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FEFO 11-02
January 28, 2011

PREMIUMS ON FARM-LEVEL REVENUE CROP INSURANCE PRODUCTS HIGHER IN 2011

Farm-level revenue crop insurance products will have higher premiums in 2011 compared to 2010 because projected prices and volatilities likely will be higher in 2011. Herein 2011 premiums are estimated for Revenue Protection (RP), the COMBO product that replaces Crop Revenue Coverage (CRC) and Revenue Assurance (RA) with the harvest price option. The 2011 RP premiums are compared to 2010 CRC premiums.

Estimated 2011 Corm Premiums

Premiums were estimated for RP, a farm-level crop insurance product that makes payments when revenue falls below a revenue guarantee.  Like CRC, RP’s guarantee can increase if harvest prices set during the month of October for corn and soybeans are above projected prices set during the month of February.   Per acre premiums were estimated given enterprise units with 400 acres in the unit.

In estimating premiums, a $5.70 projected price and .33 volatility was used.  Projected price and volatility is based on average futures and options prices during the month of February.  Actual premiums will vary from those shown here because projected prices and volatility will differ from those used in calculating estimated premiums.

figure 1

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Figure 1 shows estimated RP premiums for each county in Illinois given an 80% coverage level.  APH yields used in these estimates were the expected yields used for Group Risk Income Plan (GRIP) insurances minus five bushels.  Per acre premiums vary across counties.  The lowest premiums of $12 per acre occur in DeWitt and Douglas counties. The highest premium of $32 per acre occurs in Gallatin County.  Generally, counties in central and northern Illinois have the lowest premiums.  There is a contiguous set of counties that have premiums less than $20 per acre beginning in Ogle and DeKalb Counties in north-central Illinois that extends south to McLean County in central Illinois, and then heads east to the Illinois-Indiana border.  There is a contiguous set of counties in southern Illinois that have premiums over $25 per acre.  Much of this difference in premiums is due to differences in yield risk.

Overall, 2011 premiums are estimated to be 70% higher in 2011 than in 2010.  Increases vary across counties.  Counties with the lowest increases are in central Illinois.  The five counties with the lowest increases are Moultrie (36%), Douglas (38%), DeKalb (41%), and McLean (42%) Counties.  Somewhat surprisingly, counties with the largest increases also are in or near central Illinois.  The five counties with the largest increases are LaSalle (103%), Putnam (105%), Bureau (108%), Christian (108%), and Logan (110%) Counties.

Differences in increases also points to relatively large differences in premiums in adjacent counties. For example, there is a large difference in premiums between the central Illinois counties of McLean, DeWitt, and Macon and counties immediately to the west.  McLean, Dewitt, and Macon Counties have premiums in the $12 to $13 per acre ranges while Tazewell, Logan, Sangamon, and Christian Counties have premium costs in the $19 to $21 per acre range.  These differences suggest that farmers in different counties may make different crop insurance decisions.

Coverage Level, Harvest Price Exclusion, and Unit Choice Impacts on Premiums

table 1

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Estimated premiums for corn in McLean County Illinois are shown in Table 1 for a farm with a 180 bushel APH yield, a $5.70 base price, and a .33 volatility.  RP premiums differ across coverage levels, whether the harvest price exclusion is chosen, and unit choice.

For RP at the enterprise level, premiums range from $.96 per acre for a 50% coverage level up to a $24.58 premium at the 85% coverage level.  A 90% premium increase occurs from the 80% to the 85% coverage level.  Estimated premiums are $12.78 at the 80% coverage level and $24.58 at the 85% coverage level.  This large increase is due to increased chances of losses and because the risk subsidy decreases from the 80% coverage level to the 85% coverage level.

RP allows the guarantee to increase if the harvest price is above the projected price.  The COMBO product also has a product that does not have the guarantee increase provision in it called Revenue Protection with Harvest Price Exclusion (RP with exclusion).  Premiums for RP with exclusion are roughly 60% of the premiums for RP.  At the 80% coverage level in enterprise units for example, the RP with exclusion product has a $8.25 premium, 64% of the RP premium of $12.78 per acre.

Enterprise units have all acres in one county under the same crop and have the largest number of acres in its unit.  Basic units are all crop in a county under the same ownership split while optional units divided basic units down further based on township sections.  Due to higher risk subsidies, enterprise units have much lower premiums than basic or optional units.  At the 80% coverage level, the $12.78 per unit premium for enterprise units is 36% of the $34.93 premiums for basic units.  These premiums are based on 400 acres and different number of acres can result in different differences between premiums.

Enterprise versus Basic Unit Premium Differences Across Counties

figure 2

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While enterprise unit premium is 36% of basic unit premium in McLean County, the difference varies across counties.  McLean County has one of the lowest differences across all counties in Illinois (see Figure 2).  In Livingston county, the county immediately north of McLean County, the difference between enterprise and basic units if 50%, meaning that enterprise units have less of a premium advantage in Livingtson county than in McLean county.

All farmers likely will find enterprise units the lower premiums associated with enterprise units attractive.  However, it will be much more difficult to justifying not choosing enterprise units in counties where the enterprise unit as a percent of basic unit is lower.  For example, farmers in McLean County will likely find enterprise units more attractive than a farmer in Livingston County.

Summary

Premiums will be higher in 2011 with much of the increase due to higher projected prices and higher volatilities.  While higher, farmers likely will find crop insurance advantageous as higher projected prices allow more revenue to be protected.  Future articles will deal with crop insurance product choices.

Submitted by:  Gary Schnitkey and Bruce Sherrick, Department of Agricultural and Consumer Economics, University of Illinois

 

 
Department of Agricultural and Consumer Economics    College of Agricultural, Consumer and Environmental Sciences
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