Thursday, June 19, 2014
benfranklin_100

Crop Insurance Overlap with PLC

AgFax.Com - Your Online Ag News Source


Overview

This article addresses the potential for overlap that can exist between crop insurance and the Price Loss Coverage (PLC) program option in the 2014 farm bill.  To provide perspective, the historical overlap that existed between target prices and crop insurance prices from 1974 through 2006 is examined.  The article ends with summary observations including implications for policy and the upcoming farm program decision by farmers.

 

Policy Background

Target prices began with the 1973 farm bill.  They have existed ever since except for the 1996-2001 crop years when the 1996 farm bill replaced target price payments with direct payments.  PLC is the latest version of target price programs.  It refers to target prices as reference prices.  All target price programs have made payments when the market price is below the target price, although different farm bills have used different measures of market price.

Price Decline Overlap

PLC and crop insurance can make payments for the same price decline if

(1)     price declines between the insurance pre-plant and harvest price discovery periods, and

(2)     the price decline continues throughout the ensuing crop marketing year resulting in a crop year average price that is less than the PLC reference price.

Analysis

The potential for this overlap is examined using target prices for the 1974-1995 and 2002-0606 crop years for the economically and politically important crops of corn, rice, sorghum, soybeans, upland cotton, and wheat.  This period was selected in part because market prices exhibited no sustained upward or downward trend.  Trends affect the probability of payment by target price programs.

The target prices are from Agricultural Statistics, an annual U.S. Department of Agriculture (USDA) publication.  Crop year average prices are from the USDA, National Agricultural Statistics Service (NASS) Quick Stats database.  Consistent with PLC, per unit deficiency payment is calculated as the Target Price minus the U.S. crop year average price.

Insurance prices for 2000 and forward are from the Risk Management Agency (RMA) website.  For earlier years, a data set created by Art Barnaby of Kansas State University is used.  RMA did not compute harvest insurance prices prior to the introduction of revenue insurance, which began with Crop Revenue Coverage (CRC) in 1996.  However, Art estimated harvest prices for prior years using RMA methods.  Note that crop insurance was not offered for rice until the 1987 crop year and the insurance price used for wheat is the price based on the Chicago futures market.

Findings

The insurance price declined between the pre-plant and harvest price discovery periods in about 50% of all years as well as during only those years in which a deficiency payment occurred (Figure 1).  Such a finding was expected because insurance prices for the examined crops are based on futures prices.  It is widely-accepted that futures prices are unbiased price estimates and that new bullish and bearish price information is generated randomly.  Hence price increases and decreases about 50% of the time.

figur1.jpg

Click Image to Enlarge

During the years a deficiency payment was made and insurance price declined, average per unit deficiency payment expressed as a percent of the pre-plant insurance price exceeded average decline in insurance price for all crops (Figure 2).  The smallest difference is for corn:  a -15% decline in insurance price vs. a per unit deficiency payment that averaged 18% of the insurance pre-plant price.

The largest difference is for rice: a -18% decline in insurance price vs. a deficiency payment that averaged 59% of the insurance pre-plant price.  It should be noted that the average decline in insurance price is similar among crops, ranging from -13% for wheat to -18% for rice.  Again, this finding was expected for reasons discussed in the previous paragraph.

figur2.jpg

Click Image to Enlarge

Summary Observations

  • An overlap can exist between target price deficiency payments and declines in crop insurance price between the pre-plant and harvest price discovery periods.
  • The exact degree of overlap expected between PLC and crop insurance is difficult to calculate because PLC pays on 85 percent of FSA farms’ base acres while insurance pays on 100% of acres planted on the insured unit.  Nevertheless, this overlap has the potential to be large as illustrated by the historical experiences during the 1974-1995 and 2002-2006 crop years.
  • A policy issue is whether the deficiency payments that coincide with the insurance deductible is an overlap.  Farmers will not likely view this part of PLC payments as an overlap.  However, the social contract which underpins public subsidies for farm insurance is that a partnership exists between society and farmers in managing farm production and revenue risk.  The farmer’s share of this partnership involves the insurance deductible and payment of a premium.  PLC payments alter the deductible component of the social contract.
  • Given that crop revenue insurance is a key, if not the key, component of the crop safety net, an obvious policy question is whether the overlap between PLC reference prices and crop revenue insurance prices should be considered when designing the crop safety net?  More specifically, should the overlap be eliminated by integrating the prices of the two programs?
  • A related, interesting historical policy question is whether the elimination of target prices between 1996 and 2001 by the 1996 farm bill allowed revenue insurance products to gain traction, thereby altering the future path of farm policy debates?
  • Farmers should consider the insurance – PLC overlap when making their farm program choice.  Overlapping payments would provide additional government assistance if prices decline and stay below the PLC reference prices.  Electing PLC also creates the potential for substituting PLC for crop revenue insurance in terms of providing assistance against price declines.  This substitution allows farmers to replace revenue insurance with cheaper yield insurance.
  • Because the new insurance Supplemental Coverage Option is only available if PLC is elected, insurance companies and agents have an economic self-interest in promoting PLC as the farm program choice.  However, the potential to replace higher premium revenue insurance with lower premium yield insurance when deficiency payments are expected blunts this economic self-interest.  It will be interesting to see how these competing impacts play out.

