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Complexities of Crop Insurance Decisions

Complexities of Crop Insurance Decisions
RMA has concluded the price discovery period, so what's the right insurance option for your farm?

With the completion of the Risk Management Agency's price discovery period, producers should be prepared to make crop insurance decisions – but it's no easy task, and several factors must be weighed before making a move.

In reality, it comes down to one question, say Bruce Sherrick, University of Illinois Professor of Farmland Economics, and Gary Schnitkey, Professor of Farm Management:

How can farmers evaluate their crop insurance options, reflecting current insurance information, current price expectations, and their own farm's operating conditions?

RMA has concluded the price discovery period, so what's the right insurance option for your farm?

Sherrick and Schnitkey, in a recent Farmdoc Daily post presented by the U of I Department of Agricultural and Consumer Economics, report that for the majority of the Corn Belt, the approved Projected Price for corn is $4.62 and the volatility factor is .19. For soybeans, the projected price is $11.36 with a volatility factor of .13.

The Projected Price for corn is determined by averaging the closing December futures price during the trading days of February, and for soybeans by averaging the November Futures closing prices during February.

The volatility factors are determined by an average of the most recent five trading days' implied volatility estimates, scaled for the interval of time from now until the middle of October – the month during which average prices are used to determine Harvest Prices.

For both corn and soybeans, the volatility factors have trended downward, and relative to popularly interpreted measures of volatility are considered very low for soybeans in particular, they say.

"The volatility factor summarizes the market's estimates of the likelihood for price movements of various magnitudes, and has corresponding impacts on premiums paid for Revenue and Harvest Price related products," they explain.

"In 2014, the Projected Prices for soybeans are close to current futures market prices, while corn traded around $.14 higher than the projected price on the first sales date for crop insurance.  When actual futures prices are below the projected price, there is a somewhat increased likelihood for experiencing an insured revenue shortfall," they say, "and when actual futures prices are higher than the projected price, there is an increased likelihood that products with the harvest price option embedded will have an increase in guarantee value."

Continue reading Schnitkey and Sherrick's case study on the University of Illinois Farmdoc site.

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