Crop insurance options for 2006

URBANA, Ill. – Group crop insurance products may be more attractive for producers following the USDA Risk Management Agency’s increase in expected yields for the coming growing season, according to Gary Schnitkey, a University of Illinois Extension farm financial management specialist.
“The expected yield increases make group products more attractive and may cause some farmers to switch to group products from farm products such as actual production history, crop revenue coverage, income protection and revenue assurance,” Schnitkey said. “Higher expected yields result in higher guarantees. Higher guarantees then increase chances of receiving insurance payments and increase the amount of payments when they occur,” he said.
Group Risk Plan is a yield insurance whose guarantee equals the expected yield times the coverage level. An expected yield of 171.5 bushels and a coverage level of 90 percent results in a yield guarantee of 154.4 bushels. Payments occur when county yield, as determined by the National Agricultural Statistical Service, is less than 154.4 bushels.
Two choices. Group Risk Income Plan is revenue insurance with two options – without harvest revenue and with harvest revenue.
Schnitkey said the first option’s revenue guarantee equals the expected price times the expected yield times the coverage level. It makes payments when the actual county yield times the harvest price is below the revenue guarantee.
The second option’s revenue guarantee differs in that the higher of the expected price or the harvest price is used in calculating the guarantee. The Group Risk Income Plan with harvest revenue guarantee will always be at least as high as the Group Risk Income Plan without harvest revenue guarantee, Schnitkey said.
Therefore, payments from the option with harvest revenue will be at least as great as from the option without harvest revenue, given that similar coverage and protection levels are chosen.
Reduces chances. Using crop insurance based on actual production history means having yields substantially below most-likely yields – the Risk Management Agency projection – greatly reduces the chances of receiving payments from insurance products.
For farms with actual production history yields below their most-likely yields, the risk reductions offered by crop insurance reduces. Farmers may wish to compare their actual production history yields to what they would consider most-likely yields. If actual production history yields are below most-likely yields, group products become more attractive compared to farm products.
Conversely, farm products will be more attractive than group products when actual production history yields are above most-likely yields.
Other considerations. Schnitkey said comparison of most likely to actual production history yields should be only one consideration in the crop insurance choice decisions.
“Another should be the financial position of the farm,” he said. “Farms in vulnerable financial position will find farm products more attractive because farm products use farm yields in calculating insurance payments. Another criterion should be how well farm yields track county yields. Farms that have yields that closely track the county will find group products more attractive.”
He also said increases in expected yields may be a short-lived phenomenon as expected yields can decrease if county yields are below average in future years.