Disclaimer: This web page is designed to aid farmers with their marketing and risk management decisions. The risk of loss in trading futures, options, forward contracts, and hedge-to-arrive can be substantial and no warranty is given or implied by the author or any other party. Each farmer must consider whether such marketing strategies are appropriate for his or her situation. This web page does not represent the views of Kansas State University. 
Disclosure:  Dr. Barnaby’s research was the basis for the privately developed Crop Revenue Coverage.

WHAT HAPPENED TO MY CRC RATES?[1]

Crop Revenue Coverage (CRC) rates for 2003 soybeans and corn were changed.  In some cases the rate was increased and in other cases the rate was reduced.  These CRC rate changes are based upon a study from a consulting group, Risk Management Agency (RMA) analysis and concurrence from the owners of CRC[2] and Revenue Assurance (RA).

Rate changes should not be confused with premium costs per acre changes.  In most cases growers will pay higher premium costs per acre this year for crop insurance simply because Multiple Peril Crop Insurance based on Actual Production History (MPCI-APH) and revenue insurance price elections are higher than they were a year ago.  A year ago the corn and soybean revenue insurance price elections were $2.32 for corn and $4.50 for soybeans.  This year, in 2003, the corn revenue insurance price elections increased to $2.42 for corn and $5.26 for soybeans.  The MPCI-APH soybean price elections were $4.92 and $2.00 for corn on the 2002 crop.  For 2003, the MPCI-APH price elections were increased for corn to $2.20 and soybeans were increased to $5.30.  Because of the higher price election times the average yield times the coverage selected by growers the result is higher dollars of coverage per acre and that will generate a higher premium cost per acre.

The other variable is the rate per dollar of coverage that is multiplied times the liability or dollars of coverage to generate the premium cost per acre paid by growers.  Because of the higher price elections that alone will generate higher premiums.

Those higher revenue insurance price elections are set by the market and are totally outside the control of RMA.  However, RMA approved rate changes will also affect premiums paid by growers.  There were significant rate changes made to the CRC insurance contract and to a lesser extent the RA contract for 2003 corn and soybeans.  Those rate changes made by RMA will have additional impacts on premiums paid by growers. 

2003 Corn Premiums Versus 2002 Corn Premiums.  In order to make comparisons between this years premiums and last years premiums an example corn farm for Kansas and Nebraska under dryland and irrigation conditions was analyzed.  The price election used for MPCI-APH was $2.00 and $2.32 for revenue insurance.  Those 2002 price elections were used to generate 2003 premiums.  This allows one to compare premium costs per acre using the same dollars of coverage.  Recognize the 2003 higher price elections will also increase premiums but this analysis used 2002 price elections so that a direct comparison could be made between 2002 and 2003 grower paid premiums. 

In table 1, an example South Central Nebraska irrigated corn farm was evaluated with 170 bushel APH and 2002 price elections.  At this particular location notice the MPCI-APH premium rates were reduced by about 3 percent, while the CRC premiums were increased by 20 to 27 percent. 

The rate was calculated as the total premium divided by total dollars of coverage.  The rate calculation allows one to remove the effect on the premium from the current higher price election.  Higher price elections reduces the CRC rate, therefore percent change in rate is lower for CRC using the higher $2.42 2003 CRC price election than the percent change in 2002 and 2003 premiums based on the 2002 price election of $2.32.  The CRC rates were increased by 18 to 25 percent.

This South Central irrigated Nebraska corn farm is located where traditionally loss experience has been good.  Many insurance agents are asking why the rate change?

A dryland corn farm with a 90 bushel APH located in Southeast Nebraska was also analyzed in table 2.  At this location the MPCI-APH rates were not changed while CRC rates were reduced at the higher coverage levels and increased at the low coverage levels.

How do these rates compare with similar locations?  For that question, a North Central Kansas irrigated corn farm was evaluated to compare with the Nebraska irrigated corn farm (table 3).  At this location for 170 bushel irrigated APH and holding price elections at the same level as 2002, the MPCI-APH rates were not changed.  The CRC premiums were increased by about 20 to 28 percent and rates were increased by 18 to 26 percent, as was the case for the Nebraska irrigated farm.  However, in Kansas growers have the alternative to switch to RA with the Harvest Price Option (RA-HPO) and pay substantially lower premiums.  At 75 percent coverage in 2002, notice the CRC rate was $7.74 and less expensive than RA-HPO at $8.33.  However, this year RA-HPO is less expensive than the CRC contract.  Therefore, growers will likely switch to the RA-HPO contract rather than buy a CRC contract and will have nearly the same coverage (table 3).

