January 11, 2017

New FarmDoc Tool Assesses Performance of Crop Insurance



by Gary Schnitkey
original source FarmDocDaily

A new “Product Performance” section has been added to the 2017 Crop Insurance Decision Tool. By using this section, users can examine per acre premiums and payments from alternative crop insurance products from 1995 to 2015, thereby allowing users to gain a feel for the historical performance of crop insurance products. For corn, users will notice that the 2012 drought had large impacts on crop insurance performance.

User Selections

From the 2017 Crop Insurance Decision Tool, users will select “product performance” from the menu and make the following selections (see Figure 1):

  1. State. Any state in the nation can be selected.
  2. County. Any county can be selected.
  3. Crop. Information is available for corn, soybeans, and wheat.
  4. Product. Data are available for Revenue Protection (RP), Yield Protection (YP), RP with the harvest price exclusion (RPwHPE), Area Revenue Protection (ARP), Area Yield Protection (AYP), and ARP with harvest price exclusion (ARPwHPE).
  5. Coverage level. Choices are each available coverage level (50 to 85% for RP) and an “all” selection.

Figure 1 shows a Logan County, Illinois example where corn is selected. RP performance will be given for all coverage levels, meaning that data over the 50% to 85% coverage levels are averaged and reported.




Product Performance Output

Figure 2 shows output from selections in Figure 1. All data comes from Summary of Business, which is maintained by the Risk Management Agency (RMA). The 2017 Crop Insurance Decision Tool provides results from 1995 to 2015. Yearly performance rows will be blank if no use of the chosen product occurred during the year.




RP along with YP and RPwHPE came into existence in 2011. As a result, RP performance is reported from 2011 onward. Before 2011, Crop Revenue Coverage (CRC) and Revenue Assurance (RA) plans where in use. RP, CRC, and RA all are revenue insurances that allow guarantees to increase if harvest price is higher than projected price (RA had an option that excluded the guarantee increase, but this option was used rarely). Therefore, CRC and RA performance are reported for years prior to 2011.

The “product performance” section first reports acres insured using the selected combination. RP type products were first introduced in 1997 and 7,916 acres were insured in Logan County (see Figure 2). Use grew to 125,359 acres in 2014, decreasing slightly to 121,619 acres in 2015. RP is now the most used crop insurance product, having over 90% use in many counties (see farmdoc daily, January 4, 2017).

Next, the section reports premiums in three columns: total, subsidy, and farmer-paid premium. The subsidy represents the premium paid by the Federal government as specified by subsidy schedules written into statute. As its name implies, “farmer-paid premium” is paid by the farmer. Farmer-paid premium plus subsidy equals total premium. In Logan County, total premium was $40.56 per acre in 2015 (see Figure 2). Of the total premium, $19.79 per acre was subsidy and $20.77 per acre was farmer-paid premium.

Also given are per acre insurance payments. These are payments to farmers resulting from claims to crop insurance products. In 2015, insurance payments on RP products averaged $32.95 per acre.
The final two columns provide an evaluation of the crop insurance products. Insurance payments minus farmer-paid premium show insurance payments received from the products relative to farmer-paid premium. Positive values mean that insurance payments were larger than farmer-paid premium.

In high payment years, payments minus farmer-paid premium will be positive. For example, insurance payments were high in the 2012 drought year, resulting in payments minus farmer-paid premium of $302.26. In low loss years, payments minus farmer-paid premium will be negative. From 1997 to 2015, negative values occurred 13 out of 19 years. From 1995 to 2015, farmers received an average of $10.38 more in premium than in payments (see Figure 2). From 2006 to 2015, farmers received $22.55 per acre more in payments than they paid in premium (see Figure 2).

The loss ratio equals insurance payments divided by total premiums. In 2015, the loss ratio was .81. Loss ratios less than 1.0 mean that insurance payments were less than total premium. Conversely, loss ratios higher than 1.0 indicate that payments were greater than premium. Over time, RMA’s goal is to maintain a loss ratio near but below 1.0.

