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.

Comments, Comments and More Comments on CRC Removal[1]

Introduction.  In a recent Ag Update, it was suggested there was no reason to have multiple revenue insurance products on the market.  It was also suggested that Crop Revenue Coverage (CRC) should be removed from the marketplace where there is an available Revenue Assurance (RA) contract on the same commodity.  One could certainly reach the same conclusion that Income Protection (IP) should also be removed from the market, where it directly “competes” with one of the variations of the RA contract which is currently available. 

The logical reasons to remove CRC or IP are simply: 1) it would simplify and reduce the program’s administrative costs because it reduces the number of options that need rating software; 2) it would simplify the number of products that require training for crop insurance agents; and 3) it would prevent farmers from adversely selecting on the Risk Management Agency’s (RMA) federally reinsured crop insurance products based on premium costs. 

Because these revenue coverages are available under RA, public policy makers could eliminate the IP and CRC contract without removing any available risk management tools from growers.  The only exception is that the CRC contract does allow for a written agreement, while RA does not allow a written agreement.  This minor discrepancy should be easily fixed if the insurance company that owns RA would simply agree to the change. 

The premium costs are quite variable between these various revenue products even though RA Harvest Price Option (RA-HPO) and CRC are virtually the same guarantee on wheat, corn, and soybeans.  Yet, as has been demonstrated on this web page, premium rates can vary widely (see “What Happened to My CRC Rates?” at: http://www.agmanager.info/crops/insurance/risk_mgt/rm_pdf03/crc03.pdf ).  Note that

RA with no price option (RA-NPO) and under an enterprise unit is the “same” guarantee as IP. 

The rating of RA and CRC is a different issue.  Under current rating methods RA-HPO on corn is cheaper than CRC and yet the coverage is nearly identical.  In addition, it is difficult to explain some of the rate reductions that were applied to corn in counties that have suffered underwriting losses.  By contrast, rate increases on Nebraska irrigated corn CRC contracts by 25 percent are also difficult to explain.  Even more difficult to explain is situations where RA-HPO premium rates are less than MPCI premium rates. 

KSU WEB page readers sent Emails.  The suggestion to remove Crop Revenue Coverage (CRC) from the market received numerous email responses from readers.  Thanks for taking the time to write.  Most of the comments were negative, but one would assume that the people who agreed that duplication of revenue insurance is not necessary merely saw no reason to write.

Many of the email writers who did not agree with the suggestion to remove CRC and IP from the market had strongly-worded messages.  I appreciate all of the comments that were sent to me because they force me to think more clearly about the issues involved with these changes to crop insurance and disaster assistance programs provided through the Farm Service Agency.  Hopefully, these questions will also help public policy makers to think more carefully about some of the proposals that are coming forth at USDA. 

While people may disagree about the future of CRC, there are many other public policy changes that will have greater financial implications for insurance agents, farmers, and insurance companies.  Therefore, these issues do become very contentious.  However, readers may want to consider my response to their comments and questions before they reach a final judgment.  Most insurance specialists will recognize what is in the best interest of both growers and taxpayers before making a final judgment on any public policy.  There are bigger crop insurance issues for the industry than duplication of insurance products.  For example, those issues will include: the direct marketing discounts of crop insurance, the proposed reduction in the expense reimbursement, and a new standard reinsurance agreement.  Many insurance specialists could easily add to this short list of issues. 

For those who do not agree with the reduction in number of revenue products, the good news is that I don't get to the make the decision.  Crop insurance agents and others can sleep well knowing that Washington policy makers do not follow the writings of a university professor. 

READER QUESTIONS, COMMENTS AND MY RESPONSE[2]

1.  We need a good revenue product for the Pacific Northwest .  In Washington we do not have RA available on either wheat or barley.  We have IP and CRC for wheat and only IP for barley.  I would like the RA-HPO available on wheat and barley in all states including the PNW before we eliminate the other revenue products.  We also need to keep the regional price structure that is available in the PNW that is available in IP and CRC at least for wheat.  We need a regional price structure for barley and not based on 85% of corn.

I appreciate being on your e-mail list, the information is very valuable.

Thanks

Washington Grower

Dear Washington Grower,

I agree that RA-HPO needs to be made available in States that only have CRC or IP.  I also agree that modifications need to be made to revenue insurance to fit niche markets.  The perfect contract has not been built for all farmers.

