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.

SOMEBODY IN WASHINGTON LOVES KANSAS WHEAT GROWERS[1]

Introduction.  The prices used to calculate the disaster program have been announced but the use of the National Agricultural Statistics Service (NASS) marketing year average 2002 price will not be complete for spring crops until September 1.  Therefore it is expected the 2002 NASS Summary Report will be used to set NASS prices.  USDA also announced the disaster aid signup date starting June 6. The USDA press release is located at:

http://www.usda.gov/news/releases/2003/03/0102.htm

Most insured growers will find the final USDA policy decision that sets the payment cap is an improvement over some of the proposed alternatives.  Because USDA will use the higher of the crop insurance price election or the NASS average price, the result is a higher limit on per acre benefits.  This will result in fewer farmers suffering a reduction in disaster aid payments.   

Someone in Washington must love Kansas Wheat growers because the NASS price used to set the cap is $3.60[2] and few if any Kansas wheat growers will suffer a reduction in disaster aid.  Kansas wheat Crop Revenue Coverage (CRC) payment price was $3.34 and Revenue Assurance with Harvest Price Option (RA-HPO paid $3.40) and that is much lower than the NASS price used to set the cap.  This in not true for Nebraska wheat growers where the CRC wheat payment price was $3.72.  In states where the wheat revenue insurance payment price was higher than the wheat NASS price some wheat growers may (will) hit the payment cap.  In Kansas on 2002 wheat there were no RA offers at 80% and 85% coverage in 2002 (higher RA coverages were available on Kansas wheat in 2003).  Therefore it will not be possible for RA insured Kansas wheat growers to exceed the cap.  It appears only 85% CRC or MPCI-APH insured Kansas wheat growers have any chance of exceeding the per acre cap but very few Kansas farmers bought 85% coverage.  Because of the higher CRC payment price one would expect more Nebraska wheat farmers will hit the cap.  The result is that highly insured Kansas wheat farmers with the added disaster aid will end up with the about the same number of dollars as Nebraska wheat growers.

Corn, Milo , and Soybeans Disaster.  For corn farmers only the revenue insured growers are likely to exceed the cap and then it will likely require a yield loss that is greater than 90%.  The reason corn farmers are hitting the limit is because the CRC payment price was $2.52 (RA-HPO paid $2.43) and that is higher that the NASS $2.35 price used to set the cap.

Milo growers are less likely to hit the cap because the cap price is $2.41 and CRC paid $2.39.  Because the CRC payment price is lower than the cap price it is unlikely milo growers will exceed the cap.  There is no RA offer on milo.

The CRC and RA-HPO soybean payment price was $5.45 and that is slightly higher than the NASS $5.40 price used to set the cap.  The MPCI-APH paid $4.92 and RA without the harvest price option paid $4.50.  It is unlikely that MPCI-APH insured soybeans growers will exceed the cap and no chance for the “basic” RA insured grower to exceed the soybean cap.

Price Defined.  The major disaster aid issue left was the prices in the disaster formula.  USDA has defined (1) the price used to pay disaster payments, (2) price used to value any production, and (3) the price used to calculate the per acre cap on payments.  The price that will be used to pay most Kansas disaster claims will be the MPCI price elections.  Only if there is no MPCI price election available will USDA use a 5 year average price. 

The per acre payment cap and value of any production price will equal the higher of the National Agricultural Statistics Service (NASS) seasonal average price or the MPCI price election.  For 2002 most Kansas crops will use the NASS price with the exception of upland cotton.  

For disaster aid claims on 2001 crops, the 2001/2002 marketing year NASS average price for corn was $1.97, wheat $2.78[3], milo $1.94, soybeans $4.38 and 29.8 cents for upland cotton.  The 2001 MPCI-APH price elections for corn was $2.05, wheat $2.80, milo $1.95, soybeans $5.26 and 60 cents for upland cotton.  Therefore, the MPCI-APH price elections will be used rather than NASS prices for 2001 payment caps and calculating value of any production.

The 2002 MPCI-APH price elections for corn was $2.00, wheat $3.15, milo $1.85, soybeans $4.92 and 52 cents for upland cotton.  The seasonal average NASS prices are not reported until after the marketing year, that ends on May 31 for wheat and August 31 for the other crops.  Therefore, it is expected that USDA will use the prices reported by NASS in Crop Values 2002 Summary, released in February 2003.  This report generates a national average NASS price. 