Interpretation

Past performance will not be entirely reflective of how the products will perform in the future. RMA makes adjustments to premiums over time. For example, continuing high payments on products will result in increasing premiums and vice versa. Moreover, RMA continually conducts studies of its rating procedures, which can cause premium changes. As a result, current premiums will vary from historical premiums even given identical conditions. As a result, future performance will not match historical performance.

Moreover, values are averages across many farms in a county. In 2015, average RP premium in Logan County were $20.77 per acre. Some farmers paid higher premiums depending on crop insurance choices and historical yields, and vice versa. The average RP payment in 2015 was $32.95 per acre. Again, payments vary across farms in the county. Some farmers did not receive payments in 2015 while other farms received payments much larger than $32.95 per acre.

Importance of 2012 in Illinois

The drought year of 2012 has a large impact on crop insurance performance. In 2012, the loss ratio for RP in Logan County was 5.84, much higher than the .89 average from 2006–2015 (see Figure 2). If 2012, had not occurred, the .89 average loss ratio for the 2006–2015 would have decreased to .46.

Payments minus farmer-paid premium averaged $22.55 per acre from 2006 to 2015. Without 2012 included, payments minus premium averaged -$8.53 per acre.

The drought has similar impacts on many Illinois counties. To illustrate, Panel A of Figure 3 shows average RP loss ratios for corn in each Illinois county for 2006 to 2015. The 2012 drought particularly impacted farms in southern and eastern Illinois, causing many counties to have loss ratios above 1.0. Panel B shows loss ratios for 2006–2015 with 2012 excluded. Without 2012, most counties had loss ratios well below 1.0.




These comparisons point out the importance of “extreme” years on overall crop insurance performance. Severe droughts like 2012 occur in the Midwest occasionally, with much debate concerning their frequency of droughts. The last drought of comparable magnitude to 2012 happened in 1988, 25 years previous to 2012, suggesting infrequent droughts. However, two additional, large yield shortfalls occurred in the 1980s: 1980 and 1983. Three severe events in a decade give a very different perspective on the frequency of droughts than the more recent history of the passing of 25 years. Which represents the future the best is an open question, with a blend of the 1980s experience and the recent more moderate losses likely to be the most appropriate answer.

Summary

The Product Performance section allows users to examine historical performance of crop insurance plans, thereby providing intuitions on the frequency of payments, the size of payments, and the net costs of the plans. While evaluating past performance is useful, future performance will not necessarily match historical performance as RMA is adjusting premiums over time. Moreover, the frequency of large-scale droughts has a large impact on insurance performance. Whether there are 0, 1, or 2 drought years in the next ten will dramatically influence crop insurance performance.


January 10, 2017

Revenue Protection (RP) Use on Corn in the Midwest



by Gary Schnitkey

Revenue Protection (RP) is the most used crop insurance plan for corn. Over time, RP use has grown to over 90% of corn acres insured in many counties in the corn belt (farmdoc daily, December 13, 2016). As illustrated by maps in this article, farmers in the corn belt typically select 80 and 85% coverage levels when using RP. Detailed statistics on a county basis are available from the “product use” section of the 2017 Crop Insurance Decision Tool). Overall, use suggests farmers prefer revenue insurances that allow guarantees to increase if harvest prices are above projected prices. Use of high coverage levels suggests farmers value protection offered by crop insurance.

RP Use

According to 2016 Summary of Business statistics from the Risk Management Agency (RMA), RP use on corn acres is over 95% in most counties around the western corn-belt. For example, over 95% use predominates in North Dakota, South Dakota, Minnesota, Kansas, Iowa, and Missouri (see Figure 1).