The CRC is now duplicated by RA-HPO and it allows farmers to adversely select between the two products.  Crop insurance is a public-private partnership so one must be careful how private market rules are applied to the crop insurance program.  If it were a private market, then the premiums would be the same on both products.  If RMA would make the RA available and then allow add-on or options to be developed for niche markets that would work. 

ART

2.  I'm moving virtually ALL of my corn customers to RA from CRC this year because of the premium savings.  Send the CRC insured farmers to me and I'll tell them about RA.

Insurance Specialist selling RA

Dear Insurance Specialist,

I am glad to hear you are looking out for your customers and getting them the best deal.  I have received several horror stories where farmers have had trouble even getting an RA quote.  When they have received a quote the RA-HPO premiums saved them more than a dollar an acre.

ART

3.  In my home county using the average expected yield as reflected by the GRP policy.  Straight comparison between CRC versus RA with no options selected.  At 65% and 70% RA is lower.

But at 75%, 80% and 85% CRC is lower.  At the higher levels, it's significantly lower.

Personally, most of my clients are insuring their soybeans using GRP based on the low spring price and the fact that they rarely have claims that are under the 70-75% levels.  They want to insure against area-wide catastrophic loss and the GRP is better suited to indemnify them more in that case.

The 2002 year was a classic example.  People with CRC or RA on beans in most of my counties didn't receive a fraction of the GRP indemnity payment that they received on ALL of their planted acres.  My agency will be paying out a lot of dollars in GRP indemnity payments this year; mostly on beans.

Agents need to be telling farmers what ALL their options are and providing advice based on the facts & policy performance instead of just trying to sell the policy with the largest commission revenue.

Insurance Specialist selling RA

Dear Insurance Specialist,

Same answer, I am glad to hear you are looking out for your customers and getting them the best deal. 

4.  I'd say an inverted market in a short crop year is probably the best reason to leave CRC on the market.  It allows each individual farmer to evaluate the risk versus the premium price and make his own informed decision.

Insurance Specialist

Dear Insurance Specialist,

There are a large number of academics who will argue the market is efficient and there is no gain from what you are suggesting.  I am not in full agreement with that argument but I am not sure it is relevant in this case.  Lets assume you are right about the inverted market in a short crop year.  The long run expected payout is the same for CRC and RA-HPO.  Therefore, at signup one would need to know which year was going to have the inverted market, and even if they did know they would have to know they were going to have a crop loss in that year.  Seldom does the price fall enough to trigger payments with an average yield, the exception was the cotton CRC contract.  I did compare past revenue insurance payouts based on a harvest price using the October versus November average CBOT corn price and it is posted on the WEB at:  http://www.agmanager.info/crops/insurance/risk_mgt/rm_pdf02/harvestp.pdf

ART

5.  Of course leave CRC on the market.  If their agent refuses to show them RA then the farmer is free to select a different agent that will look out for his best interests instead of his own wallet.  You can't protect a person from themselves.  This is America where everyone has the right to make right and wrong choices.

Insurance Specialist selling RA

Dear Insurance Specialist,

You will get no argument from me on freedom of choice.  RMA is the regulator and we expect regulators to make sure the customer is being offered products that are priced “fairly”.  Most insurance regulators would be accused of not meeting their mission if they approved a nearly identical offering but at a higher premium.  Most policy makers would hold RMA to a higher standard because they are the regulator, set most of premium rates and approve the others, and are the reinsurer of last resort.

ART

6.  Why do you feel the need to protect the farmer from himself?   I'd say RMA and research analysts like yourself need to spend more time educating the farmer to go to a different agent who looks out for their best interest rather than trying to limit their choices of coverage.

Insurance Specialist

Dear Insurance Specialist,

If you want a “free” market, that will work too.  If we closed down USDA and FSA, eliminate Farm programs, FmHA loans, disaster loans, disaster payments, direct farm payments, counter cyclical payments, conservation reserve program payments, crop insurance, experiment station, extension service, lay off all USDA employees, close the county FSA office, etc., Iowa will still be planted to corn and Kansas will be planted to wheat.  There would be some marginal acres go out of production but most of the acres would be planted. 

However, land values and cash rents will drop by 50% and that will offset the loss of government support.  The fall in land values is the reason public policy is not going to a “free” market because the financial pain to reach a “free” market is too large for policy makers to accept.  For the same reason crop insurance is not going to be eliminated either. 