Carl Zulauf

farmdocDaily

Tags: , , , , ,


Leave a Reply

Name and Email Address are required fields. Your email will not be published or shared with third parties.

Sunbelt Ag News

    Rose on Cotton: Gin Show Visit – High Quality Cotton Still in Demand2-28

    Trade Promotion Authority: Vilsack Whips Up Support2-27

    Ethanol: Corn Growers Defend RFS – DTN2-27

    Planting: New Rigs at the Top of Their Game – DTN2-27

    Rice Market: Only Feeble Signs of Price Improvement2-27

    Wheat: Study Sheds Light on Stem Rust Disease in Africa and Asia2-27

    AFB Grain-Soybean Close: Strong Outside Markets Provide Good Support2-27

    AFB Cotton Close: Selling Continues with Wide Range2-27

    AFB Rice Close: Positive Finish for the Week2-27

    Nebraska: Can You Shoot an Uninvited Drone?2-27

    Turkey Hunting: Tips for the Spring Gobbler Season2-27

    DTN Livestock Close: Slow, Choppy Trade2-27

    Doane Cotton Close: Technical Selling, Profit-Taking Weigh on Market2-27

    Cotton Base Acres Count as Generic Base Under Farm Bill2-27

    Soybeans: Monsanto Plans In-Field Training for Roundup Ready2 Xtend2-27

    DTN Cotton Close: Texas Could See More Freezing Rain, Snow2-27

    Shurley on Cotton: Improvement Slows Down, but What Else Did We Expect?2-27

    Peanut Stocks and Processing: Utilization Up 7%2-27

    USDA: Peanut Price Highlights2-27

    Weekly Cotton Market Review – USDA2-27

    DTN Grain Close: Brazil Truck Strike Remains a Market Mover2-27

    Keith Good: Chinese Corn Imports Not Likely to Recover; Food Stamp Debate Wages On2-27

    Georgia Celebrates National Peanut Month with PB&J Day, Donations2-27

    USDA Changes Deadline: Yield History Update, Reallocation Base Now Due March 312-27

    DTN Grain Midday: Short-Covering in Fairly Quiet Trade2-27

    DTN Livestock Midday: Markets Hit by Selling Pressure2-27

    U.S. Grain Transportation: West Coast Ports Return to Normal2-27

    Pinnacle’s Sanders in 9 Southern States with Newest Acquisition2-27

    DTN Grain Open: Brazil Trucker Strike Fueling Soybean Market2-27

    DTN Cotton Open: Higher Finish on Last Trade Day of February?2-27

    DTN Livestock Open: In Cattle, Maybe Moderately Higher Early2-27

    South Carolina: Got Wild Hogs? Time To Speak Up.2-27

    Texas: Master Marketer Program Hits 25th Year, Going Strong2-27

    Louisiana Rice: Losing Methyl Bromide Creates Challenge For Bin Insect Control2-27

    Iowa Senate Approved Tougher Restrictions on Manure Applications – DTN2-26

    NFL Star Turned Farmer Engages Youth, Community Through Ag – DTN2-26

    Chumrau on Wheat: USDA Forecasts Higher Production in 2015-162-26

    Corn Yields: Expectations for the 2015 Average – What Does History Teach Us?2-26

    ELS Cotton Competitive Payment Rate Is Zero2-26

    NRCS Invests $84M Natural Disaster Funds in 13 States2-26

    Georgia: Crabgrass Control Depends on Soil Temperatures2-26

    DTN Cotton Close: Bounces Off New High2-26

    Climate Corporation To Deliver Enhanced Climate Pro Service At $3 Per Acre2-26

    Early Spring Best Time to Test and Tune Farm Machinery2-26

    Ag Conservation Easement Program Accepting Comments on Final Rule2-26

    Pesticide Drift: Calm, Still Days Are Most Dangerous – DTN2-26

    Livestock: Port Resumptions Bring Meat Industry a Sigh of Relief – DTN2-26

    Keith Good: Global Soybean Issues; Vilsack on Crop Insurance; Food Stamps Re-Revisited2-26

