2022 price discovery period used to determine projected prices and volatility factors for federally sponsored corn and soybean crop insurance products is completed for areas with a sales closing date (scd) from 3/15. for most of the corn belt, the projected approved price (pp) for corn is $5.90 and the volatility factor (vol) is 0.23, and for soybeans, the projected price is $14, 33 with a volatility factor of 0.19. these represent substantially higher prices than in recent years and will result in higher premiums overall and consequently higher levels of insured income.
Table 1 below contains projected prices, volatility factors and harvest prices for the previous 12 years. Forecast Price (pp) and Harvest Price (hp) are used to determine guaranteed revenues based on futures prices and do not reflect the local cash basis. the forecast price for corn is determined by averaging the December closing futures price over February trading days, and for soybeans by averaging the November closing futures price over February. volatility factors are determined by an average of the five most recent trading days implied volatility estimates, scaled for the time interval from now to mid-October, the month during which average prices are used to determine prices from harvest. years in which hp was greater than pp are shown in bold.
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for corn, the projected price is $1.32 pp above last year’s pp, and for soybeans $2.46 above the projected price for 2021. the pp for corn is more than $2 higher than in 2020, so, for example, 85% coverage on a 235 bushel trend-adjusted aph policy would result in $400 more coverage per acre compared to 2020 levels. but, perhaps more importantly, the price Current futures for corn on December 22 at the time of this writing was about $6.10. soybean futures for November 22 are approximately equal to the average price. The projected price for corn is significantly below current commercial prices due to price volatility and an increase perhaps due to the Russian invasion of Ukraine. This relationship has important implications for the risk management provided by crop insurance, as initial coverage levels and premiums are based on pps rather than futures prices. For policies that include harvest price options for warranty increases, the drop price increase is already partially “in the money” as the harvest price option is more likely to trigger a warranty increase. The volatility factor summarizes market estimates of the probability of price movements of various magnitudes and has corresponding impacts on the premiums paid for revenues and products related to the price of the crop. for both commodities, volume factors are unchanged relative to 2021, but with prices much higher, actually resulting in slightly less relative to 2021.
More importantly, when current futures prices are above projected prices, there is a lower chance of experiencing an insured income shortfall because the insured price is somewhat below the estimate of actual market value. ; but the harvest price option increases in relative value as prices are then more likely to end the insurance period above the projected price. More importantly, premiums for crop insurance products do not change in response to differences between average futures prices during February and actual futures prices during the underwriting period. that is, the initial value of rp insurance increases if the average price during February is above the futures price during the sales period, and the value of rp insurance decreases if the average price during February is below the futures price during sales period, but the cost of insurance is not affected by either case. this fact can substantially influence the net cost of insurance from year to year and can have a significant effect on the relative desirability of different products and coverage levels.
The question you face each year at this point in the calendar is: how can you sensibly evaluate crop insurance options for yourself, reflecting current insurance information, current price expectations, and current conditions? operations of your own farm? the university of illinois farmdoc and farmdoc daily programs provide a suite of online tools including a farm-level crop insurance premium calculator, a crop insurance to compare insurance results, and a price distribution tool that allows the user to retrieve the market estimate of future prices and the probability of triggering crop insurance guarantee prices. These tools are available at:
In addition, there are several recorded farmdoc daily webinars addressing 2022 crop insurance and related farm program decisions at:
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The following materials provide an approach to evaluating the most important crop insurance product and choice options facing corn and soybean growers using the University of Illinois ifarm Crop Insurance Evaluator. The case presented is for McLean County, a large, high-performing county in central Illinois. this case, and similar analyzes for approximately 750 other counties in 10 states (il, in, ia, mi, mn, nd, oh, sd, and wi) largely in the midwest for corn and soybeans under basic and business elections, they are available on the farmdoc website in the crop insurance section at: https://fd-tools.ncsa.illinois.edu/evaluator
The tool is free to use, just like all the other tools on the site. More importantly, there can be large differences in premiums, even over short distances or between adjoining counties, and in choice of unit and APH endorsement. therefore, while the case farm information provided for each county is helpful in understanding relationships between options, it is important to compare the conditions that most closely match your own case. It is also important to carefully discuss options and final decisions with a qualified insurance agent to ensure accurate information about specific costs.