Many counties in Illinois, Indiana, and Ohio have lower RP use than in the western corn-belt (see Figure 1). In these eastern corn-belt counties, higher use of Area Risk Protection (ARP) occurs. RP and ARP are similar in that both are revenue insurances whose guarantees increase if harvest prices are above the projected prices. ARP uses county yields in determining payments while RP uses farm yields. In eastern corn-belt counties, the sum of RP and ARP use often is above 90%.

Two counties illustrate RP and ARP use in the eastern corn-belt. Sangamon County is in west-central Illinois and has 66% of its corn acres insured using RP, 32% using ARP, with the sum of RP and ARP use being 98%. Noble County is in the northeast Indiana. In Noble County, RP use is 43%, ARP use is 51%, and the sum of RP and ARP use is 94%.

Some counties outside the corn belt have more use of Yield Protection (YP) insurance, a yield insurance. For example, higher YP use occurs along the Mississippi River in Mississippi, Arkansas, and Louisiana (see Figure 1). Take Bolivar County, Mississippi as an example. RP is used to insure 71% while YP is used on 29% of the acres. Besides the Mississippi Delta, more use of YP also occurs in:

Counties in the middle part of Michigan, Western New York counties, Texas panhandle counties (see Figure 1). By far, RP is the plan most used to insure corn. In some areas, predominately in the eastern corn belt, ARP has significant use, with RP and ARP being used on over 90% of corn acres. In areas outside the corn belt, RP use often is above 50% of acres, but YP has a higher percentage of acres than in the corn belt.

RP Coverage Levels

In most counties, RP’s coverage levels range from 50% to 85% coverage levels in 5% increment. Figure 2 shows a weighted average coverage level for RP products in 2016. To illustrate weighted average coverage level calculations, suppose a county has 60% RP acres insured using an 80% coverage level and 40% using an 85% coverage level. The weighted average coverage level for this county is 82% (.6 use x .80 coverage level + .4 use x .85 coverage level).




Average coverage levels for RP in corn is over 80% in southern Minnesota, the northern two-thirds of Iowa, Illinois, and Indiana, and western Ohio (see Figure 2). Counties around this core of the corn belt typically have average coverage levels between 75% and 80%. Average coverage levels then decrease to between 70% and 75% the further away from the central core of the corn belt.

County Level Detail

More detail on crop insurance use is available from the 2017 Crop Insurance Decision Tool, a Microsoft Excel spreadsheet available for download from farmdoc. In the “product use” section, users make a state, county, and crop selection. Then, product use details are given.

Figure 3 shows an example of output for corn in Sangamon County, Illinois. In 2016, 197,535 acres of corn were insured. Of the acres insured, 66.3% of acres insured using RP, 32.0% used ARP, and 1.0% used YP. RP with the harvest price exclusion (RPwHPE) and Area Yield Protection (AYP) had much smaller percentages of acres. Within RP use, 47.9% of acres were insured using an 85% coverage level, 14.7% at an 80% coverage level, and 3.7% at lower coverage levels.




Figure 3 shows these use statistics for 2016. Users can change the year to any year from 1995 onward. The product use section of the 2017 Crop Insurance Decision Tool also includes graphs detailing crop insurance use over time.

Commentary

RMA offers different types of insurances including yield insurances, revenue insurances with harvest price exclusion, and revenue insurances with guarantee increase provisions. RP and ARP are both revenue insurances with guarantee increase provisions. High use of RP and ARP suggest that farmers prefer revenue insurances over yield insurances. Moreover, high use suggests that farmers value the guarantee increase associated with RP and ARP.

In the heart of the corn-belt, farmers typically purchase RP at high coverage levels. Weighted average coverage levels are above 80% in the center of the corn-belt, indicating that most acres are insured using either the 80% and 85% coverage levels. High coverage levels suggest that farmers desire risk protection offered by crop insurance.


January 09, 2017

Prospects for 2017 Ethanol Usage

Ethanol production in the United States ended the year on a record-setting note. It could mean an even bigger number for the corn-based fuel in 2017.