No need to send me any “cards and letters” on this issue because a “free” market is not a public policy that is acceptable to most farmers and public policy makers.

Please read the next comment where I am doing too much educating.

ART

7.  Art, I just read your article in the Omaha World Herald. I want to tell that your article is true but missing some very key facts. I am an agent writing both RA & CRC. While in fact RA is cheaper in certain areas and at certain levels, the end result can be very costly in a loss situation. As you know, (I hope), RA & CRC's harvest price is set at a different time. RA insured growers last year saved a few cents an acre on premium but lost 8 cents PER BUSHEL on corn in his loss settlement. I know some people think, from false reports; agents who service Federal Crop Insurance are getting “fat off the hog”. Where in fact it takes a lot of work to make sure we have all the facts about each program to offer the best product to our producers.

Now, your article, suggests farmers should rush in to their agents & switch from CRC to RA. It is articles like yours, without all the facts, that give this worthy program a bad rap. Give our nations food suppliers, crop agents, some credit, & get your facts together before writing such an article that could jeopardize RMA's efforts in producing the best product for our farmers.

Thanks,

Ticked Off Insurance Specialist

Dear Ticked Off Insurance Specialist,

I have read the article in the Omaha World Herald and the basic facts are correct. 

You are correct the gross corn indemnity was more under CRC this year.  RA-HPO paid more on winter wheat this year in Kansas and Oklahoma with a total loss.  CRC and RA-HPO paid exactly the same on soybeans.  In some cases the net crop insurance payments for RA-HPO on corn were greater than CRC because of the lower RA-HPO premiums.

However, over the long run, the expected payout on corn is the same whether you measure the harvest price based on October (CRC method) or November (RA method).  In 93, 95, 96, 99, and 2001 RA-HPO would have paid more than CRC.  In 98 and 94 they would have paid the same.  The biggest payment differences were in 93 when RA-HPO would have paid 25 cents more and 1975 when CRC would have paid 22 cents more.  The long run average payment difference is essentially zero.

Because one cannot predict in which year the October price will give a higher payment, I think my advice is correct and it is in the best interest of farmers to buy the lower priced contract.  Your observation is based on 1 year; my recommendation is based on 28 years of data.

A study was done to evaluate the difference in indemnity payments before the CRC corn harvest price was changed from November to the October average CBOT December corn price.  The results are post on the WEB page:  http://www.agmanager.info/crops/insurance/risk_mgt/rm_pdf02/harvestp.pdf

CRC made the change from the November to the October average price to reduce administrative costs because that will allow corn and soybean losses to be adjusted at the same time and not require a second trip to the farm. 

I always appreciate emails from readers and I am happy to correct any errors, but this is one case where the facts appear to be correct.  Most reasonable insurance people would agree because of the new higher corn CRC premium rates, RA-HPO is the better buy on corn.

ART

8.   Art, Thought I'd let you know how impossible it is to get help to change to RA-HPO here in our county.  I have been e-mailing other farmers about CRC versus RA-HPO.  One farmer called his local agent and was told I (or you) didn't know what we were talking about and that the whole county would have to suffer a loss before he could collect.  Of course, if they can play dumb until 5:00pm today they have it made. 

Tick Off Farmer

Dear Farmer,

It is the GRP contract that is tied to county yields.

ART

9.  RMA Approved Discounts and Commission Cuts by one crop insurance company is an attempt to ruin the businesses that has taken agents 25+ years to build.  I just wanted to see what you thought about the PDP plan (Premium Discount Plan) that was approved by the RMA in favor of one company.  I guess what I don't understand is why they are able to “rebate”[3] insurance premiums in some states and not in others, this simply isn't fair!  I am also very surprised that RMA is allowing them to advertise a reduced premium with no service loss.  It is very clear that this is a reduction in agent premium and means more money for the insurance companies.

Insurance Specialist Upset with PDP

Dear Insurance Specialist,

I am not sure PDP means added profits for the competing insurance companies because the other companies without the PDP are not happy with the discounts either.  Most agents have argued the discounts are coming from agents’ commissions.  The PDP also adds “fuel” for those in Washington that want to reduce the expense reimbursement.  Agent commissions vary widely depending on where one is writing insurance, the size of the agent’s book and the historical loss experience on that book also affect agent commissions. 

