Getting a Grip on GRIP

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Getting a Grip on GRIP. Gary Schnitkey Agricultural Economist University of Illinois. Topics. Illinois versus Iowa experience How GRIP works Risks/Returns Situations where it works. GRIP. GRIP (Group Risk Income Plan) is revenue insurance based on county yields - PowerPoint PPT Presentation

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Getting a Grip on GRIPGary SchnitkeyAgricultural EconomistUniversity of IllinoisTopicsIllinois versus Iowa experienceHow GRIP works Risks/ReturnsSituations where it worksGRIPGRIP (Group Risk Income Plan) is revenue insurance based on county yieldsGRIP-NoHR (No Harvest Revenue option) much like RA with base price optionGRIP-HR (Harvest Revenue option) much like CRC or RA with harvest price optionGRIP is the revenue counterpart to the county-level yield insurance GRP (Group Risk Plan)Group Products Akin ToGroupAkin toInsurance Type GRP APH Yield GRIP-NoHRIP, RA with Revenue no base priceguarantee increase GRIP-HRCRC, RA with Revenue - harvest price guarantee increaseIntroduced in I statesIntroducedGRP (Group Risk Plan) 1995GRIP-NoHR 1999 (Group Risk Income Plan -- No Harvest Revenue option)GRIP-HR 2004 (GRIP -- Harvest Revenue option)Group Product Use, Corn, IllinoisGRPGRIPIowa 2005 UseGRP 1.2%GRIP 3.6%Group Product Use, Soybeans, IllinoisGRIPGRPIowa 2005 UseGRP 1.9%GRIP 4.7%Percent of Iowa Counties Receiving GRIP-NoHR Payments for Corn, 1999 -2004 ---------- Coverage Level ------------Year 90% 85% 80% 75% 70%1999 54% 30% 11% 4% 2%2000 66 22 2 1 02001 72 49 25 11 12002 3 3 3 1 12003 3 0 0 0 02004 82 72 41 16 1AVG 47% 29% 13% 6% 1% Percent of Iowa Counties Receiving GRIP-NoHR Payments for Soybeans, 1999 -2004 ---------- Coverage Level ------------Year 90% 85% 80% 75% 70%1999 19% 9% 4% 2% 2%2000 69 57 31 18 62001 46 19 8 4 12002 0 0 0 0 02003 30 15 9 7 52004 95 85 71 51 23AVG 43% 31% 21% 14% 6%How GRIP WorksMarshall County, Iowa2005 ExampleParameters in 2005County: Marshall County, IaCrop: CornExpected Yield: 164.3 *Expected Price: $2.38 *** County specific, set by RMA** Settlement prices during February (Next year for entire month)Farmer choicesProtection Level Choice from within rangeGRPGRIPMax$579$587Min $323$346Max varies by year, based on formulaMax results in highest premiums and highest payments, when they occurFarmer choicesCoverage Level70% to 90%Suggestion:Take highest coverage levelChange payment/premium by lowering protection level2005 Per Acre Premiums, Marshall County, Iowa (100% Protection Level, Corn)CoverageLevelGRP GRIP-NoHRGRIP-HR70%$3.96 $2.96 $5.5175% 4.80 4.24 7.2280% 6.17 6.90 10.5885% 6.89 10.00 13.8590% 8.60 15.92 20.25Per Acre Guarantees,90% Coverage Level GRP GRIP-NoHR GRIP-HRType YieldRevenue Revenue Coverage level .90 .90 .90x Expected yield 164.3 164.3 164.3x Price xxx $2.38 $2.38 @ Guarantee 147.9 bu $352 $352 @@@ Higher of expected or harvest price@@ Will be higher when harvest price > expected pricePayment exampleTypical YearActual yield = 170 bu.Harvest price = $2.00Guarantees on previous slide (90% cov level)Shortfall = (Guarantee Actual)/Guarantee when Guarantee > Actual GRP: .000 (147.9 guarantee < 170 actual) GRIP-NoHR: ($352 - (170*2)) / $352 = .034 GRIP-HR: ($352 - (170*2)) / $352 = .034Payments (Max Protection Level, 90% Coverage Level) GRP GRIP-NoHR GRIP-HRProt. level $579 $587 $587X shortfall .000 .034 .034X price factor xxx xxx 1.00 *Payment $0 $20 $20* Higher of (harvest price / expected price) or 1Payment exampleDrought YearActual yield = 130 bu.Harvest price = $3.00Shortfall = (Guarantee Actual)/Guarantee when Guarantee > Actual GRP: (147.9 130) / 147.8 = .121 GRIP-NoHR: .000 Guarantee < actual ($390) GRIP-HR: ($443 - (130x3)) / $443 = .120Per Acre Guarantees, Revised90% Coverage Level GRP GRIP-NoHR GRIP-HRType YieldRevenue Revenue Coverage level .90 .90 .90x Expected yield 164.3 164.3 164.3x Price xxx $2.38 $3.00 @ Guarantee 147.9 bu $352 $443 @@@ Higher of expected or harvest price@@ Will be higher when harvest price > expected pricePayments (Max Protection Level, 90% Coverage Level) GRP GRIP-NoHR GRIP-HRProt level $579 $587 $587X shortfall .121 .000 .120X price factor xxx xxx 1.26 @Payment $70 $0 $89@ Higher of (harvest price / expected price) or 1(3.00 harvest price / 2.38 expected price) = 1.26GRP Shortfalls, Marshall County, Iowa, Corn (90% coverage level) Expected Final GRPYear Yield Yield Shortfall (90%)1995 131.1 133.7 01996133.2 139.4 01997133.2 136.4 01998135.3 144.5 01999136.5 153.8 02000137.6 144.0 02001146.7 150.5 02002146.7 181.8 02003150.1 175.9 02004158.4 183.2 0Marshall County, Corn