Crop Insurance Today - 14

Figure 11 Weekly Corn Futures Prices December Contract
2011-2016

Figure 12 Prices for 2016 RP and RP-HPE Plans of Insurance

up almost 34 percent from 12.5 million bales in
2015/16. Increased exports are expected to absorb the additional production and result in ending stocks remaining about the same level as last
year, at 3.6 million bales, about 22 percent stocksto-use ratio, down eight percent from last year.
The more favorable supply and demand fundamentals have given some support to the season
average price expectations being forecast in the
67 to 69 cents per pound range with May 2017
futures prices currently in the mid-70 cent range.
The projected base prices used to establish the
value of the crop and the insured liability for the
Revenue Protection and Yield Protection forms
14

MAY2017

of insurance are shown in Table 2, starting from
2010 and ending with the 2017 crop. Projected base prices are the average of futures prices
during the discovery month that precedes the
sales closing date for the policy.
Base prices are influenced by various factors,
including remaining stocks for the crop, planting
intentions in the United States, increasing yields,
changes in demand for the crop, the availability
of alternatives, and growing conditions in other
countries. For example, coarse grain, soybean,
and wheat stocks have continued to expand in recent years as production has exceeded use, which
has increased pressure within the commodity

markets to reduce prices to improve the balance
between supply and demand. With the increase
in stocks, 2016 corn, soybeans, wheat, and cotton base prices dropped below the base prices for
any year from 2010 through 2015. Base prices in
2017 continued to decline for winter wheat and
rice, but have increased for corn, soybeans, spring
wheat, and cotton.
Corn is responsible for roughly one-third of
the value of all crop production and the price for
corn has a strong influence on the prices of other crops. Corn has the highest insurance liability
and premium and is often seen as an indicator of
overall industry conditions. Figure 11 provides
corn futures prices for the contract for December
delivery for each crop season starting with 2011
and continuing through 2016. In 2011, weather,
below trend yields, and strong demand led to a
surge in corn futures prices in the $7.70 per bushel range by late summer before retreating to less
than $6.00 by the end of the contract. The 2011
base price of $6.01 per bushel for corn continues
to be the highest in the history of the program.
The base price of $5.68 per bushel for 2012 reflected the decline in price at the end of 2011 and expectations of increased production in the coming
year. As the 2012 drought set in, prices ran up to
more than $8.00 per bushel by late August. With
the decline in demand at the higher price level, in
combination with an increase in foreign production, prices began to moderate, ending the year
above $7.00. Corn prices started out the 2013 year
sharply lower due to an end to the drought and
an expectation for a recovery in corn production,
resulting in a base price of $5.65. Prices continued
to fall throughout 2013, ending the year at around
$4.25. The slide in prices continued into 2014,
with futures prices finishing the year at $3.96 per
bushel. With no support on the demand side and
accumulating stocks, the 2015 futures price hovered above the $4.00 level before retreating toward
the end of the year. Futures prices remained weak
in the early part of 2016 and, other than a brief
surge in June, weakened further throughout the
remainder of the year.
The implied volatility factor (IV) derived from
futures market information serves as a measure
of riskiness of expected prices. Each year, the
Risk Management Agency (RMA) calculates the
implied volatility factor for an insured commodity by averaging the implied volatility of near the
money options for a selected futures contract over
the final five trading days of the discovery period for that crop. For example, implied volatilities

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