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: Is it Possible that U.S. Production May Fall Short of USDA Projections?11-28

    DTN Cotton Close: Small Gains But Still Lost 284 Points for the Month11-28

    DTN Livestock Close: Expect Packers to Start Monday Close to Knife11-28

    DTN Grain Close: OPEC Decision Keeps on Giving11-28

    Peanut Stocks: Shelled Edible Grade Utilization Up 7% Over 201311-28

    Peanut Price Highlights – USDA11-28

    Cotton Market Weekly Review – USDA11-28

    USDA Clears Disaster Aid for Livestock, Honeybees and Farm-Raised Fish Producers11-28

    DTN Livestock Midday: Feeder Cattle Futures Push Higher11-28

    DTN Grain Midday: Wheat Jumps 10 to 14 Higher11-28

    DTN Cotton Open: Futures Begin Slightly Higher11-28

    Future Tech: Rice Yields Improve; Corn Holding Vaccine; Plants Respond to Damage – DTN11-28

    Soybeans: Prices Likely to Return to Seasonal Patterns — DTN11-28

    U.S. Grain Transportation: Inspections Continue to Increase11-28

    DTN Livestock Open: Higher Start for Cattle Futures11-28

    Keith Good: Corn, Soybean Prices Up Slightly in November — USDA11-28

    AFB Grain-Soybean Close: Corn, Wheat Higher, Soybeans See Modest Losses11-26

    AFB Cotton Close: Prices Surge Higher11-26

    AFB Rice Close: Jan, March Chart Bullish Key Reversals11-26

    Energy: N. American Oil Companies See Improved Financial Results in 3rd Quarter11-26

    Residential Heating Oil Prices Lower11-26

    Propane Stocks Fall 2M Barrels11-26

    Gasoline Prices Drop 7 Cents11-26

    Diesel Prices Fall 3 Cents11-26

    Texas: Hopkins County Designated Natural Disaster Area11-26

    Kansas: 4 Counties Declared Natural Disaster Areas11-26

    Alabama: 4 Counties Designated as Primary Disaster Areas11-26

    Texas Pecans: Demand Good but Quality Variable11-26

    Louisiana Pecans: Light Deliveries, Good Buying Interest11-26

    Georgia Pecans: Prices Slightly Higher with Strong Trade11-26

    DTN Grain Midday: Soybeans Slip 5 to 10 Lower11-26

    Farmers Share What They’re Thankful For — DTN11-26

    GMO Crops Have Facts on Their Side, but Debate Goes on — DTN11-26

    Wheat: Make One Last Scouting Trip This Fall — DTN11-26

    Farm Income Down 21%; Expenses Up 5.7% – USDA Forecast11-26

    Livestock: 6 Tips to Fight PEDv This Fall11-25

    Doane Cotton Close: Outside Strength Helps Prices Rebound11-25

    AgFax Cotton Review: New Stink Bug App; India Exports Drop11-25

    Tax Breaks: Waiting for 2014 Equipment Deduction, Biofuel – DTN11-25

    USDA: Weekly National Peanut Prices11-25

    Georgia: 10 Farm Bill Meetings Scheduled for Mid Dec.11-25

    AgFax Rice Review: Iraq Resumes U.S. Purchases; Cambodia Wins Best Rice Award11-25

    Winter Weather Creates More Problems for Railroads — DTN11-25

    Future of Cellulosic Biofuels in U.S. Questioned — DTN11-25

    AgFax Peanut Review: Growers Urged to Plant Earlier; Texoma Sells Drying Facility11-25

    Shurley on Cotton: New Round of Weakness Sets In11-25

    Welch on Wheat: Crop Condition Down Slightly11-24

    Welch on Grain: Snow Keeps 770M Bushels of Corn in Field11-24

    Farmland Partners Buys 7 South Carolina Farms for $28M11-24

    Livestock: Hog and Pork Prices Return to Reality11-24

    Corn: Breaking Down Stalks Takes Thought, Planning — DTN11-24

    DTN Fertilizer Outlook: Winter’s Arrival May Delay Some Buying11-24

    Brazil Soybeans: Dry Conditions Still Cause for Concern11-24

    Flint on Crops: Low Input Farming May be Necessary in 201511-24

    Midwest Corn And Soybean Yields – Our Readers’ Reports – AgFax11-22

    Grain Drying: 6 Questions About Effects Of Sudden Drop In Temps11-21

    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