USDA's Risk Management Agency uses futures prices in February to determine spring Projected Prices. Those prices determine the planting time revenue guarantees for taxpayer-subsidized crop insurance revenue products. The Projected Prices do not reflect local basis.
"For most of the Midwest, the Projected Price for corn is $5.65 and the volatility factor relating to the price risk is anticipated to be 0.20," says Bruce Sherrick, a University of Illinois economist. "For soybeans, the Projected Price is $12.87 and the volatility factor is likely to be 0.17. For comparison, the 2012 prices and (volatility factors) were $5.68 (0.22) and $12.55 (0.18) for corn and soybeans respectively."
The Projected Price for corn is determined by averaging the closing December futures price during the futures trading days of February. The soybean Projected Price is the average of the November Futures closing prices in February.
Volatility lower for both crops
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 March 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 are considerably lower than in both 2011 and 2012," says Sherrick. "The lower volatilities have important implications for premiums and for the value of the Harvest Price options embedded in many products."
Both December corn futures and November soybean futures trended generally lower during February, the month RMA uses to calculate the projected prices. As a result of the February down trend, the $5.57 December corn futures closing price on the final day of trading in February was 8 cents below the $5.65 insurance price. Similarly, November soybeans on Feb. 28 closed at $12.595, roughly 28 cents below the insurance price.
"The February 2013 down trend in futures somewhat decreases the likelihood that the harvest prices will exceed the projected prices compared to a year when projected prices are at or below current futures prices," notes Sherrick.
RMA strives to match premiums to loss rates
Sherrick explains some other changes that complicate insurance evaluation this year.
RMA modified base rates across much of the corn and soybean production region to try to move premiums and loss rates into closer congruence.
Additionally, RMA implemented the Trend Adjusted APH Endorsement last year. That significantly hiked many producers' APH levels for 2012. However, 2013's very low yields in the lower and western portions of the Corn Belt subsequently negatively impacted many APH levels.
Group policies likewise became more attractive in some regions that had low historic loss rates, while other areas experienced increases.
"The result again is that producers face a complex array of choices across products and election levels available to manage the risks associated with their crop production," says Sherrick.