There are other factors.  For example, in high risk areas, RA-HPO is less expensive than MPCI.  Companies cannot set the insurance rate so if the product is underrated and the expense reimbursement rate is set by Congress, then the only way companies can cover their share of underwriting losses is to cut agent commissions.  The lower premium also reduces the expense reimbursement. 

Am Ag went under and another company withdrew from North Dakota .  A “joint venture” between two large companies was just announced.  One company will assume the retail part of the market and the other will provide the reinsurance. It is unclear if the company providing the reinsurance will retain its SRA.  The number of insurance companies writing crop insurance has been reduced by more than 50% since 1986.  Fewer companies mean fewer people bidding for agents, just like any other market.  If all companies stop writing Federal Crop there will be only one buyer of agent services and that is RMA.  These activities do not suggest an industry with wide profit margins.

Service is something that cannot be measured by government.  In the private sector, if service is poor, customers move to a competitor.  If crop insurance were moved back to USDA with no private sector selling, loss adjusting, etc., then it becomes a take it or leave it offer for farmers no matter how poor the service.

ART

10.  Take the whole damm crop insurance program off the market.

Uninsured Grower

Dear Grower,

If crop insurance were taken off the market, that would leave two options; a standing disaster program or the “free market”.  Disaster programs favor high risk growing areas because disaster aid is nothing more than “free” crop insurance and high risk areas will collect more of the claims.  However, under a “free” crop insurance program high risk growers will contribute nothing to the program costs. 

As for the “free market” approach, the economics will work but it is politically unacceptable.  See my comments above.

11.  I agree with you that it does not make sense to have two competing revenue products. I don't agree with RMA that the RA rating is correct. There has always been a movement within FCIC to change the rating structure away from the old MPCI-APH program.  I think your colleagues along with FCIC came to some agreement that the approach for rating RA was correct.  There has always been the thought among the company that owns RA, some commodity organization, professors, and others that the coverage did not have to offer both up and downside coverage. I think they found out very quickly that they could not sell one way coverage; bingo RA-HPO.

Bottom line I think you are correct, one revenue product, I think RMA is wrong in their choice but as they say we have no vote..

Insurance Professional

Dear Insurance Professional,

Most of the academic community has accepted the RA rating method as being correct and RMA has accepted that conclusion.  The increase in the CRC rates now makes it more expensive than RA-HPO on most farms.  RMA also set the 2003 soybean MPCI price election over the market and that will move farmers away from revenue insurance.  After last year’s soybean result, farmers may not be so fast to move from RA to MPCI-APH this year.

If RMA would make the RA contract available in Nebraska and others states there is no reason to leave CRC on the market. I did not come to this conclusion easily but given the RMA imposed rate increase on CRC, it is no longer relevant.  If you put the interest of farmers first, there is no other conclusion.  How can public policy makers leave CRC on the market when they know farmers can buy the same coverage for less premium in an RA-HPO contract?  Is it ethical for RMA to leave CRC on the market when they know RA-HPO provides unlimited coverage for less premium?

Whether the RA contract is actuarially sound is another question.  I don’t think it is in North Dakota and some other locations but my academic colleagues have concluded that I am wrong.  Loss experience will tell the final story, but only the private sector will suffer the loss.  Any RMA loss will be covered by the taxpayer. 

I am not willing to concede that RA is a superior product to the CRC contract. The initial RA contract was substantially different than the CRC contract but with the changes made to RA in 2000 it essentially became a clone of the CRC contract.

Many CRC critics have simply taken the position that CRC sold because insurance agents made higher commissions and insurance companies made higher profits with the CRC contract.  Given the level of participation in CRC, I don’t think farmers have bought the contract simply because of agents and companies.  I think many farmers do prefer replacement-revenue coverage and have demonstrated so with their pocketbooks and for 7 years now.  If this was not the preferred coverage then it really made no sense for RA to make the changes that were made in 2000.

ART

12.  In my opinion CRC is slightly over-rated in a few places.... nothing significant.... RA-HPO is definitely under-rated almost everywhere.... all crops and levels.... but that's just my humble opinion, what do I know?

Insurance Professional

Dear Insurance Professional,

I think CRC is over rated on York county, Nebraska irrigated corn (and similar counties).  However, it does not matter because RA-HPO is an unlimited liability and the premium is lower.  If the soybean market were to hit $15 on the CBOT, RA-HPO would take a number of insurance companies under.  If all of the companies go under, then USDA would need to take over the program.

