Crop Insurance Today - 15

over the final five trading days in February on the
futures contract for December delivery are used
in the determination of the IV factor in the major corn producing states. The IV factor is used by
RMA to simulate the expected price distribution
for the crop. This distribution is used to simulate
price risk and establish the price risk component
of the premium rate for revenue plans for the crop.
A high IV indicates a greater likelihood for large
price movements while a low IV implies a more
stable market with futures prices expected to
move within a smaller range. Other things being
equal, higher IV values result in higher premiums
on policies insuring the farmer's revenue.
Historical values for IVs for selected major crops are shown in Table 3. In 2016, the IV
values for corn, soybeans, and cotton dropped
sharply, indicating that the market was expecting
more stable prices. This expectation was met for
corn prices, which traded within a narrow band
throughout the year as indicated in Figure 11. Stable prices provided an important contribution to
the positive gross underwriting gain for the year.
Figure 12 shows the change between the base
prices established early in 2016 to the harvest
prices established close to the end of the growing
season. The harvest prices shown are the average
daily prices for the harvest month for the same
futures contract used to establish the base price
earlier in the year. Harvest prices are important
in that they are used to calculate the producer's
actual revenue, which is used to establish the
amount of indemnity for Revenue Protection
(RP) policies. Harvest prices for soybeans rose to
$9.75 from a base price of $8.85 at the start of the
year. As previously observed in Figure 11, corn
prices declined over the course of the year. Prices
also declined for winter wheat, spring wheat, and
rice, while cotton prices rose from $0.62 to $0.69
per pound

Figure 13 Share of Insured Acres Covered at 70% or Higher

[Information sources for this section includes:
USDA, Foreign Agricultural Service, P, S & D database; Office of the Chief Economist; World Agricultural Supply and Demand Estimates Report
(WASDE), various issues; NASS Quick Stats; and,
RMA Manager's Bulletins and the price Discovery
Application.]

Federal Crop Insurance
Program Experience

The financial performance of the Federal
Crop Insurance Program continued the recovery
that began in 2015 thanks to another year of excellent growing conditions and relatively stable
crop prices. Declines in base prices for corn, soybeans, wheat, and cotton in 2016 led to a small
reduction in the total insured liability to about
$100 billion in 2016, about $2 billion below the
prior year and $23 billion below the record set

in 2013. This, in combination with reductions
in price volatility factors for corn, soybeans, and
cotton, led to a decline in gross premium to $9.3
billion in 2016, down $0.4 billion from the previous year. Insured acres of 291 million were also
down from the record level of 300 million set in
2015. Farmers continued to buy higher coverage
levels in 2016, with the share of acres covered at
70 percent or higher rising from 80.9 percent in
2015 to 81.4 percent in 2016 (Figure13).
Table 4 provides the standard measures used
to comprehend the scope and performance of the
crop insurance program. The volume of business
insured in 2016, as measured by policy counts,
unit counts, liability, premium, and acres, are all
below the corresponding amounts from 2015.
The observed reduction in liability and premium
is consistent with the reduced prices for major
field crops. Indemnities for the year are much

Table 3 Volatility Factors
Historical
Price
Volatility1

Volatility Factor2

CROPS

1968-2016

2010

2011

2012

2013

2014

2015

2016

Wheat, Winter ($/bu)
Wheat, Spring ($/bu)
Corn ($/bu)
Soybeans ($/bu)
Upland Cotton ($/lb)
RICE ($/cwt)

0.19
0.23
0.20
0.18
0.24
0.23

0.27
0.24
0.28
0.20
0.21
0.19

0.33
0.25
0.29
0.23
0.37
0.22

0.26
0.19
0.22
0.18
0.19
0.14

0.24
0.15
0.20
0.17
0.17
0.11

0.19
0.14
0.19
0.13
0.15
0.10

0.17
0.15
0.21
0.16
0.16

0.22
0.15
0.17
0.12
0.14
0.15

3

2017

0.18
0.13
0.19
0.16
0.15
0.17

% CHANGE
2015-16
2016-17

29.4
0.0
-19.0
-25.0
-12.5
3

-18.2
-13.3
11.8
33.3
7.1
13.3

Historical volatility values are obtained by fitting log-normal distribution to the time series of the ratio of the harvest price to the base price from 1968 to 2016. For each year in that time period, the harvest
and base prices are calculated by using relevant futures prices in that year. Source: Barchart.com
Revenue Protection for 2011-15 and Revenue Assurance for prior years as of April 15, 2017.
3
Due to insufficient futures price data, revenue insurance was not available in 2015
Source: Various RMA Manager's Bulletins
1

2

CROPINSURANCE TODAY®

15


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