The U.S. ethanol industry ended 2016 on a high note. Ethanol production for the week ending Dec. 30 set a new ethanol production record with an average of 1.043 million barrels per day. The March futures price for corn moved higher last week to close at $3.58 in large part due to strength in the ethanol sector. Ethanol production and exports returned strong numbers over the first quarter of the marketing year. Currently, the World Agricultural Supply and Demand Estimates report forecast for corn consumption for ethanol production is 5.3 billion bushels. According to University of Illinois agricultural economist Todd Hubbs, when taking into account an increase in projected gasoline consumption in 2017 and robust ethanol export levels, the ability to surpass this projection is a strong possibility.

“Domestic ethanol consumption in 2017 will be influenced by domestic gasoline consumption, due to the ethanol blending requirement and the biofuels volume requirement associated with the Renewable Fuels Standard,” Hubbs says. “The EPA final rulemaking for the Renewable Fuels Standard for 2017 was released on Nov. 23 and is discussed in greater detail in the farmdoc daily article posted Nov. 30. In brief, the renewable fuels volume requirement is set at 19.28 billion gallons for 2017, which is up from the 18.11 billion gallons required in 2016.

“The conventional ethanol requirement is set at 15 billion gallons for 2017, 500 million gallons larger than 2016 and equal to the statutory requirement level,” Hubbs says. “If the gasoline consumption forecast used by the EPA is correct, the E10 blend wall will be 14.36 billion gallons in 2017. The EPA believes an ethanol supply of 14.56 billion gallons is reasonably attainable in 2017. Within the 14.56 billion gallons, E15 and E85 blends are expected to be 107 and 204 million gallons respectively. The ability to attain the E15 and E85 blend levels remains to be seen, but the increase in ethanol requirements provides support for greater corn usage in 2017.”

U.S. retail gasoline prices averaged $2.14 per gallon in 2016, which is 12 percent less than the price experienced in 2015 and is the lowest price since 2004. The December Energy Information Agency Short Term Energy Outlook projected an increase in gasoline prices for 2017 to $2.30 per gallon. Despite the projection of higher gasoline prices, gasoline consumption is forecast at 143.60 billion gallons in 2017, which is up from the 142.72 billion gallons consumed in 2016. Ethanol production is forecast to be 1 million barrels per day.

“If the EIA projection is correct, approximately 15.3 billion gallons of ethanol will be produced in 2017,” Hubbs says. “When considering the robust ethanol export trade currently in process, the U.S. ethanol industry is expected to produce a record level of ethanol in 2017.”

Ethanol export numbers are available from U.S. Census trade data for 2016 through November. U.S. exports of ethanol thus far are at 948 million gallons, which is up almost 27 percent from the similar period in 2015.

According to Hubbs, for 2016, the prospect of ethanol exports exceeding 1 billion gallons is not unreasonable.

Canada, China, and Brazil imported approximately 67 percent of the ethanol shipped from the U.S. through November. “The increase in ethanol exports is driven largely by increased volumes sent to China and Brazil,” Hubbs says. “China imported 179 million gallons through November, which far exceeds the 73.8 million gallons imported during the entirety of 2015. Brazil imported 224 million gallons through November, which is almost double from 2015. As we progress into 2017, the increases are expected to persist in Brazil because high sugar prices are expected to decrease ethanol production as mills allocate cane for sugar production in 2017. There is concern that China could raise ethanol tariffs and reduce ethanol imports in 2017 due to a possible trade dispute with the new administration.”

Hubbs says the implications for corn consumption during the 2016–17 marketing year can be seen in the USDA Grain Crushing and Co-Product Production report released on Jan. 3. Grain crushing for fuel alcohol is available through November. For the first three months of the marketing year, 1.34 billion bushels of corn has been processed for ethanol. This is up 3.2 percent from 2015 processing numbers.

