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

    Feed Outlook: Record Corn Crop on Higher Yields9-15

    DTN Livestock Close: Futures Settle with Mixed Price Action9-15

    Doane Cotton Close: Post-Report Strength Wanes9-15

    DTN Cotton Close: Tumbles to Steep Losses9-15

    Corps of Engineers Vindicated in ’11 Missouri River Basin Flood — DTN9-15

    DTN Grain Close: Corn, Soybeans Higher in Mild Trade9-15

    Cotton Outlook: U.S. Production Cut Nearly 1M Bales9-15

    Oil Crops Outlook: U.S. Soybean Yields To Raise Ending Stocks to 8-Year High9-15

    Wheat Outlook: Higher Imports, Decreased Exports9-15

    DTN Livestock Midday: Mixed Prices Hold Across Complex9-15

    Good on Grain: Revisions to Corn, Soybean Acreage Estimates Possible9-15

    Choose Your Cover Crops Carefully — DTN9-15

    DTN Grain Midday: Corn, Soybeans Slightly Higher9-15

    GMO Critics to Get Their Say at D.C. Hearings — DTN9-15

    Arkansas Forage and Grassland Council Conference Set Oct. 30 in Conway9-15

    DTN Cotton Open: Falls to Sharp Losses on Brisk Volume9-15

    Arkansas Winter Forages: What to Plant and How Much9-15

    DTN Grain Open: Starting the Week Lower Again9-15

    DTN Livestock Open: Futures Staged for Mixed Start9-15

    Flint on Crops: Variety Trials are Worth Your Attention9-15

    Kansas Farmers Can Pursue Prizes for Soybean Yields, Values9-15

    Keith Good: Cargill Sues Syngenta Over GMO Corn Rejected by China9-15

    Farmland Auction: Arkansas, Louisiana, Mississippi Cropland – October 229-14

    Cotton – Southeast – More Cotton Defoliation; Rains Come Too Late – AgFax9-12

    Cotton – Midsouth – Picking Starts, More Cotton Defoliation Begins – AgFax9-12

    Soybeans – South – Variable Soybean Loopers; More Beans Cut – AgFax9-12

    Rice Crop: Harvest Zooms Along in Texas, Louisiana, Starts to Pick Up in the Delta9-12

    Rice Market: USDA Chops 11.5M CWT from Total Supply9-12

    Rose on Cotton: USDA Released a Bearish S&D Report9-12

    Environmental Groups Sue EPA Over Delay in Chlorpyrifos Ban – DTN9-12

    Cleveland on Cotton: Growers, Do Not Price Your Crop Right Now.9-12

    Welch on Wheat: U.S. and World Ending Stocks Increase9-12

    Welch on Grain: Increased Corn Production, Carryover9-12

    AFB Grain-Soybean Close: Soybeans Up, Wheat Lower, Corn Mixed9-12

    AFB Cotton Close: Slight Losses in Dec.9-12

    AFB Rice Close: Futures See More Solid Gains9-12

    Railroad Criticism a Long-Standing Refrain Among Farmers9-12

    Texas Sorghum: Sugarcane Aphids Confirmed on Southern High Plains9-12

    USDA: Peanut Price Highlights9-12

    AgFax Rice Review: New Reservoir for Texas Growers; Continued Drought Problems in California9-12

    Peanut Harvest Gains Momentum In SE, Starts In Delta – AgFax9-12

    Small Farms and the Affordable Care Act9-12

    Georgia: Plains Peanut Festival, September 27, Celebrates Peanuts And Legacy9-12

    Mississippi Outdoors: Litter is Illegal, Unattractive and Even Harmful9-12

    Farming on the Mother Road: Farmers Becoming Sparse in California — DTN9-12

    Cattle at the Crossroads: Impact of Herd Expansion9-12

    Georgia Gains Section 18 To Apply Transform On Grain Sorghum For Sugarcane Aphids9-12

    U.S. Grain Transportation: Total Inspections Highest Since May9-12

    Nimitz, Non-Fumigant Nematicide, Gains EPA Registration9-12

    Grain Transportation: Congress Attempts to Find Rail Delay Solution – DTN9-11

    Texas: Growers Get Financial Help with Organic Certification9-11

    USDA Pegs Average Corn, Soybean Yields at Record Highs – DTN9-11

    USDA: $328M to Conserve Wetlands and Farmland, Boost Economy9-11

    2nd Arkansas Soybean Grower Breaks 100 BPA, and State Record9-11

    Ethanol: 11th Hour RFS Campaigns – DTN9-11

    USDA Adds More Primary Natural Disaster Areas9-11

    Arkansas Soybean Producer Breaks 100-Bushel Barrier 2 Years In A Row9-11

    Shurley on Cotton: No Surprise — Crop Estimate Shrinks9-11

    USDA: Corn, Soybean Production Forecast Raised, Cotton Lowered9-11

    WASDE Cotton: U.S. Production Reduced 1M Bales9-11

    WASDE Rice: U.S. Supplies Reduced 11.5M CWT9-11

    WASDE Oilseeds: U.S. Soybean Projection Up 97M Bushels9-11

    WASDE Coarse Grains: U.S. Corn Production Boosted to 14,395M Bushels9-11

    WASDE Wheat: Projected U.S. Supplies Raised 10M Bushels9-11

    Delaware: Soybean Farmers Urge Neighbors to ‘Share the Road’9-11

    Farm Program Decisions: Choosing Between ARC-CO and PLC9-11

    Livestock: Cattle Market Is Extra Jumpy This Year – DTN9-11

    U.S. Energy: Demand for Ultra-Low Sulfur Diesel Likely to Rise9-11

    Gasoline Prices: Show Marginal Decrease9-11

    Propane Stocks: Inventories Down Slightly9-11

    Diesel Prices: Average Holds Steady9-11

    Farming on the Mother Road: Arizona Ranchers Crave Grass, Water — DTN9-11

    Soybeans, Corn in Midwest Facing Possible Early Frost – AgFax9-10

    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