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.

Higher 2004 Kansas Wheat Crop Insurance Premiums[1]

Introduction.  The wheat market is 33 cents lower than last year and that will lower coverage and premium costs per acre.  The estimated Revenue Assurance (RA) volatility is little lower too, declining form 0.22 to 0.19.  The option market used to set the volatility value is very thinly traded with an open interest of less than 10 at-the-money options.

The new method for setting the Crop Revenue Coverage (CRC) high/low price factors are not available to the author.  However, the high/low price factors were set at almost the same level as in 2003.  The high/low price factors were set at 0.31 and that compares with 0.306 and 0.292 in 2003.  Why the wheat high/low price factors changed little for Kansas wheat but received substantial increases on 2004 soybeans and corn is a good question[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 2004 premiums for Revenue Assurance with the Harvest Price Option (RA-HPO) and CRC used the RMA official $3.40 price election that was lower than the $3.73 2003 price election.  The lower revenue insurance price election will lower the coverage but also lower premium cost per acre.

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 premium 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, based on the 2004 volatility value of 0.19, increased from 9-19 percent.  The RA especially received a higher rate increased at the 80 and 85 percent coverage levels.

Because RMA did not increase the high/low price factors on wheat as was done on corn soybean, the resulting increase in CRC premium rates were more modest than expected.  The CRC rate increases were most caused by higher MPCI premium rates.  The CRC rates are (or were) directly based on the CRC premium rate.

At this location CRC rates are a little lower than RA-HPO rates.  The only major difference between RA-HPO and CRC is that RA-HPO has unlimited liability while CRC’s liability is constrained to no more than a $2.00 price increase.  However, the market has never exceeded the CRC liability limit.  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 should carry a slightly higher premium than CRC as is the case.  It appears the rates are now “fair” between CRC and RA-HPO, so there is no advantage.  Growers will pick based on personal preference[3].

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 except for the 85% coverage where CRC premiums were higher.  If one were going to buy 85% coverage, then RA-HPO would be the better offer.  For the other coverages the CRC premiums are slightly lower than RA-HPO premiums as one would expect.

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. 

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.  The high/low price factors for 2004 are nearly the same as the factors for 2003.  In most cases the CRC premium are slightly lower than RA-HPO.  There is no real advantage to either contract because CRC has limit liability.

Revenue insurance buyers should get an offer for both contracts.  Many growers will select the lower premium cost, but the slightly higher RA-HPO premiums are likely fair when compared to CRC because of the unlimited liability. 

The Income Protection (IP) contract is available in only 4 counties, the prices are based on Chicago wheat not Kansas City wheat, coverage does not increase if market prices increase and is only offered as an enterprise unit.  However, IP is often less expensive and for small farmers the IP enterprise unit is the same as a basic unit under other APH based products.