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.

Wheat Premiums for the 2004 Kansas Wheat Crop[1]

Introduction.  Many growers and insurance agents are using last year’s prices elections, Revenue Assurance (RA) volatility, and Crop Revenue Coverage (CRC) high/low factors for calculating 2004 wheat premiums.  The market is about 25 cents lower than last year and that will lower coverage and premium costs per acre.  Currently the estimated RA volatility is a little lower too, but the option market is very thinly traded and those values are volatile.  The new method for setting the CRC high/low price factors are not available to the author, however, based on 2004 soybeans and corn CRC high/low price factor increases it is reasonable to assume the wheat high/low price factors will also be increased. [2]

Central Kansas Wheat Premiums.  Wheat premiums for Central Kansas wheat were analyzed in Table 1.  The premiums calculated were for a 40 bushel actual production history (APH), price elections and rates for 2003.  These premiums were calculated for comparison purposes with the 2004 premiums.  The 2004 premiums were calculated based on a 40 bushel yield and a higher $3.35 MPCI price election for 2004.  The 2004 price election of $3.35 is higher than the $3.15 price election on the 2003 crop, which has the effect of increasing the dollars of coverage.  The increase in price election alone will increase the premium cost per acre but it also increases the coverage.  The estimated 2004 premiums for Revenue Assurance with the Harvest Price Option (RA-HPO) and CRC used an assumed $3.73 price election that was available on the 2003 crop.  The current price estimates for the 2004 crop is about $3.50 (estimated RA volatility, RA, IP, and CRC price elections are currently being updated on www.AgManager.info). 

After American Agrisurance exited the industry the CRC contract was turned over to the Risk Management Agency (RMA) and RMA now owns CRC.  The 2003 wheat rates were submitted by American Agrisurance for RMA for approval.  The 2004 CRC rates are the first wheat rates being set by RMA.  Currently the CRC premiums are difficult to estimate because RMA has changed the rating procedure. 

RMA set the CRC rates on corn and soybeans, which was the first set of rates not developed by American Agrisurance.  RMA increased the high/low price factors used in the rating of CRC by 76 percent on corn and 44 percent on soybeans.  Many agents are calculating CRC rates using last year’s high/low price factors.  It is very likely those high/low price factors for wheat will be increased over the 2003 values. 

The first set of CRC premiums calculated for 2004 were based on the assumption the high/low price factor were increased by the same percentage amount as the soybeans (Table 1).  The second set of premiums under the 2004 CRC premium column were calculated based on the assumption RMA would increase the high/low price factors by the same percentage increase as the corn high/low price factors.  The high price/low price factor will not be released until after September 15 so farmers will have a very short time period to evaluate the CRC premium rates.

Because the MPCI price election was increased from $3.15 to $3.35, it is necessary to compare premium costs with the higher price election removed from the analysis.  Simply increasing the price election and the resulting dollars of coverage will increase premium costs even if premium rates are decreased.  Therefore, in table 2 all of the MPCI-APH and revenue insurance contracts were converted to a dollar per hundred of coverage.  This allows one to compare premium rates across product lines and remove the price election differential effect on the analysis. 

For 2004 Central Kansas wheat (in this county and APH) MPCI-APH rate per hundred dollars of coverage were increased by 12-13 percent at most coverage levels.  The Revenue Assurance rates, assuming a .22 volatility that was applied to the 2003 contract, increased from 15-25 percent.  The RA especially received a higher rate increased at the 80 and 85 percent coverage levels.

If the high/low price factors for CRC are increased similar to the soybean high/low price factors the resulting rate increases on winter wheat would be about 19 percent to 24 percent.  If high/low price factors are increased similar to corn then the percent increase in rates ranges from 26 to 31 percent.  It is possible that these revenue insurance rate increases will not be this severe because the volatility value could be slightly lower in 2004 than it was in 2003 and it is possible the high/low price factors may be less than the estimates.    

In 2003, the CRC rates for 80 percent coverage and less were lower than the RA-HPO rates.  This was a consistent theme with rates in the lower risk production areas until RMA took over the process of setting rates.  At this location if CRC rates are set based on high/low price factors similar to the soybeans then the premium costs for CRC and RA-HPO are very similar for 2004.  The only difference is the RA-HPO has unlimited liability while CRC’s liability is constrained to no more than a $2.00 price increase.  Also, the CRC contract will be adjusted based on a June average harvest price while RA-HPO will be adjusted based on a July 1-14 average price.  Because of the unlimited liability in RA-HPO, it would have a slight advantage over a CRC contract if both are carrying the same premium costs. 