The “small” rate increases for the RA contract are caused by increasing the volatility factor from 0.18 to 0.20.  For 2003 RA did not use a market measure of volatility on corn and soybeans.  This was a one year agreement and presumably future RA rates will be calculated based on the market determined volatility factor.  If the volatility factor had not changed then the small rate increases for RA would not have occurred.  It is possible that the volatility factor could be lower next year and the rates in 2004 will be the same as they were in 2002 for RA-HPO.

A Northeast Kansas dryland corn farm was also evaluated to compare rates with Southeast Nebraska (table 4).  At this location, the MPCI-APH rates were not changed.  The lower coverage CRC rates and premiums were increased about 20 percent, but at the upper coverage levels there was either a rate decrease or only a “small” increase.  RA-HPO rates increased at the 80 and 85 percent coverage levels.  The lower coverage rate increases are caused primarily by changing the volatility from 0.18 to 0.20.  At this location, RA-HPO is substantially less expensive than the CRC contract.  That would also have been true in 2002 (table 4).

Who Cares?  The rate increases in Nebraska are relevant because in Nebraska there are no RA offers.  Therefore, growers who want revenue replacement coverage will have to buy the CRC contract.  However, in an area that is generally considered to be low risk in Nebraska , CRC rates increased by more than 20 percent.  Kansas growers in low risk areas saw similar rate increases but Kansas growers have the option to switch to RA-HPO.  A year ago in the low risk Kansas irrigated areas, CRC was less expensive than RA-HPO.  However, with these rate changes the RA-HPO will be cheaper than the CRC contract (table 3).

The RA-HPO was always cheaper in the higher risk dryland growing areas and that will not change in 2003.  In Kansas and other states with an RA-HPO offer for 2003 corn and soybeans, there should be no CRC corn contracts sold because in all cases RA-HPO is less expensive and provides identical coverage on soybeans and nearly the same coverage on corn.  The only exception is in a few cases CRC is less expensive than RA-HPO under enterprise units because RA has a different definition for enterprise units.  (If there are exceptions to this rule for corn the author is not aware of them and if someone should find an exception please send it to me.)

These rate changes did not apply to the current wheat crop so growers who purchased CRC on fall wheat may have paid less premium than they would have paid for an equivalent RA-HPO contract in low risk growing areas.  However, in 2004 the CRC rate changes are expected to apply to wheat.  Wheat contracts sold in the fall of 2003 for 2004 wheat will likely be cheaper under RA-HPO than CRC.

So why does Nebraska not have the RA offer?  The RA insurance contract is owned by a private insurance company and therefore it is their decision where to file the RA contract.  However, the rate changes that have been applied to CRC does effect states like Nebraska that do not have the RA offer.  One would expect with these CRC rate changes, Nebraska has suffered large insurance underwriting losses.  In order to determine if that was true, table 5 shows the loss ratios by year for corn in Kansas and Nebraska .  The loss experience in these tables does not separate irrigated and dryland corn because the statistics provided on the RMA WEB page does not allow the data to be sorted by practice. 

The loss ratio is defined as the total indemnity payments divided by the total premium including the portion paid by the government.  If the loss ratio is less than one then for every dollar paid in premiums, including the grower paid and government paid premium, growers collected less than a dollar from indemnity payments, generating an underwriting gain. 

Nebraska has an underwriting gain of 6 cents on corn for the years 1989 through 2002 while Kansas had an underwriting loss of 29 cents.  Nebraska corn growers generated a sales weighted average loss ratio of $0.94 versus a Kansas sales weighted average corn loss ratio of $1.29 (table 5).  By contrast the corn loss ratio in Texas was $1.80.

The loss ratios were also generated for these 4 corn counties in Nebraska and Kansas (tables 6 and 7).  The loss experience for these 4 counties was listed by year.  The sales weighted average loss ratios for the 14 year period was also reported.  The sales weighted loss ratio gives greater weight to more recent losses because sales have been larger in more recent years than in the early years.  The simple average annual loss ratio gives a loss experience based on the assumption that the losses in those early years would have likely had the same loss ratio even if the sales volume had been larger.  The average loss ratio is lower for both Kansas ($1.20) and Nebraska ($0.87) because it gives less weight to the 2002 losses (table 5).

Based on that crop insurance loss experience for 65% coverages and greater, it is difficult to understand why irrigated Nebraska corn growers would need to suffer substantial rate increases while states such as Kansas and North Dakota can simply switch to the RA-HPO contract.  The example irrigated Nebraska corn county (86% of the corn acres are irrigated) had a sales weighted average loss ratio of $0.40 or a 60 cent underwriting gain over the most recent 14 years (table 6).  However, this county had its CRC irrigated corn premium rates increased by 18-25 percent (table 1).  While the example dryland Nebraska corn county (2% of the corn acres are irrigated) had a sales weighted average loss ratio of $1.19 or a 19 cent underwriting loss over the most recent 14 years (table 6).  With the underwriting loss growers might expect CRC dryland corn premium rates to increase but the opposite happened.  Rates at the 80% and 85% coverage levels were cut (table 2).  So why would RMA increase CRC rates in low risk areas and cut rates in high risk areas that have underwriting losses?