“If corn used for ethanol production maintains this pace, 5.37 billion bushels will be processed in the marketing year,” Hubbs says. “Using EIA weekly ethanol production numbers, December ethanol production averaged over 1 million barrels per day. These production levels place corn use for ethanol production in a range of 455 to 460 million bushels for the month if corn use maintains the pace of the three previous months. With a conservative estimate of corn crush in December, total corn consumption for ethanol production through the first third of the marketing year would be above the current WASDE projection.

“Lower corn prices, strong ethanol exports, and greater blending requirements combine to make 2017 appear to be a strong year for corn consumption in ethanol production,” Hubbs concludes. “If the U.S. ethanol industry produced over 1 million barrels per day for the entire year, the ability to blend at requirement levels under an expanded gasoline consumption scenario and meet potential export market demand bodes well for corn use in the sector for 2017.”


January 05, 2017

Brazil Soybean Update | an interview with Kory Melby

The soybean crop in Brazil looks to be mostly in good condition, however, as you’ll hear in this interview by Todd Gleason some areas are under performing.


Kory Melby, Brazilian Ag Consulting Service - Goiania, Brazil


January 05, 2017

Tropical Bird Populations to Change | an interview with Jeff Brawn

Jeff Brawn, Animal Biology - University of Illinois College of ACES NRES

The future of the red-capped manakin and other tropical birds in Panama looks bleak. A University of Illinois research project spanning more than three decades and simulating another five decades analyzes how changes in rainfall will affect bird populations. The results show that for 19 of the 20 species included in the study, there may be significantly fewer birds if conditions become dryer.


January 04, 2017

Two Percent More Pork & Higher Prices

The last USDA Hogs and Pigs report issued in December estimated this year’s supply of pork will be larger than most analysts expect. Todd Gleason has more on how that will happen.

U.S. pork producers, in the last quarter of 2016 set a pigs per litter record,10.63. For the whole of the year, the new annual record is 10.5 pigs per litter. Every sow is having more pigs. Given these numbers, the industry will increase pork output by about three percent this year says Purdue University Extension Agricultural Economist Chris Hurt.

Quote Summary - And that will be to 25.7 billion pounds. This represents a 12 percent increase since 2014 when PED reduced production and contributed to record high hog prices. Pork production will rise by two percent in the first-half of 2017 and by about four percent in the last-half.

What does this mean for the price of hogs? With three percent higher production one might expect annual prices to be lower, however there are additional items to consider

First, retail prices did drop in 2016, but there is opportunity for those prices to come down more. Lower retail prices will stimulate the quantity of pork that consumers purchase. Secondly, USDA expects exports to expand by five percent which will move more of the increased production to foreign customers. Finally, with the addition of new processing capacity, the farm-to-wholesale margins are expected to drop. Lower margins at the processing stage may contribute to stronger bids to hog producers.

Live hog prices are expected to be about $48 in 2017, $2 higher than in 2016. Chris Hurt predicts prices will average $45 in the first quarter, the very-low $50s in the second and the third quarters, and then drop to $43 in the final quarter of 2017. A range of $2 higher or lower would be reasonable for price projections. He expects costs of production are expected to be around $50 on a live weight basis in both 2016 and 2017 based on current feed price expectations.

This means the industry operated at an estimated loss of about $12 per head in 2016 and is expected to have losses that average about $6 per head in 2017. Losses in the first quarter of 2017 are expected to be about $13 dollars per head. Modest profits may return in the second and third quarters. Then with a return to the largest losses of the year in the final quarter maybe around $18 per head.

Because the 2017 outlook is for weak returns the Purdue number cruncher says it is important hog farmers keep further expansion to a minimum. This will be difficult with new processing capacity coming in 2017 as those plants will want to stimulate some added production to fill their lines.


December 24, 2016

Celebrating a 40 Year Career with Darrel Good

Forty years ago Darrel Good hired on at the University of Illinois as a commodity markets and grains specialist. He has written more than 1500 Weekly Outlooks and done countless thousands of interviews over this same time frame. Please take time to send Darrel an email thanking him for his service.


