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ECON 339X: Agricultural Marketing

ECON 339X: Agricultural Marketing. Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911. Yesterday’s Reports Risk Management Tools Yield and Revenue Insurance. Today’s Topics. Anticipated vs. Actual. % Planted. Source: USDA-NASS. Principal Crop Area.

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ECON 339X: Agricultural Marketing

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  1. ECON 339X: Agricultural Marketing Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911

  2. Yesterday’s Reports Risk Management Tools Yield and Revenue Insurance Today’s Topics

  3. Anticipated vs. Actual % Planted Source: USDA-NASS

  4. Principal Crop Area Million acres Source: USDA-NASS

  5. Corn Area Units: 1,000 acres Source: USDA-NASS

  6. Soybean Area Units: 1,000 acres Source: USDA-NASS

  7. Corn Stocks Billion bushels Source: USDA-NASS

  8. Soybean Stocks Billion bushels Source: USDA-NASS

  9. Wheat Stocks Billion bushels Source: USDA-NASS

  10. Crop Insurance • One of many risk management strategies • Traditionally set up to protect farmers in times of low crop yields • Now offers coverage for low prices • Available on over 100 commodities

  11. Why Crops Fail

  12. Types of Crop Insurance • Individual Yield (APH) • Area Yield (GRP) • Individual Revenue (CRC, IP, RA) • Area Yield - Individual Revenue Combination (GRIP)

  13. Example Farm A 100 acre corn farm in Story County, Iowa with a 5-year average yield of 180 bu/acre Purchases insurance at the 75% coverage level Initial prices: $3.90/bu for Individual Yield Ins. $3.99/bu for Individual Rev. Ins.

  14. Individual Yield Insurance (APH) Farmer chooses percentage of expected yield to insure • Expected yield measured by average yield Price at which the crop is valued is set up front and does not change If yields are 100 bushels per acre, the farmer receives $136.50 per acre = $3.90/bu * (75% * 180 bu/ac - 100 bu/ac)

  15. Yield Insurance Payout Graph No Payout Payout

  16. Yield Insurance is like an Option

  17. Individual Revenue Insurance (CRC, IP, RA) Farmer chooses percentage of expected revenue to insure • Expected revenue measured by average yield times initial crop price Price at which the crop is valued can move with price changes in the market

  18. Individual Revenue Insurance (CRC, IP, RA) In our example, the farmer has insured $538.65 of revenue per acre (75% * $3.99/bu * 180 bu/ac) Final value of the crop determined by average futures prices over harvest period

  19. Individual Revenue Insurance (CRC, IP, RA) If yields are 100 bushels per acre and harvest prices average $3.50, the farmer receives $188.65 per acre • 0.75*$3.99/bu.*180 bu./acre - $3.50/bu.*100 bu./acre

  20. Revenue Insurance Payout Graph No Payout Payout

  21. Rev. Insurance is like an Option

  22. Individual Revenue Insurance (CRC and RA) These policies have a “harvest price option” If the harvest price is greater than the planting price, then the harvest price is used in all calculations In essence, the policy is giving you a put option with the strike price at the planting price

  23. Harvest Price Option

  24. Individual Revenue Insurance (CRC and RA) If yields are 100 bushels per acre and harvest prices average $5.00, the farmer receives $175.00 per acre • 0.75*$5.00/bu.*180 bu./acre - $5.00/bu.*100 bu./acre

  25. Insurance Payout Graph Only RI Pays Neither Pay Only YI Pays Both Pay

  26. Crop Insurance Subsidies Coverage LevelSubsidy % 50% 67% 55% & 60% 64% 65% & 70% 59% 75% 55% 80% 48% 85% 38%

  27. Insurance Premiums Per Acre Premiums ($ per acre) Cov. Level Yield RA RA w/ HPO CRC 50% 0.97 2.24 55% 1.50 3.36 60% 2.12 4.59 65% 3.26 2.80 6.08 6.93 70% 4.46 5.91 10.84 9.46 75% 6.52 11.04 18.65 13.93 80% 9.81 19.64 31.43 21.35 85% 14.95 33.78 52.11 33.53 For our example farm in Story County, Iowa for corn

  28. Choosing Insurance Policy Choice depends on several factors Type of farm and crop mix How well the county average yield represents your farm Your marketing strategy

  29. Changes to the Program Starting in 2011, RMA will offer the “Combo” product, combining APH, RA, and CRC Brings consistency to crop insurance premium rates (will no longer have different rates for the same basic coverage)

  30. Class web site:http://www.econ.iastate.edu/classes/econ339/hart-lawrence/

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