Grain Sorghum.  In Kansas and other states there is no RA offer for grain sorghum.  Therefore, some grain sorghum growers maybe concerned these CRC rate changes may be applied to their grain sorghum contract. 

The CRC grain sorghum price election was increased from $2.20 in 2002 to $2.30 in 2003.  These increased price elections will increase the grain sorghum premium cost per acre because of the additional dollars of coverage but the underlying rate per dollar of coverage was not changed (tables 8 and 9). 

However, in the following years it is expected the new CRC rating method will also be applied to wheat and grain sorghum. If that is the case, then similar rate increases on those contracts can be expected.  Does the loss history support this is a different question and one would need to look at the loss experience for those crops and locations? 

Summary and Rate Relativity.  The loss ratios in the tables are based on the most recent loss history for corn.  Some critics have argued that this is insufficient data to make any judgment on setting rates, and I agree with that position.  The RMA WEB based loss data covers only the most recent 14 years because that is all of the data posted on the WEB page.  RMA is working with loss data from 1975 to 2002.  Also the data posted on the WEB page is not separated by practice, therefore the corn loss data reported in the paper combines losses from irrigated and dryland corn.  The loss data also is not separated by RA versus RA-HPO.  The loss data on the WEB does separate IP from indexed IP, which has very few sales but ignores the separation of the RA contract that has a much larger market share (and growing) and a larger impact on the cost of the crop insurance program.

While there is not sufficient data to set the “absolute” rate, the analysis does raise questions are the rates relatively correct between products?  RA-HPO in theory should carry a slightly larger premium than CRC because it has no liability limits.  CRC has a liability limit of a $1.50 corn price increase and decrease.  With no similar limit on the RA contract, if the market were to become volatile, RA-HPO would clearly pay more than the CRC contract.  However, as has been demonstrated at these two Kansas locations RA-HPO premiums are substantially cheaper than CRC (tables 3 and 4).  In North Dakota it is even possible to buy an RA-HPO contract for less money than MPCI-APH contract and yet the RA-HPO contract also pays more (assuming the same price election for both products).  Clearly that is not reasonable.

The analysis also raises the question about the direction of the rate changes.  In the low risk areas with good loss experience over the last 14 years, CRC rates were increased by more than 20 percent.  At the same time CRC rates have been cut in areas that have not had good loss experience over the last 14 years, for example some southeast Nebraska counties and North Dakota.

The logical question is how did RMA justify these CRC rate changes?  Many analysts are unable to explain why these CRC rate increases were justified on a contract that provides less coverage than the RA-HPO in areas with good underwriting experience (over the recent 14 year period).  Probably the only solution for this issue is to make the RA contract available for Nebraska and other states that currently do not have the contract, assuming CRC rates are going to be calculated with the new rating method.[3]

Until the CRC contract is taken off the market, one would expect these rate differences to continue to be discussed.  In addition, the revenue products do not meet the risk management needs for all locations in the country.  The perfect contract probably has not been built for all customers.  One would think rather than providing duplicate products more effort would be spent to meet the risk management needs of the niche markets that are not currently covered by the existing set of insurance offers from RMA.

Future products and market demand for new risk management tools are currently being studied by RMA.  The RMA has contracted a group of professors to do the analysis.  The study is underway and the author is a part of the team.

SHOULD THE DISASTER CAP BE BASED ON NASS PRICES?

I received a recent phone call from a Washington economic analyst, who claimed the recent disaster aid questions posted on the Web page missed the target.  The disaster aid questions posted on the Web page assumed the value of the crop was based on the expected crop value at planting time.  The language in the Law states: “may not exceed 95 percent of what the value of the crop would have been in the absence of the losses, as estimated by the Secretary”.  The analysts’ interruption of the Law is the value of the crop, in absence of the disaster, is determined after harvest.  Of course, this approach assumes that the yield and prices are held constant because if all farmers had a good crop and only one individual suffered a disaster, price would have fallen.  Lower prices would have caused the counter cyclical payment to be paid to farmers, even to those who had yield losses.

Under this approach, her argument is that any MPCI or revenue insurance price election is the wrong value to use.  This approach would have valued 2001 losses based on the National Agricultural Statistics Service (NASS) average price for the marketing year for 2001/2002.  For 2002/2003, she would have used the higher of the loan rate or the projected USDA national average price to set both the payment cap and the salvage value of the crop.