The case farm information shown below is from mclean county, illinois, with starting price and performance conditions shown in the table below. The case farm is assumed to qualify for the trend-adjusted aph endorsement which brings its average corn aph from approximately 197 to 208. the case shown is for a business unit on 100 acres (the online version can be selected for any county/crop of interest and alternated between units and actual area). the standard deviation of county yields is estimated to be about 31.2 bu./acre and the agricultural yield risk is about 8 bu./acre higher. Some basic risk information related to performance risk is provided (e.g., there is a 30% chance that the farm performance will be below 189, and a 1 in 10 chance that the farm performance will be below 189). farm is below 156 at the county level (against which area insurance plans are settled) there is a 30% chance that average yields will be below 194, 1 in 5 years or 20% chance that returns are less than about 183, and so on). median gross income (adjusted cash basis) without insurance is estimated to be approximately $1,163/acre. gross receipts calculation reflects negative correlation between performance and prices, as well as simulated local conditions and initial prices. the average futures price reflected in is the result of the process used to model the implied price spread in the options markets for the settlement period and may differ from current futures prices at any time and, more importantly, it is related to actual futures prices, not the projected rma price. this number is updated regularly as market conditions change. in accordance with rma rules, aph and trend aph are rounded to the nearest whole bushels, and other features of compensation calculations are maintained to comply with rma rules and procedures. The following table shows a screenshot of the case farm information for mclean county in more detail.
The following table shows information grouped by type of policy at all levels of coverage. there are three blocks of results with the left hand side collection relating to income protection (rp) policies (by far the most common purchase), the middle block corresponding to rp or rp-hpe harvest price exclusion policies , and the set on the right side for performance protection or policies and p. the table has information for each policy type with each row corresponding to a different coverage level from 50% to 85%. County-level products shown in the table below are calculated assuming maximum protection levels in all cases and a maximum protection factor of 1.2 for area products. For each insurance policy option, there are five columns that display:
- the premium paid by the farmer per acre (premium est) – gives the product costs for a representative case. an 85% rp policy has a premium of $31.38 per acre (this level is much higher than the premium compared to policies a year ago due to higher pps, vols and aph).
- the average payment per acre (average payment): Provides the expected average payment of the insurance product. the average payment for 85% rp is $73.95 per acre. over time, the payment for the product will be equal to this value. some years the payments will be equal to $0, and some years the payments will be higher. The average of all those payments is $73.95 for an 85% rp policy.
- How often the policy makes a payment (Payment Frequency): Provides the percentage of time the policy will make a payment. for 85% rp policies, the payout frequency is 39.8%, which means this policy will pay a little over a third of the time.
- the net cost of insurance: provides the estimated premium minus the average payments. Over time, this value represents the “cost” of the insurance policy. Negative costs indicate that policy payments should be expected to exceed the premium paid by the farmer. All costs in this column are negative for McLean County; In other words, given the subsidy premium, farmers will earn more than they spend over the life of the crop insurance. the 85% rp policy has a net cost of $42.57 (or an expected profit of $42.57) due to the significant federal assistance provided for crop insurance premiums.
Business unit policies shown in the table above cost less than basic unit policies due to their slightly lower risk and lower premium rates (business units have the highest subsidy). To understand the items in the table, consider the 85% policies (bottom row) and note that the guaranteed base income is approximately $1,043/acre = 208bu x $5.90pp x .85 coverage. Average gross income per acre shows the average bottom line with each level and type of insurance, made up of crop income plus insurance income, if less premium, in this case equal to $1,205/acre. the net cost of insurance is a particularly important feature to understand. Federal crop insurance policies are designed to pay all premiums on average. however, they also receive subsidies to encourage producer participation and to account for inaccuracies in ratings. therefore, in net terms, they should return more than the premium paid by the farmer. a negative net cost shows the insurance benefit directly. in the 85% case shown, the policy will actually pay the farmer $42.57 more than the cost of the premium per year, on average, while rp-hpe pays $32.27 more and yp pays $23.02 more than the cost of the premium per year on average.
In the case of RP, if harvest prices at the end of the insurance period are greater than $5.90, the guaranteed income is adjusted to the higher price. under rp-hpe policies, the guarantee is fixed and does not increase if crop prices rise. The rp-hpe policy in the center block would have a premium cost of $16.90/acre, and the yp policy (right side block) would be $9.25/acre under the business unit coverage.
other rows in the table have comparable information for different coverage levels. As you can see, lower coverage levels can result in substantially lower premiums due to lower implied income or covered performance, and less chance of activating insurance. the subsidy rate for the lower coverage policies is higher than for the higher coverage policies with the intent of roughly matching the dollar value of the subsidy per acre.