    Farm Bill Deadlines Approach: 17 Questions – Answers for Landlords2-25

    U.S. Energy: ExxonMobil California Refinery Outage – Implications for Oil Markets2-25

    Propane Inventories, Prices Dip2-25

    Gas Prices Continue to Climb2-25

    Diesel Prices on the Rise2-25

    DTN Cotton Close: Futures Rally Off Early Losses2-25

    DTN Grain Close: Soybean Prices See-Saw Lower2-25

    California: 9 Counties Designated Natural Disaster Areas2-25

    Arizona: 2 Counties Designated Natural Disaster Areas2-25

    Farm Management: 4 Cost Control Plans to Make Ends Meet – DTN2-25

    Texas: Sutton County Designated Natural Disaster Area2-25

    Brazil Soybean Harvest: Truck Driver Blockades Hit Farmers Hard – DTN2-25

    Texas: Planter Clinic, Dimmit, March 112-25

    South Carolina Peach Farmer Honored for Achievement in Produce Innovation2-25

    Keith Good: Exports Damaged by Port Delays; Ethanol Production Cutting Back2-25

    Keith Good: Senate Ag Committee Hears from Farmers2-25

    Crop Insurance: ARC Payments Pretty Good for 2014 Corn2-24

    Revenue Insurance: The Upside Down Safety Net2-24

    USDA: Weekly National Peanut Prices2-24

    DTN Fertilizer Trends: Slow Climb Higher; Canadian Rail Strike Fuels Prices2-24

    No More Cuts: 392 Farm, Nutrition, Conservation Groups Urge Congress to Stop – DTN2-24

    Looking at Biodiesel Through a Chicken House Window2-24

    Biofuels: Novel Pretreatment Could Cut Costs by 30% or More2-24

    Welch on Grain: USDA Projects Reduced Acreage2-24

    Welch on Wheat: Texas Crop Still in Great Condition2-24

    Sunbelt Ag Events

    Rice News

     

    About Us

    AgFax.Com covers agricultural trends and production topics, with an emphasis on news about cotton, rice, peanuts, corn, soybeans, wheat and tree crops, including almonds, pecans, walnuts and pistachios.

      

    This site also serves as the on-line presence of electronic crop and pest reports published by AgFax Media LLC (formerly Looking South Communications).

        

    Click here to subscribe to our free reports.

      

    We provide early warnings and confirmations about pests, diseases and other factors that influence yield. Our goal is to quickly provide farmers and crop advisors with information needed to make better and more profitable decisions.

         

    Our free weekly crop and pest advisories include:

    • AgFax Midsouth Cotton, covering cotton production and news in Alabama, Arkansas, Louisiana, Mississippi, Tennessee and Missouri.

    • AgFax Southeast Cotton, covering cotton production and news in Alabama, Florida, Georgia, North Carolina, South Carolina and Virginia.

    • AgFax Southwest Cotton (new for 2013!), covering cotton production and news in Texas, Oklahoma, Kansas and New Mexico.

    • AgFax West (formerly MiteFax: SJV Cotton), covering California cotton, alfalfa, tomatoes and other non-permanent crops in California's Central Valley.

    • AgFax Rice covering rice production and news in Arkansas, Louisiana, Mississippi, Missouri and Texas.

    • AgFax Peanuts, covering peanut production in Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Texas and Virginia.

    • AgFax Southern Grain: covering soybeans, corn, milo and small grains in Southern states.

    • AgFax Almonds, covering almonds, pistachios, walnuts and other tree crops in California's Central Valley.

    • AgCom 101, providing guidance to ag professionals involved in social media.

    Our newsletters are sponsored by the following companies: FMC Corporation Chemtura Dow AgroSciences.

          

    Mission statement:

    Make it as easy as possible for our community of readers to find and/or receive needed information.

              

    Contact Information:

    AgFax Media. LLC

    142 Westlake Drive Brandon, MS 39047

    601-992-9488 Office 601-992-3503 Fax

    Owen Taylor Debra L. Ferguson Laurie Courtney

          

    Circulation Questions?

    Contact Laurie Courtney