January 20, 2011 Crop Insurance Changes
For several years the Risk Management Agency (RMA) of the United States Department of Agriculture (USDA) and the various private insurance companies that deliver crop insurance protection to millions of producers across the country have been negotiating a major overhaul of the basic policy that is used for most insurable crops. The new Common Crop Insurance Policy, sometimes known as COMBO, will go into effect for crops insured in 2011. Covered crops include corn, soybeans, grain sorghum, wheat, barley, cotton, rice, canola and sunflowers.
According to William Edwards, Extension economist at Iowa State University, the new Common Crop Insurance Policy, sometimes known as COMBO, will go into effect for crops insured in 2011. Covered crops include corn, soybeans, grain sorghum, wheat, barley, cotton, rice, canola and sunflowers.
Instead of a different policy for each type of insurance, there will now be one master policy with several options:
- Yield Protection
- Revenue Protection
- Revenue Protection with Harvest Price Exclusion
Yield Protection (YP) is equivalent to the old Actual Production History (APH) policy. Yield protection establishes a guarantee based on the APH yield, which is determined by four to ten years of actual yield records. No changes were made in how APH yields are calculated for each insurance unit. Producers can choose to guarantee from 50 to 85 percent of their current APH yield. A major change from the old APH policy is that the indemnity price used to calculate the payment made to the producer in the event of a loss is now the same as the price used for revenue insurance policies. Previously RMA set the indemnity price using forecasts for fall cash prices.
For spring planted crops the average closing futures price for each working day during the month of February is used. The corn price is based on the December CME contract, while the November contract is used for soybeans. Producers can choose to use from 55 to 100 percent of this price for the indemnity price at which yield losses are paid. Naturally, choosing a higher price will result in a higher premium. Catastrophic level yield coverage (CAT) is still available for a cost of $300 per crop. The guarantee is 50 percent of the APH yield, and losses are paid at 55 percent of the indemnity price.
A producer can also choose Revenue Protection (RP), which is equivalent to the old Crop Revenue Protection (CRC) and Revenue Assurance with the harvest price option (RA-HPO). Revenue Protection guarantees the insured producer a minimum number of dollars of gross revenue per acre. The yield used to set the guarantee is the same as the APH yield used for Yield Protection, and the price is the same February futures price. The guarantee is the product of these two values, times the level of guarantee selected (from 65 to 85 percent). There is no option to select less than 100 percent of the February price for the guarantee, and catastrophic coverage is not available.
If the average CBOT price for the relevant contracts during the month of October is higher than the February price, the guarantee is increased, based on the October price. The October price is also used to calculate the “actual” revenue. This is exactly the same procedure that was used previously for CRC policies. RA policies used the average November price for corn, but the new Revenue Protection option will use the October price for both crops. Approximately 85 percent of the insured corn and soybean acres in Iowa in 2010 were covered with this type of policy.
The third option is called Revenue Protection with Harvest Price Exclusion (RPE). It is equivalent to the former basic Revenue Assurance (RA) policy. The only change is that the harvest price for corn will be the average for October instead of November. Under this option the guarantee does not increase even if the October price is higher than the February price. Consequently, premiums will be lower for RPE than RP.
Table 1 summarizes the old and new terminology. Current policies will automatically be converted to the corresponding policy option for 2011 unless the producer requests a change.
Previously CRC and RA used different procedures for computing premiums each year. In some years RA-HPO was cheaper than CRC, and in other years CRC was cheaper, despite the fact that they offered essentially the same coverage. Under the new Common Crop Insurance Policy only one set of premiums will be offered. The level of premium subsidies provided by RMA will not change.
Three insurance options based on county yields instead of individual farm yields are still available:
- Group Risk Plan (GRP)
- Group Revenue Insurance Plan (GRIP)
- Group Revenue Insurance Plan with harvest price option (GRIP-HPO)
There were no changes made to the group insurance plans. Group risk policies have not been widely used in Iowa, typically accounting for only about four percent of the total insured acres in the state.
Two years ago RMA increased the level of premium subsidies for policies specifying enterprise and whole farm units, to match more closely the percent subsidies for basic unit coverage. Many producers elected to shift to enterprise units, and bought a higher level of guarantee for essentially the same cost as for a lower guarantee under basic units.
This will be continued under the new common policy. Enterprise and whole farm units offer producers a substantial savings in premiums compared to basic or optional units. Previously CRC based the discounts on the number of acres insured, while RA used the number of township sections included in the policy. The new common policy requires that the acres covered must be located in at least two sections within a county to qualify for enterprise unit designation. In addition, the crop acres in each section must be larger than the lesser of 20 acres or 20 percent of the total acres. Thus, one large unit combined with one very small unit may not qualify.
Whole farm units are also available for Revenue Protection (but not Yield Protection), in which all insurable crops in a county are combined into one coverage unit. The revenue guarantee and the actual revenue are aggregated over all the insured crops. The policy must include at least two crops that each make up 10 percent or more of the total planted acres. Eighty percent of the premium for whole farm unit policies is paid by RMA.
Combining more acres and farm units into a single policy reduces the probability of collecting at least a small payment each year. The more spread out the individual units are, the more this is true. However, when an indemnity payment is triggered, it will likely be a larger payment. Moreover, the biggest risk in recent years has come on the price side of the equation rather than the yield side, and price declines have the same effect on enterprise and whole farm coverage as they do on basic or optional units. Nevertheless, farmers who opt for enterprise or whole farm coverage may want to consider purchasing add-on coverage to take care of localized weather events such as hail.