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Next, the table below shows comparable results, but for products at the county or area level, again for mclean county. these are calculated assuming the chosen maximum coverage factors.
County level policies start with 70% coverage options and go up to 90%, unlike farm level policies which have a maximum of 85%. The highest coverage ARP policies also have the highest premiums and expected average payments due to the protection factor that allows for a 1.2 payment scale to help offset the farm-to-county basis risk that remains due to the imperfect correlation between farm and county yields. in other words, payments can occur when they are not needed and not occur in years when they are most needed to compensate for low income on the farm. ARP policies have the highest payouts over time, but can result in fairly low risk protection as a result. finally, as shown in the right-hand block, the area’s yield protection policy is triggered directly by the county’s yield shortfall of its guaranteed fraction of the county’s expected yield, but is paid out as a capped fraction of the shortfall. again shows fairly high payouts but may result in limited risk protection due to the possibility of localized yield breaks and thus a farm could have very low yields but receive no payout because county yields are not were affected.
While the above materials provide a great deal of information on the expected performance of different insurance policies and levels of coverage, they focus primarily on the average over time in each case. however, it is also important to understand the impact of insurance on the likelihood of experiencing particularly low income. for example, one might be more interested in which insurance allows a farmer to most consistently cover cash rent plus all variable costs, or to do the best job of compensating for particularly low income results under covered production, and so on. One way to begin to understand this type of impact is to examine the income risk and associated income levels and their associated probabilities. This type of information is often referred to as VARs or “Values at Risk” in different insurance contracts. These results are displayed in the revenue risk tab, a screenshot of which is provided below for the mclean county case farm being examined. the results are first summarized graphically and also tabulated in terms of probabilities of achieving different target income levels.
To understand the risk reduction impact of different insurance policies, the graph tabulates the probability of achieving different levels of gross income (lower axis) versus the probability of occurrence (vertical axis). Because distributions with higher probability of higher earnings are preferred, the bottom and right lines are preferred over the top and left lines in this graph. the blue line provides the possible results of income without insurance. the entries above the graph give specific percentiles and income pairs at the 1%, 5%, 10%, and 25% income levels. for example, there is a 25% chance that uninsured income will be below $931 without insurance, and a 5% or 1 in 20 year chance that income will be below $689/acre without insurance.
Buying insurance has two types of income distribution consequences: First, it changes the entire remaining schedule by the amount of the premium. then, it adds retroactive payments to insurance-covered outcomes, shifting specific parts of the income distribution to the right. ideally, insurance should make payments when incomes are lower and not make payments when incomes are higher, resulting in an overall shift in the income distribution to the right at lower income levels, resulting in lower income when only premiums are paid and no claims are paid. (the tops of the curves are not shown on the graph, but would be shifted to the left in the uninsured case). As can be seen from the graph, ARP at a 90% coverage level shifts the distribution to the right because of its large average payouts, but does little to remove the severe low-income results. yp (green) has almost a small effect compared to no insurance, as it shifts the income distribution to the right, but still does not eliminate the low-income tail risk. rp 85% and rp-hpe 85% (largely hidden behind the rp line) do the best job of “cutting the tail” of the income distribution with minimum earnings of approximately $968 or more, guaranteed in most countries. cases. the group’s products are generally interesting because they pay more than premiums across a wide range of incomes, but they don’t protect against particularly severe drops in income. furthermore, in years with high crop revenues, they actually cost more in terms of total revenue due to their higher initial premiums.
Similar patterns to these results occur with soybeans, albeit at more moderate cost magnitudes and in many places with relatively less valuable area protection options. soybean average gross income shifts up relative to last year by a much larger amount than corn due to higher market prices (and since the different costs of putting in the crop are much more attractive for insurance this year than in recent years). past years). while the presentation used mclean county as an illustration, cases covering most counties in the corn belt are provided on the farmdoc website.
Crop insurance is rightly seen as the cornerstone of active risk management programs, and its importance increases in environments with higher input costs, higher commodity costs, and higher price volatility. Differences in underlying rates and initial price and volatility conditions can materially affect the relative performance of alternatives from year to year, and across different trades within a given year. ifarm’s crop insurance tools are intended to provide growers with the knowledge to make informed crop insurance decisions best suited for their own operations.
Note: The views expressed in this document are solely the views of the authors and do not necessarily reflect those of the entities with which they are professionally affiliated. all errors and omissions are the sole responsibility of the author.
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