If the high/low price factors on 2004 CRC wheat are increased similar to corn, the resulting CRC rates would be substantially higher than the RA rates and clearly CRC buyers would want to switch to the RA-HPO contract.  Which contract will be the preferred contract depends on those high/low price factors that will not be available until after September 15.  Farmers will probably want to advise their agent they want rates for both the CRC and RA-HPO contracts.  Most growers will simply then pick the contract with the least premium assuming they have made the decision to purchase replacement-revenue insurance.  Because the CRC high/low price factors will not be released until after September 15, agents will only have about 10 days to do the analysis. 

If growers have decided to purchase the MPCI-APH contract and they are definitely not going to purchase either revenue contract, they could do their analysis on coverage levels and price elections now because those parameters are already set for the 2004 winter wheat crop.

Western Kansas Wheat Premiums.  A sample set of rates were also calculated for western Kansas wheat (table 3).  The results are similar to the central Kansas wheat rates with CRC and RA-HPO premiums being very similar if the high/low price factors are increased similar to the soybean values.  If this is the result the less expensive contract will most likely depend on the volatility value but there appears to be only a few pennies difference between the contracts.  However, if the high/low price factors are increased by a percentage similar to the corn high/low price factors then CRC will be higher than RA-HPO and RA-HPO will be the preferred contract. 

The MPCI-APH rates for western Kansas were actually reduced at the higher coverage levels (table 4).  RMA also increased the MPCI-APH rates at the lower coverage levels.  At the same time RA-HPO received a substantial premium increase at the 80 and 85 percent coverage levels.  The combination of increasing the RA-HPO rates and cutting the MPCI-APH rates has the effect of preventing a situation where RA-HPO was cheaper than MPCI-APH. 

Increasing the high/low price factors similar to soybeans resulted in substantial rate increases on CRC at the 50-75 percent coverage levels.  The increases on the 80 and 85 percent coverage were very modest.  Using these high/low price factors resulted in premium costs that were very similar to the RA-HPO premium costs.  However, if the high/low price factor are increased similar to corn the result would be CRC premiums that are higher than the RA-HPO premiums (Table 4).

Summary.  It is clear RMA has done several things with the 2004 winter wheat rates.  First, they have cut the MPCI-APH rates and increased RA-HPO rates for the higher coverage levels in the high risk growing areas.  This will prevent a situation where RA-HPO is cheaper than MPCI-APH.  If the high/low price factors are similar to soybeans the result is the premium costs for RA-HPO and CRC will be nearly identical.  If RMA increases the high/low price factors similar to corn the resulting higher CRC rates will be higher than RA-HPO rates and under those conditions growers would certainly want to switch to the RA-HPO contract. 

Should RMA Combine Products?  If these two revenue contracts are now going to carry nearly the same premium and provide nearly the same coverage (in some cases identical coverage) then it really makes no sense to continue to provide multiple revenue products.  Multiple products covering the same risk only increases the administrative costs of the program for government, insurance agents and insurance companies.  Offering nearly identical insurance products requires maintaining the software to rate multiple products, multiple policies must be updated and simply tracking all the different price measurements adds to the administrative costs of this program. 

If these revenue rates are going to be similar (rates should be similar for similar coverage) this makes the argument even stronger for consolidating insurance products.  RMA could simply reduce the insurance contracts to two basic policies for crops, an APH and a Group Risk Plan (GRP) base policy.   A single APH yield coverage insurance policy would simplify the administrative process, generate one price election, and one APH basic rating structure for software maintenance.  Growers would then add endorsements to get the revenue coverage and a separate endorsement to get the replacement coverage.  This would reduce the multiple price election calculations because MPCI-APH, RA, IP, and CRC would all have the same price election.  The harvest prices for the revenue contracts would all be based on the same market and would reduce the number of prices that currently must be tracked by RMA and the insurance industry.

The other base RMA contract would be the Group Risk Plan (GRP), which would be the base index product.  The Group Risk Income Protection (GRIP) coverage would simply be an endorsement on to the GRP contract. 

Offering two basic crop insurance contracts with revenue endorsements would provide all of the currently available coverage.  It would reduce administrative costs that could be better spent working on new risk protection products.