Yields197719881993Chart1124.995.7771836007115.597.843192959104.399.9092023173104.1101.9752116756104.8104.041221033942.5106.1072303922111108.1732397504132.1110.2392491087119.3112.305258467120.9114.3712678253129.4116.4372771836109.8118.5032865419122.7120.5692959002131.7122.6353052585133.7124.7013146168143.2126.76732397570.5128.8333333333121.5130.8993426916127.1132.9653520499127.4135.0313614082154.3137.097370766585.7139.1633801248151.7141.2293894831134.8143.2953988414140.6145.3614081996139.2147.4274175579146.2149.4934269162155.8151.5594362745145.2153.6254456328152.9155.6914549911184157.7574643494179.6159.8234737077185.1161.889483066YearBu. per AcreSheet1-3978.39327094472.06600935831972124.995.77718360071973115.597.8431929591974104.399.90920231731975104.1101.97521167561976104.8104.0412210339197742.5106.10723039221978111108.17323975041979132.1110.23924910871980119.3112.3052584671981120.9114.37126782531982129.4116.43727718361983109.8118.50328654191984122.7120.56929590021985131.7122.63530525851986133.7124.70131461681987143.2126.767323975198870.5128.83333333331989121.5130.89934269161990127.1132.96535204991991127.4135.03136140821992154.3137.0973707665199385.7139.16338012481994151.7141.22938948311995134.8143.29539884141996140.6145.36140819961997139.2147.42741755791998146.2149.49342691621999155.8151.55943627452000145.2153.62544563282001152.9155.69145499112002184157.75746434942003179.6159.82347370772004185.1161.889483066Sheet1YearBu. per AcreSheet2Sheet3GRIP Shortfalls, Marshall County, Iowa, Corn (90% coverage level) Expected Harvest GRIPYear Price Price Shortfall (90%)1999 2.40 1.96 02000 2.54 2.11 .0342001 2.45 2.05 .0462002 2.30 2.43 0 2.38 2.37 0 2.93 1.99 .127Shortfalls the same for GRIP-NoHR and GRIP-HR.GRP Shortfalls, Marshall County, Iowa, Soybeans (90% coverage level) Expected Final GRPYear Yield Yield Shortfall (90%)1995 45.2 50.6 01996 46.6 49.2 01997 46.6 50.4 01998 47.7 51.6 01999 51.8 50.3 02000 52.6 45.2 .0452001 53.4 49.7 02002 52.5 53.5 02003 53.1 31.7 .3362004 53.6 51.6 0GRIP Shortfalls, Marshall County, Iowa, Corn (90% coverage level) Expected Harvest GRIPYear Price Price Shortfall (90%)1999 4.95 4.85 02000 5.36 4.72 .1292001 4.59 4.37 .0132002 4.53 5.45 0 5.23 7.32 .058 7.27 5.26 .183Shortfalls the same for GRIP-NoHR and GRIP-HR.Risk/returns www.farmdoc.uiuc.edu/cropins/index.html Crop Insurance Evaluator:For an example farm in each county for corn and soybeans shows the following for different insurance product:Frequency of paymentsPremiumsAverage paymentsNet costsAbility to prevent disastersMarshall County, CornAverage farm for county159 bu. APH yield, average variabilityEvaluations shown for 2005 yearEvaluations based on maximum protection levelFrequency of paymentsExample of tables from Evaluator1% VARA 1% VaR of $200 means that 1% of the time revenue will be below $200Measure of risk reductionWant VaRs to be as high as possible 1% VaR from Evaluator$ per acre, CornLevel APH CRCGRP GRIP-NoHR GRIP-HR65% 203 21275% 221 231 198 205 20485% 243 247 205 216 21790% 213 223 226Group products lower risk less than Individual productsLow coverage Individual not as good as high coverage GroupNet CostsAverage payments over time minus premiumHigh levels indicate high costs, negative levels mean expect more insurance payments than premium over timeNet Costs from Evaluator$ per acre, CornLevel APH CRCGRP GRIP-NoHR GRIP-HR65% 1.45 2.2675% 1.74 2.04 .78 -3.94 -4.6585% 3.76 4.77 -4.65 -12.50 -17.8790% -9.77 -17.13 -26.47Individual products have higher costs than Group productsMarshall County, SoybeansAverage farm for county50 bu. APH yield, average variabilityEvaluations shown for 2005 yearEvaluations based on maximum protection level1% VaR from Evaluator$ per acre, SoybeansLevel APH CRCGRP GRIP-NoHR GRIP-HR65% 166 17475% 183 192 159 162 16485% 203 207 165 173 17590% 168 179 180Group products lower risk less than Individual productsLow coverage Individual not as good as high coverage GroupNet Costs from Evaluator$ per acre, SoybeansLevel APH CRCGRP GRIP-NoHR GRIP-HR65% .57 1.0675% .81 .93 -.56 -2.66 -2.6885% 1.48 2.89 -3.18 -7.96 -8.9590% -5.31 -10.52 -12.60Individual products have higher costs than Group productsRisk/Returns SummaryGroup products cost less than individual products. Over time, group products may average more in payments than paid in premiumsGroup products reduce risk less than individual farm productsSituations Where Group Products Work:Farm-yields either:Closely follow county-yields (i.e., large farm), orAre above county-yieldsFarm has low APHFarm is in relatively strong financial positionTend to work best in good producing countiesSituations Where Group Products Do Not Work as Well:Highly leveraged farmsFarms where re-planting occurs oftenHail is a major concernFarms with high-risk farmland SummaryGRIP does fit certain situationsRepresent another option in the risk management tool kit