ART

13.  Art, old buddy.... those of us in Nebraska (God's Country) don't have an RA-HPO alternative.  Maybe the same with Wisconsin and a few other RA free states....

Insurance Specialist

Dear Insurance Specialist,

That is the story.  Irrigated Nebraska corn farmers are paying higher premiums because of the CRC rate increases, while in North Dakota farmers can and should change to RA-HPO.  That logic says the CRC rates were too low in Nebraska and too high in North Dakota .

ART

14.  Hi Art.  Do you think that the GRIP program is in jeopardy?  Is the RMA considering eliminating GRP, GRIP or one of them in the future?

Crop Insurance Specialist

Dear Crop Insurance Specialist,

Many CRC critics have argued the better contract is the group risk program (GRP).  GRP clearly has a market niche that fits certain locations.  However, some of the evidence would suggest the GRP is most popular in some markets where the MPCI-APH is severely misrated  RA has tried to address some of the misrepresented MPCI-APH rates but those rates were clearly used as the basis for rating the CRC contract and would be the case if revenue products and MPCI-APH are combined together.

GRP is the favorite program of USDA and economists.  No chance that RMA will eliminate either GRP or GRIP.

ART

15.  Well Doc, it was Good to hear that you are wondering what we have been wondering for some time now.  Further question, why did they raise the CRC Irrigation rates when comparing it to the non Irrigation on Corn in Nebraska ?   Also, we thought Am Ag had to provide the rating changes to RMA for their approval.  Your comments do not indicate that to be the case.  Yes, what did happened to your CRC rates?  In any event I continue to appreciate and enjoy reading your updates and perspectives. 

Insurance Specialist

 Dear Insurance Specialist,

The new CRC rates are based on a study that a group of professors did for RMA.  Am Ag wanted a rate increase in North Dakota on the RA contract (they had a big book in North Dakota).  In order to get the rate increase they had to accept the results of the study.  One could say Am Ag agreed.  It was one of those deals where either your “brains or signature will be on the contract”.  Regardless of how the rates were increased in Nebraska , the result is higher CRC rates.

With people threatening to sue me and “no dog in the fight” that is all I have to say about the issue.

ART

16.  Art, for every rule, there is an exception.  In the area where I work, RA is by far the most competitive revenue product.  However, in some cases, CRC enterprise units have a smaller premium than RA enterprise units.  This situation is soybeans when the operator has many acres in few sections.  Of course, with large operators, a small difference in premium over several thousand acres is economically significant.

Insurance Specialist

Dear Insurance Specialist,

CRC, IP, and RA do not use the same definition for enterprise units.  As a result there are cases where CRC is cheaper on corn under enterprise units.  No one has been able to send me a corn example where CRC is cheaper than RA-HPO under basic or optional units.  There are a few soybean cases at some coverage levels where CRC is cheaper than RA-HPO (I did learn something new today).  However,  making both contracts available only allows farmers to adversely select and not a good reason to leave CRC on the market.

17.  I have a question as to what is going to happen with Premium Discount Program currently offered by a single insurance company for the years to come.   Is this 10% discount given to the farmer going to be in effect again next year? This has a lot of agencies questioning what is going to take effect next year for 2004.

Insurance Specialist with no PDP

Dear Insurance Specialist,

First it is not a 10% discount.  It is a 3% of total premium discount that works out to be about 7.5% farmer paid premium discount at the more popular coverage levels.

The discount was granted because the company argued they could deliver crop insurance cheaper through the internet.  That may be true if large farmers are more likely to buy crop insurance off the internet.  If they end up with a book of large farms only, the result will be reduced costs pre premium dollar for the insurance company.

As you know they are also trying to recruit agents.  In that case many agents have argued the 3% discount is coming out of their commission.

It is my understanding that the discount will remain in future years.  However, if Congress cuts the expense reimbursement payment as proposed they will have even fewer dollars to work with under the discount.  So will they stay with the discount?  Beats me.

ART

18.  I am a subscriber to your email and appreciate it very much.

Based on the email rec'd this a.m. - I would like to comment on the overall concepts a detailed below:

I think I have a more burning question than "why do we have CRC where RA is available......"

1-Why do we have CRC and/or RA at all?

2-Why do we not have a CRC type calculation method for a Revenue Price Trigger added to the MPCI product?  We can incorporate the value of the CRC/RA concept into one product.

