Crop Insurance Today June 2018 - 17
Table 4 Federal Crop Insurance Program Performance, Gross Basis1
POLICIES
CROP
UNITS WITH FARM-PAID GROSS
INSURED LOSS
YEAR WITH
PREMIUM LIABILITY PREMIUM PREMIUM INDEMNITY UNDERWRITING ACRES RATIO
PREMIUM
GAIN
Thousands
Million Dollars
Million
2008 1,149 3,023 89,897 9,851 4,160 8,680 1,171
2009 1,172 2,729 79,548 8,951 3,524 5,222 3,729
2010 1,140 2,572 78,085 7,595 2,883 4,254 3,341
2011 1,152 3,322 114,210 11,972 4,509 10,869 1,103
2012 1,174 2,529 117,160 11,117 4,138 17,451 -6,334
2013 1,224 2,584 123,811 11,808 4,511 12,085 -277
2014 1,207 2,539 109,879 10,072 3,858 9,133 939
2015 1,205 2,547 102,532 9,767 3,678 6,311 3,456
2016
1,160 2,441 100,584 9,326 3,461 3,906 5,420
2017 1,125 2,368 106,076 10,070 3,716 5,145 4,925
272
264
256
266
283
296
294
296
290
311
0.88
0.58
0.56
0.91
1.57
1.02
0.91
0.65
0.42
0.51
1
Data as of May 18, 2018
Source: RMA Summary of Business
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 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, which is utilized
to 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 factors result in higher premiums on
policies insuring the farmer's revenue, while lower IV factors result in lower premiums.
Historical values for IVs for selected major crops are shown in Table 3. In 2016, the IV
factors for corn, soybeans, and cotton dropped
sharply, indicating that the market was expecting more stable prices. Consistent with this expectation, corn prices traded within a narrow
band throughout the year as indicated in Figure
12. While the IV factors for these three crops
increased in 2017, corn prices again traded
within a narrow band throughout the year. In
2018, the IV factors for these crops, along with
those for rice and winter wheat, have decreased
once again, with the corn IV factor for the coming year below the level set in 2016. Over the
course of the coming year we shall see if prices
remain more stable than the previous year as
the lower IV factors imply.
Figure 13 shows the change between the base
prices established early in 2017 to the harvest
prices established close to the end of the growing
season. The harvest prices shown are the average
daily prices in 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. The harvest price for spring wheat
rose to $6.76 from a base price of $5.65 at the
start of the year, an increase of almost 20 percent.
Rice also experienced a large increase of 21
percent throughout the year, while the price for
winter wheat was unchanged. The price for corn
declined by roughly 12 percent over the year,
while soybeans and cotton decreased by 4 percent and 7 percent, respectively.
[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; RMA
Manager's Bulletins, Price Discovery Application,
and Actuarial Information Browser.]
Federal Crop Insurance
Program Experience
The Federal Crop Insurance Program continued to perform well in 2017 thanks to another
year of excellent growing conditions and stable
crop prices during the year. After experiencing
two years of gross underwriting losses (defined
as gross indemnities exceeding gross premiums)
in 2012 and 2013, the program saw a modest recovery in 2014, followed by three years with solid
gains. The amount of liability insured increased
several percentage points in 2017 over 2016
thanks to higher prices for soybeans, cotton,
spring wheat, and corn, while prices for winter
wheat and rice declined. Premium crossed the
$10 billion barrier, a level last reached in the years
2011 through 2014. On a percentage basis, premium increased slightly faster than liability, partly due to increases in the price volatility factors
for corn, soybeans, cotton, and rice. In addition,
acres insured surged to 311 million due to growth
in the Rain Insurance product under the Pasture,
Rangeland, and Forage program. Farmers continued to purchase high coverage levels in 2017,
with the share of acres covered at 70 percent or
higher having stabilized around the 82 percent
level over the past three years (Figure 14).
The public cost of the crop insurance program can be calculated using program outlays
and revenues. These are equal to gross indemnities, less farmer-paid premiums, plus administrative and operating expense (A&O) payments
made on farmers' behalf to the companies, plus
company underwriting gains. While final costs
for 2017 are still uncertain, the total cost is estimated to be $4.439 billion, well below the longrun annual average of $7.9 billion as reported
in the January 2015 projections of the Congressional Budget Office (CBO) for the life of the
2014 Farm Bill.
Table 4 provides the standard measures summarizing the performance of the crop insurance
program. While liability, premium, and the number of acres insured increased in 2017, policy
counts and unit counts decreased in comparison
to the prior year. Indemnity payments continue
to be at a low level, particularly in comparison
CROPINSURANCE TODAY®
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