Corn

    GRIP-NoHR came into existence in 1999. Tables 3a and 3b show corn payments from GRIP-NoHR for all counties in Illinois for policies at the 90% coverage level and 100% protection level. Also shown are average payments over the 7 years as well as the estimated premium for a 2006 policy. Information in the table is illustrated for Adams County. A GRIP-HoHR policy at a 90% coverage level would have made a $68 payment in 1999, $13 payment in 2004, and $147 payment in 2005 (see Table 3a). The average payment from 1999 through 2005 is $33 per acre and the 2006 premium for a 90% product at a 100% protection level is $15.97 per acre.

    The average GRIP-NoHR payment from 1999 through 2995 across all Illinois counties was $33. The average 2006 farmer-paid premium across all counties is $15.30. In another analysis, we simulated GRIP-NoHR payments from 1972 through 2005 using historical data updated to current conditions (see Group Risk Calculators under Excel spreadsheets tools in the crop insurance section of farmdoc). Simulated results show qualitatively the same results as actual historical results: GRIP-NoHR average payments exceed farmer-paid premium.

    GRIP-HR is an alternative that allows it guarantee to increase if harvest prices are above expected prices. GRIP-HR became available in 2004. The harvest price has not been above the expected price in either 2004 or 2005. Hence, payments from GRIP-HR are the same as GRIP-NoHR in 2004 and 2005. Over the entire time period, harvest price exceeded the base price only in 2002. In 2002, GRIP-NoHR at the 90% coverage level and maximum protection level had average payments of $28 across all Illinois counties. GRIP-HR would have averaged payments of $40 per acre, $12 more than GRIP-NoHR.

    Historical GRIP-NoHR Payments for Soybeans

    Tables 4a and 4b show soybean payments from GRIP-NoHR for all counties in Illinois for policies at the 90% coverage level and 100% protection level for soybeans. Tables 4a and 4b have a similar format to those showing results for corn (Tables 3a and 3b).

    The average GRIP-NoHR payment from 1999 through 2005 across all Illinois counties was $11. The average 2006 farmer-paid premium across all counties is $11.35. GRIP-NoHR has roughly the same payments from 1999 through 2006 as the 2006 premium. In another analysis, we simulated GRIP-NoHR payments from 1972 through 2005 using historical data updated to current conditions (see Group Risk Calculators under Excel tools in the crop insurance section of farmdoc). Simulated results suggest that GRIP-NoHR payments will exceed farmer-paid premium. The period from 1999 through 2005 has been one of stable yields for soybeans. The simulated results included years with larger yield losses, resulting in higher average insurance payments than the actual payments from 1999 through 2005. In comparison to corn, soybean policies had lower payments relative to farmer-paid premiums than did corn policies in both simulated and historical results.

    GRIP-HR has been available since 2004. GRIP-HR payments would differ from GRIP-NoHR in years in which harvest prices exceeded expected prices. For soybeans, harvest prices exceed expected prices in 2002 and 2003. In 2002, GRIP-NoHR at a 90% coverage level and maximum protection averaged $4 per acre across all Illinois counties. GRIP-HR would have averaged $15 per acre in payments, $11 more than GRIP-NoHR. In 2003, GRIP-NoHR at a 90% coverage level and maximum protection level averaged $4 in payments across all Illinois counties. GRIP-HR would have averaged $52 per acre, $48 per acre more than GRIP-NoHR.

  • Issued by: Gary Schnitkey, Department of Agricultural and Consumer Economics

     


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