November 30, 2016

2016 Gross Farm Revenue & Income

It looks like this year is going to be better than last year for farmers in central Illinois. Todd Gleason explores how gross income has changed for row croppers in the middle of the prairie state.



The gross revenue for corn is $292 per acre. It is tallied from three income sources. The crop is worth $262. There was a $20 farm safety net payment from the ARC-County program and a $10 crop insurance indemnity. The total, again $292, is lower than last year says University of Illinois Agricultural Economist Gary Schnitkey, “Even though we are putting in a very high yield, we are using 231 bushels to the acre for the corn average - the same as in 2014, revenues will be down for corn in 2016 as compared to 2015”.



Schnitkey calculated the gross revenue figures for the farmdocdaily website.

The soybean figures add up in a similar fashion. The gross revenue is estimated to total $718 per acre. It’s a figure much higher than the 2015 gross says the agricultural economist, “We are including very high soybean yields for 2016. Record-breaking yields, in fact, of 73 bushels to the acre. The price is above $9.50, and this may actually turn out to be low as prices continue to climb. Overall, revenue on soybeans will be up from last year and much higher than total costs. So, our bright spot for the 2016 year will be revenue and income from soybeans”.



All in all, on the highly productive soils of central Illinois, 2016 will go down as a high-yield low-income year. Another year in which farmers just-get-by says Gary Schnitkey.

Quote Summary - Get-by year, but better than it could have been without the high yields. Most farmers will maintain equity, but may see some working capital declines. The declines will be more pronounced on farms working a higher percentage of cash rented land. It is better than 2015, but still not up to sustainable levels for the long-run. We need to see higher returns, particularly for corn prices in the future.

There are a series of graphics detailing 2016 central Illinois row crop farm gross income on the farmdocdaily website.


November 28, 2016

EPA Renewable Fuels Standard Rallies Soybean Oil Prices

Source | Darrel Good, Agricultural Economist - University of Illinois

The price of soybeans rallied about 10 percent from mid-October to mid-November. It came,despite the record sized crop harvested in the United States.



Farmers have been in awe of the soybean market since mid-August. There have been a few reasons for it to rally; a short crop out of South America and a drought constrained supply of palm oil coming from Indonesia for instance. Still, this U.S. soybean crop is big, mighty big in fact. Yet, the price of soybeans has gone higher.

Darrel Good writes about it in this week’s Weekly Outlook. You may read it online at FarmDocDaily.

There are two unusual things about this price rally. Well, one really, but it is driven by the first. The rally has come because the world seems to be short of vegetable oils. Soybean oil is among those. Here’s the important part, soybean oil lead rallies generally do not last. Darrel Good thinks this one might and that it could change the dynamics of the soybean complex. The change is driven by the Renewable Fuels Standard. The RFS did the same thing for the corn market when it began to ramp up ethanol production in the United States more than a decade ago.

The soy complex is made up of three parts; the price of soybeans, the price of soybean meal, and the price of soybean oil. The last two are the products derived from the soybean when it is processed, crushed.

The EPA RFS announcement, made last week, initially resulted in a surge in soybean oil and soybean prices. Increasing soybean oil consumption for mandated advanced biofuels, in this case biodiesel production, this year and beyond may require the domestic soybean crush to be larger than previously thought concludes Darrel Good. He says this could lead to some long-term pricing questions.

Historically, the domestic crush has been driven by soybean meal demand. If it is driven instead by soybean oil demand, this could result in lower soybean meal prices. Soybean meal has a short shelf life. Its price would need to be low enough to for it to be used quickly.

The impact of higher soybean oil prices and lower soybean meal prices on the price of soybeans is difficult to anticipate. However, a “surplus” of soybean meal, says Good, might result in lower soybean meal prices relative to feed grain prices. It could cause the soybean meal to corn price ratio that has ranged from 2.55 to 3.2 in recent years to decline. The historical range is 2.0 to 2.5.


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