3-Why do we not do away completely w/ both CRC and RA and by implementing #2 above?

4-Why are we not saving enormous amounts of computer program money by doing this?

5-Are you aware that on Thurs. ( 3-6-03 ) no company including RMA could provide an accurate quote on RA w/ enterprise units?

6-We went to 5 web sites (one of which was ours) - w/ the exact same quote information and rec'd 5 different price quotes!

7-Do you know the RA premium calculation module is 31 pages of calculation code?

8-Do we think RA w/ HPO and Enterprise units is a good product?  Absolutely Therefore, we can solve all this much more simply by utilizing (workable) calculations of CRC -Include your unlimited price trigger difference of RA Include the other attractive options of RA BUT Do it as an MP option and you have turned 3 products into one workable, understandable and administrable product.  You have the ability and political power to do things like this.  I do know preliminary discussions on this exact situation have occurred at RMA.  Is there anything you and I can discuss toward this end?

Insurance Specialist

Dear Insurance Specialist,

Thanks for the note.  Of course anyone may discuss issues with me.  Hopefully the discussion will help people think through the issues.

You have clearly bought the RMA story of combining CRC, RA, and MPCI-APH into a single RMA product.  However, there are few other things that you may want to consider.

a.  RMA has never set the MPCI price election based on the market, a necessary condition for revenue insurance.

b.  There are a number of improvements that could be made to the revenue product for some niche markets.  Many analysts will agree that without the backing of Am Ag, revenue insurance would never have been on the market.  Will RMA provide that innovation? 

c.  Congress is asking for crop insurance improvements to meet the risk management needs of farmers.  Will those improvements come from RMA or the private sector?

Setting rates that are correct relative to each other is a separate issue from multiple revenue insurance products.  Many inside USDA have argued that the replacement coverage and the revenue coverage should be simply two add-on options to the MPCI-APH contract.  Presumably, this alternative would make the rates consistent across product lines. 

Note that marginal payout for each additional unit of loss under an MPCI-APH contract in a declining market greatly increases moral hazard.  Therefore, greater thought and analysis will need to be given to the price discrepancy between revenue insurance and MPCI-APH price elections before MPCI-APH and revenue products are combined.  One has to remember the market price is a combination of the futures price and the basis.  The basis can vary greatly from location to location.

If MPCI-APH and RA are going to be combined into a single product, then it probably makes sense to set the minimum price at the loan rate.  One would then adjust the price election up to reflect years when market prices are actually higher than the loan rate.  The higher market price is more critical on MPCI-APH than the revenue insurance contract because it does not necessarily require yield loss to trigger revenue payments unlike the MPCI-APH contract that requires an insurable yield loss. 

In addition, the RA contract is currently owned by a private insurance company and they would have to agree to turn that product over to RMA.  Therefore, in the short run, a more logical scenario is to eliminate CRC and IP on crops in markets where the two products “compete” head-to-head with the RA contract, and retain the MPCI-APH contract. 

ART

19.  Art; thanks for all the work you do on behalf of the ag community.  My partner and I are crop insurance agents in a western state.  We insure wheat, barley and forage for our customers.  We are in the 3-5th year of a drought in most of our area, and our producers are very astute at crop insurance.  Most of our clients are purchasing coverage at 70-75% level and are purchasing CRC on wheat, so by using the MPCI price to calculate the value of the crop they will receive little, or no, disaster payments.  It seems very unfair to me that they should be penalized for making good risk protection decisions.  It also seems unfair that the disaster payments would be based on a price that was picked by RMA almost a year before harvest, and was not really indicative of the value of the crop at harvest time.  We support the growers in their effort to have the CRC price used for crop value, but I see little hope of that happening with the current political situation we are in.  I'm disappointed that this may cause producers to make poor risk decisions based on further disaster relief, because if they do they will suffer again if there is no disaster relief in the future. 

Insurance Specialist

Dear Insurance Specialist,

I agree it makes no sense to cut disaster aid payments to growers who bought higher levels of insurance coverage.  If you want farmers to pay higher premium cost for better coverage but then cut their government benefit that just tells farmers to buy less coverage.

