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Corn+Soybean Digest

Report Examines Risk Management Option

A University of Illinois (U of I) Extension analysis of a new crop insurance option recently made available to farmers indicates it compares favorably with other group products, particularly in soybeans.

"If an individual is purchasing group products, a Group Risk Income Plan (GRIP) with a harvest revenue (HR) option should be given consideration," said Gary Schnitkey, U of I Extension farm financial management specialist who authored the study, "GRIP-HR: An Analysis of Returns and Risks" for Farm Economics: Facts & Opinions.

Schnitkey's full report can be viewed online at: http://www.farmdoc.uiuc.edu/manage/newsletters/newsletter.html.

GRIP-HR is a revenue product that makes payments when county revenue is below a revenue guarantee, Schnitkey explained. GRIP-HR's guarantee will increase when the harvest price set in the fall is greater than the expected price set in the spring. This differs from GRIP without the harvest revenue option (GRIP-NoHR), whose guarantee cannot increase.

The HR option was added to the GRIP plans this year. Schnitkey compared risks and returns associated with GRIP-HR to other group insurance products and to Crop Revenue Coverage (CRC). The group products are evaluated at their highest coverage level and highest protection level. Comparisons were made for both corn and soybeans.

"GRIP-HR compares favorably with other group products, particularly for soybean crops," said Schnitkey. "GRIP-HR does not have as great a risk of reductions as farm-level revenue products like CRC and Revenue Assurance (RA), particularly in corn.

"GRIP-HR likely has higher returns than the farm-level products. This presents a risk-return tradeoff: GRIP-HR has higher returns but lower risk reductions when compared to farm-level revenue products."

In the economic models Schnitkey used, results of the comparisons vary across the state.

"In general, GRIP-HR results are more favorable in the central part of the state when compared to southern Illinois," he said. "Northern Illinois is in between central and southern Illinois in terms of the results."

He recommends that producers use the Marketing and Crop Insurance: Risk Model that is available for download in the FAST section of the farmdoc Web site (http://www.farmdoc.uiuc.edu/fasttools).

"This tool is a Microsoft Excel spreadsheet that compares the risks and returns of crop insurance products and marketing strategies by crop and by county," he said. "Farmers can enter their own yields for analysis."

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