Based on the NASS February report the seasonal average corn price is $2.35, $3.60 for wheat[4], $2.41 for milo, and $5.40 for soybeans.  NASS prices are higher than the MPCI price election and the NASS price will be used in the disaster formula.  Because the NASS prices for upland cotton is 40.5 cents, the MPCI price election of 52 cents will be used in the formula for cotton disaster aid.

Yield Defined.  The historical yield will be the higher of the 5 year average county yield or crop insurance’s Actual Production History (APH).  The exact crop years used to calculate the county average yield have not been identified.

Crop disaster payments are subject to a per acre cap on payments that will effect all farm sizes.  For most 2002 Kansas crops the sum of (1) any crop production times the seasonal average NASS price, (2) the disaster payment, and (3) the crop-insurance indemnity less the farmer paid premium cannot exceed 95 percent times the historical yield times average NASS price.  Crops that have a higher MPCI-APH price than NASS will substitute the MPCI-APH price for the NASS price in the previous formula.  The crop disaster payments will be reduced if the per acre cap on benefits is exceeded.

Example Kansas Dryland Corn Case Farm.  An example Western Kansas corn farm with 100 bushel average yield was developed in table 1 to examine the disaster program.  In this particular example, the farm was compared with no insurance purchased, 50% CAT insurance, 75% MPCI-APH, and 75% revenue insurance.  A grower with nearly a total crop loss of a 99% yield loss was assumed.  A total yield loss on dryland corn in the western 2/3 of Kansas is not unusual.

Disaster Aid Defined with a 99% Yield Loss.  The disaster aid provided by the 65/50 program passed by Congress would pay this example grower a maximum of $65 if insured and $58.50 if uninsured.  This is calculated based on 100 bushels times 65% times the MPCI-APH price election of $2.00 times 50%. 

In the example in table 1 it is assumed the corn grower suffered a 99% yield loss and the cap is based on the NASS price of $2.35.  The disaster aid payment based on yield loss below the trigger point times the 50% of MPCI-APH market price would generate a disaster payment of $64 versus $57.60 for the insured grower.  The insured grower at 75% coverage would generate an indemnity payment on line 18 of $148 for MPCI-APH, $186.48 for CRC, $179.82 for RA-HPO, and $171.57 for “basic” RA. 

The net insurance payments (less premium) plus the disaster payment plus value of the salvaged crop would generate a total value of $238.28 for CRC, $234.83 for RA-HPO, and $227.97 for RA on line 21.  The maximum benefit cap is $223.25 for this grower based on 100 bushels times $2.35 times 95 percent.  All of the revenue insurance products exceeded the cap and that means this grower will have her disaster aid payment reduced on line 23.  There was no payment reduction for uninsured, CAT or the MPCI-APH alternatives.  The disaster payments were reduced by $15.03 for CRC, $11.58 for RA-HPO and $4.72 for basic RA.   

Higher Crop Insurance Coverages Reduce Disaster Aid.  Figures 1, 2 and 3 shows how different coverage levels will impact the amount of dollars revenue insured growers will be able to collect on their disaster aid.  For example, at an 85% RA-HPO insurance guarantee and a 99% yield loss this grower will lose 41% of the disaster payment.  If this same grower had purchased a 70% RA-HPO insurance contract he\she would have lost less than 3% of the disaster aid payment. 

One would have expected the reduction in disaster aid would have been greatest under CRC because CRC paid larger indemnity payments than RA-HPO.  CRC paid $2.52 for lost corn production while RA-HPO paid $2.43 for lost production.  The 70% and 75% CRC coverage did show a larger reduction in disaster aid than RA-HPO but not at the 80% and 85% coverage levels (figures 1 and 2).  The reason is that RA-HPO premiums are lower than CRC premiums at all coverage levels for this location.  Therefore, the net RA-HPO indemnity payment is higher than the net CRC indemnity payment at the 80% and 85% coverage levels even though the gross CRC indemnity payments are larger.  RA with out the harvest price option insured growers with a total crop loss also suffered a reduction in disaster aid if he/she purchased coverage at 75% and greater (figure 3).

The MPCI-APH insured grower suffered no disaster aid loss at this location.  This is a high risk dryland growing area.  If the MPCI-APH premiums were lower as would be the case in a lower risk growing area, then some MPCI-APH insured growers may also suffer a reduction in disaster payments if the yield loss is large.