Everyone agrees that the Law says to use 95 percent times historical yield.  Most analyst agree the historical yield will be defined as the higher of the Actual Production History (APH) proven yield under the crop insurance program or a 5 year county average yield.  A few analysts also want to use the Farm Service Agency (FSA) program yield, but this is unlikely.  On those two variables there seems to be little debate inside USDA and the definition of “historical yield” may have already been decided.  The other decision that appears to have been settled is premiums will be deducted first, and only the net insurance payments will count against the cap. 

The major issue is the price definition.  USDA will have to determine the price used to set the cap on payments, the price used to determine disaster payments, and the price used to determine the salvage value of the crop.

The 2001/2002 NASS average market price for corn was $1.97, wheat $2.78, milo $1.94, soybeans $4.38 and 29.8 cents for cotton.  The Agricultural World Outlook Board publishes the World Agricultural Supply Demand Estimates (WASDE) and the current March price for corn is $2.30, wheat $3.60, milo $2.35 and soybeans $5.40.  They are not allowed to publish an estimated price for cotton.  Because cotton prices are below the loan rate, one would use the loan rate for cotton under this plan. 

It is likely the NASS wheat price for 2002/2003 marketing year will be available before any disaster payments are paid.  The other crops will likely have NASS monthly prices for September through May or June available before payment of any disaster aid.  Therefore USDA could use the available NASS prices to calculate an “average” price rather than the WASDE forecasted prices. 

The argument for using the NASS price is because it is closer to prices actually received by farmers.  Under this argument neither the MPCI price election or the revenue insurance prices are relevant.  If the NASS average price for 2002 corn[4] is $2.30 that would increase the cap and reduce the number of insured growers who would suffer a reduction in disaster aid.  The $2.30 NASS price would also increase the salvage value of the damaged crop.  Under this approach while NASS or other USDA prices would set the cap and the crop salvage value, the MPCI price election would be used to calculate the disaster payment.  The corn disaster payment would be based on $2.00 in 2002 and $2.05 in 2001.  Using this method, the corn cap would be lower in 2001 with $1.97 NASS price but the disaster payment would be larger in 2001 with a MPCI-APH corn price election of $2.05.

This debate is going on inside USDA and depends on how one interprets the Law.  Should USDA value the crop at harvest time or the expected crop value?[5]  The USDA debate will continue on the price used to set the cap, calculate crop salvage value, and to calculate the disaster payments.  It is possible that different prices will be used for each one of these formulas.  It is also clear that some Washington policy makers want a narrow interpretation so that disaster aid will stay within budget.  However, this will likely reduce disaster aid for many “highly” insured growers.

An alternative for those who reached the per acre cap limit.  In 2002, with severe losses in Kansas and high levels of insurance coverage, some growers may discover they are ineligible for disaster payments, depending on how this per acre cap is finally defined by USDA.  If growers are unfortunate enough to have also suffered a 35 percent yield loss or more in 2001, they may find it to their advantage to switch and claim the disaster payment on a 2001 loss. 

There is also some suggestion that these disaster payments will follow the insurance unit structure.  The question has also been raised if farmers will be able to switch between 2002 and 2001 losses based on each unit.  Again, that is just one of the many ideas that are being debated internally and externally within USDA. 

It appears that all competing ideas on how to define the cap and the ultimate disaster aid payments are in the mix and nothing has been ruled out or ruled in at this point.  Also, this particular disaster aid payment has to be funded internally.  Some policy makers will want the disaster aid payments to remain within the OMB projected budget estimate rather than exceeding the budget and taking money out of other USDA programs.

The other consideration is that a very restrictive cap on disaster aid payments will lower the incentive for farmers to purchase higher levels of insurance coverage in the future.  Farmers may not reduce their coverage because this is a single year disaster program that “officially will not be provided” in the future.  However, there have been many examples where Congress has provided a disaster program and if that does occur in the future there is no guarantee future disaster programs will look like this one.  It is probably reasonable to assume that if there is another disaster program debate greater attention will be made to prevent penalizing insured farmers.

The latest information suggests that the USDA will use the annual average price reported by NASS in February 2003 to set the cap and value of any production.  USDA will also use the net rather than gross crop insurance payment.

Payments.  Monthly NASS prices and historical wheat and feedgrain cash prices are presented in Table 10.  These prices are used to calculate the counter cyclical payments once the price weights are determined at the end of the marketing year.  Price election for crop insurance is listed in table 11.

Farm Service Agency (FSA) Loans, Direct Payments and Counter Cyclical Target Prices.  The payment rates and loans are listed in table 12 for 2002.  These are the rates that are current in the law.

TABLE 10.  NASS REPORTED MONTHLY AVERAGE PRICES FOR KANSAS AND THE UNITED STATES