ART

20.  Art, I saw that you have received numerous emails on this subject. One thing to consider.   In our state, we sell a lot of " Enterprise " units. i.e. a producer receives a discount for putting his whole crop together for loss purposes. Without debating the methodology of this business decision, an important distinction needs to be made.  RA-HPO Enterprise discount is based off of the number of sections a producer has the crop in.  CRC Enterprise discount is based off of the number of planted acres a producer has with each crop.  For a lot of producers, the way their land is situated leads to advantages for CRC over RA-HPO.  A lot of our clients have been able to overcome the pricing advantages of RA-HPO in an optional unit structure when they switch to an enterprise unit structure.  Having this choice allows for our producers to save premium and get into a product that will better fit their individual needs.

Insurance Specialist

Dear Insurance Specialist,

The two contracts define enterprise units differently so that under some conditions CRC is less expensive than RA-HPO.  However, this just lets farmers adversely select between products based on premium.  That is okay in a private market but RA and CRC are backed by government.  If this were a private market these products would have about the same price.  Only under government can one get this premium difference.  In a private market a low premium might be good but buyers might worry (and should worry) if the company will be around to pay claims.  If crop insurance is underpriced and the company fails, then the government will pay the claims.  That is not good news for insurance companies but probably does not enter in to the farmer decision.

ART

21.  Art, before I hit you with questions, I want you to know I appreciate your efforts on the risk management front.  I find most of your material right on target and helpful even though I am several states away.

Question #1.  What does (or in your opinion will) the clause for buying coverage after receiving disaster aid look like?  I am thinking specifically of alfalfa/hay that tends not to be insured.

Question #2.  Is there a publication/resource that covers grazing insured winter wheat?  To the best of my knowledge, grazing is not an acceptable practice in my state from an insurance standpoint (i.e., it ends your coverage).  However, some producers are contemplating grazing wheat because of high feed prices.

Thanks,

Professor

Dear Professor,

Growers that have a disaster aid claim will only be required to buy crop insurance if there is a contract available on the crop that disaster aid was claimed.

Winter wheat grazing is a big deal in Oklahoma and south.  You might talk to the RMA’s regional office in Oklahoma City (you can find those offices on the RMA WEB page).

I would analyze that question by calculating the potential insurance payment versus what it will cost to buy feed rather than graze the wheat.

ART

22.  Art, there is a R&D bulletin released December 20th with the 2003 RA volatility factors for corn and beans.  We are assuming that RMA changed the procedures when reviewing the RA rating methodology.  Can you shed some light on this?  Do you know when the spring wheat volatility factors will be released or if that procedure changed?

Thanks for your help!

Insurance Specialist

Dear Insurance Specialist,

Am Ag was negotiating the rate changes before they went out of the insurance business.  Am Ag agreed to a rate increase on CRC in Iowa and low risk states to get an increase in the RA rates in high risk states.  RMA increased the RA rate in North Dakota but RA-HPO is still less expensive than MPCI-APH at the higher coverage levels.  There are cases where CRC is less expensive than MPCI-APH under these corn rate changes in North Dakota but the RA-HPO is cheaper than CRC under basic and optional units in all cases.  There appears to be no exceptions.  So farmers will change to RA-HPO if they have the option.  However, these changes will lower CRC premiums in Texas and other high risk states at the higher coverage levels that do not have the RA-HPO alternative.

CRC rates were increased in Iowa by about 20% so farmers will shift to RA-HPO.  RA-HPO rates were not changed in Iowa but increased because the volatility value was increased from 0.18 to 0.20 for corn.  The volatility was set for this year as a compromise but it is unclear if the market measure will be applied next year.  If the volatility value were the same then Iowa RA rates did not change.

ART

23.  I have to ask, though, doesn't it make you feel sick to formally ask to have CRC taken off the market?  It was such a valuable product to many.  What about the poor guys who don't have RA option?  Is there any push to help them?

Reporter

24:  Art, you have not suffered any loss in this situation.  Revenue insurance was your idea. It is solid today in the revenue management area for farmers, they cannot operate without it.  You have been recognized by your peers.

Insurance Specialist

25.  Art, hopefully when the RA boys go to Stockholm to claim their Nobel Prize, the nomination will include a footnote acknowledging your contributions!

Colleague

I hope you are kidding otherwise you are full of “El Toro Poop Poo”!  Clearly it is in every ones best interest for the RA contract to succeed.  I wish the RA team only success.  Probably it would have been wise to omit the questions/comments 23, 24 and 25 but it is always nice to receive a few positive comments.

ART