URBANA-Group crop insurance products may be more attractive for producers following the USDA Risk Management Agency's increase in expected yields for the coming growing season, said a University of Illinois Extension farm financial management specialist.
"The 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)," said Gary Schnitkey.
He noted that increases in expected yields from 2005 to 2006 averaged 7.5 bushels for corn and 1.6 bushels 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," he explained.
Schnitkey's report, "Expected Yield Increases and Choice Between Group and Farm Crop Insurance," can be accessed online through farmdoc at: http://www.farmdoc.uiuc.edu/manage/newsletters/fefo06_02/fefo06_02.html .
Group Risk Plan (GRP) is a yield insurance whose guarantee equals the expected yield times the coverage level. An expected yield of 171.5 bushels and a coverage level of 90 percent results in a yield guarantee of 154.4 bushels. Payments occur when county yield, as determined by the National Agricultural Statistical Service is less than 154.4 bushels.
Group Risk Income Plan (GRIP) is revenue insurance that has two options: GRIP without harvest revenue option (GRIP-NoHR) and GRIP with the harvest revenue option (GRIP-HR).
"The first option's revenue guarantee equals the expected price times the expected yield times the coverage level," said Schnitkey. "GRIP-NoHR makes payments when the actual county yield times the harvest price is below the revenue guarantee."
GRIP-HR's revenue guarantee differs in that the higher of the expected price or the harvest price is used in calculating the guarantee.
"GRIP-HR's guarantee will always be at least as high as GRIP-NoHR's guarantee," said Schnitkey. "Hence, payments from GRIP-HR will be at least as great as from GRIP-NoHR, given that similar coverage and protection levels are chosen."
Using crop insurance based on Actual Production History (APH) means that having yields substantially below most-likely yields--the Risk Management Agency projection--greatly reduces the chances of receiving payments from insurance products. "Some farms have APH yields below their most-likely yields," Schnitkey said.
"This reduces risk reductions offered by crop insurance," he said. "Hence, farmers may wish to compare their APH yields to what they would consider most-likely yields. If APH yields are below most-likely 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 most-likely yields."
Schnitkey pointed out that comparison of most likely to APH yields should be only one consideration in the crop insurance choice decisions.
"Another should be the financial position of the farm," he said. "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 that have yields that closely track the county will find group products more attractive."
He noted that increases in expected yields may be a short-lived phenomenon as expected yields can decrease if county yields are below average in future years."