Lower Yields Reduce Disaster Aid.  Growers with a total yield loss obviously have the greatest reduction in their disaster payments with higher insurance coverage purchased.  Therefore, most growers will need to suffer a yield loss over 90% before they would suffer any reduction in disaster aid, then only if they purchased high levels of crop insurance coverage.  Figure 4 shows how different yield levels will impact the amount of dollars RA-HPO insured growers will be able to collect on their disaster aid.  For example, an 85% RA-HPO insured grower will lose 42% of their disaster aid payments with a zero yield.  If this same grower had produced 25% of a normal yield or 75% yield loss his/her disaster aid would only have been reduced by less than 1%.  Revenue insured corn growers with larger yield losses obviously have the greatest chance for reduction in their disaster payments.  Because the formula uses net indemnity payments the high risk growing areas will require a larger yield loss to suffer a loss in disaster payments because the larger premium is deducted first.

Disaster Aid Does Help.  These “highly” insured growers are clearly better off because of the disaster aid payment being provided to them.  The use of the NASS price is higher than the MPCI-APH corn price election, therefore using the NASS price increased the cap and reduced the number of corn growers that will suffer a reduction in disaster aid.  However, many growers may look at their current insurance position and discover they would have been better off if they had bought the lower coverage levels.  With a total yield loss clearly growers would have ended up with the same total number of dollars because they would have collected more in disaster aid payments.

So the real question is will growers view this as a windfall payment or as a message to reduce their insurance coverage levels from 75 and 80 percent coverage to perhaps 70% or changing from revenue insurance to MPCI-APH in the future.  Because one can never be certain how any future disaster aid may be provided this becomes a fairly tricky question.  The definition of prices used to calculate disaster aid payments under went many changes by public policy makers after Congress passed the Law.  If growers could make a new 2002 crop insurance purchase decision after the disaster aid was approved they would have purchased lower coverage because the difference is made up in the form of disaster aid payments.

Lower insured growers probably should thank the growers that purchased higher levels of revenue insurance coverage.  It is unlikely that policy makers would have used the higher NASS prices to set the per acre payment limit if there had not been so many corn growers who had purchased the higher revenue insurance coverages.

$80,000 Limit.  There is an $80,000 payment limit on disaster aid.  There will be some farmers with disaster payments below the cap but will have their disaster aid cut because of the $80,000 payment limit.

Not Defined.  This analysis assumes the “all wheat” NASS price.  The definition of which wheat price to use has not been settled.  It is my understanding that some wheat state Senators have suggested to USDA the appropriate wheat price is the “all wheat” price as reported by NASS.

Because the MPCI-APH price election is not separated between spring wheat and winter wheat, it makes sense to use the “all wheat” NASS price to set the cap and to calculate the value of any wheat production.  Also in 2001 the MPCI-APH wheat price election is higher than the NASS price.  Therefore, in 2001 there would be one cap price for spring and winter wheat because there is only one MPCI-APH wheat price election.  It is reasonable to assume if USDA uses a single wheat cap price in 2001, then one would also use a single wheat price cap in 2002. 

It has not been reported publicly the 5 crop years that will be used to calculate the county average yield. For example, will USDA use crop years 1996-2000?  One would assume 2001 yields would not be used in the county average yield because that was one of the disaster years.

Summary.  Assuming the “all wheat” NASS price is used, few if any Kansas wheat growers will hit the cap on payments.  The CRC payment price for a total wheat loss is $3.34 and a higher $3.60 cap means there will be few Kansas wheat growers that will hit the cap.  However, this is not true in Nebraska and other wheat states.  The CRC payment rate in Nebraska is $3.72 and because it is higher then the $3.60 cap price some Nebraska wheat growers will hit the cap.

On corn, the CRC payment price was $2.52 and the NASS cap price is $2.35.  Because the CRC insurance payment price is higher then the cap price there will be some corn growers that will hit the cap. 

Glass Half Full.  Using the higher of the NASS price or the MPCI price election is clearly “farmer friendly”!  Without this change the cap would have been lower.  Even with a cap farmers will receive some (in most cases all) of the disaster payment.  So farmers are clearly better off to have disaster program.  Even in the worst case scenario where corn farmers lose 40% of the disaster payment, would growers prefer 60% of something or 100% of nothing?