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Extension and Outreach/Department of Economics
Market Outlook, Farm Bill, and Crop Insurance
WinField Sales Leadership MeetingShoreview, Minnesota
Mar. 25, 2015
Chad HartAssociate Professor/Crop Markets Specialist
Extension and Outreach/Department of Economics
U.S. Corn Supply and Use2011 2012 2013 2014 2015
Area Planted (mil. acres) 91.9 97.3 95.4 90.6 89.0
Yield (bu./acre) 147.2 123.1 158.1 171.0 166.8
Production (mil. bu.) 12,360 10,755 13,829 14,216 13,595
Beg. Stocks (mil. bu.) 1,128 989 821 1,232 1,777
Imports (mil. bu.) 29 160 36 25 25
Total Supply (mil. bu.) 13,517 11,904 14,686 15,472 15,397
Feed & Residual (mil. bu.) 4,557 4,315 5,036 5,300 5,275
Ethanol (mil. bu.) 5,000 4,641 5,134 5,200 5,225
Food, Seed, & Other (mil. bu.) 1,428 1,397 1,367 1,395 1,410
Exports (mil. bu.) 1,543 730 1,917 1,800 1,850
Total Use (mil. bu.) 12,528 11,083 13,454 13,695 13,760
Ending Stocks (mil. bu.) 989 821 1,232 1,777 1,637
Season-Average Price ($/bu.) 6.22 6.89 4.46 3.70 3.50
Sources: USDA-WAOB 2011-14, USDA-OCE 2015
Extension and Outreach/Department of Economics
U.S. Soybean Supply and Use2011 2012 2013 2014 2015
Area Planted (mil. acres) 75.0 77.2 76.8 83.7 83.5
Yield (bu./acre) 41.9 40.0 44.0 47.8 46.0
Production (mil. bu.) 3,094 3,042 3,358 3,969 3,800
Beg. Stocks (mil. bu.) 215 169 141 92 385
Imports (mil. bu.) 16 41 72 25 20
Total Supply (mil. bu.) 3,325 3,252 3,570 4,086 4,205
Crush (mil. bu.) 1,703 1,689 1,734 1,795 1,840
Seed & Residual (mil. bu.) 88 105 97 116 116
Exports (mil. bu.) 1,365 1,317 1,647 1,790 1,820
Total Use (mil. bu.) 3,155 3,111 3,478 3,701 3,775
Ending Stocks (mil. bu.) 169 141 92 385 430
Season-Average Price ($/bu.) 12.50 14.40 13.00 10.20 9.00
Sources: USDA-WAOB 2011-14, USDA-OCE 2015
Extension and Outreach/Department of Economics
Corn Yields
Source: USDA-NASS
Top: 2014 YieldBottom: Change from last yearUnits: Bu/acre
Extension and Outreach/Department of Economics
Soybean Yields
Source: USDA-NASS
Top: 2014 YieldBottom: Change
from last monthUnits: Bu/acre
Extension and Outreach/Department of Economics
World Corn Production
Source: USDA-WAOB
Country or Region2013/14 estimate
2014/15 forecast
Change from February 10
Change from 2013/14
Million Tons Percent Percent
World 989.6 989.7 -0.2 0.0United States 351.3 361.1 0.0 2.8
Foreign 638.3 628.6 -0.3 -1.5Argentina 26.0 23.5 2.2 -9.6Brazil 80.0 75.0 0.0 -6.3Mexico 22.9 23.2 0.0 1.4Canada 14.2 11.5 0.0 -19.0European Union 64.3 74.2 0.0 15.4FSU-12 46.9 43.6 -0.3 -6.9Ukraine 30.9 28.5 0.0 -7.9Russia 11.6 11.5 0.0 -1.2
South Africa 15.0 11.5 -14.8 -23.2China 218.5 215.5 0.0 -1.4India 24.3 22.5 0.0 -7.3
Extension and Outreach/Department of Economics
World Soybean Production
Source: USDA-WAOB
Country or Region
2013/14 estimate
2014/15 forecast
Change from February 10
Change from 2013/14
Million Tons Percent Percent
World 283.7 315.1 0.0 11.0United States 91.4 108.0 0.0 18.2
Foreign 192.3 207.0 0.0 7.6Argentina 54.0 56.0 0.0 3.7Brazil 86.7 94.5 0.0 9.0Paraguay 8.2 8.5 0.0 3.7Ukraine 2.8 3.9 0.0 40.6India 9.5 10.5 0.0 10.5China 12.2 12.4 0.0 1.2
Extension and Outreach/Department of Economics
Hog Crush Margin
Source: ISU Extension
The Crush Margin is the return after the pig, corn and soybean meal costs.Carcass weight: 200 pounds Pig price: 50% of 5 mth out lean hog futuresCorn: 10 bushels per pig Soybean meal: 150 pounds per pig
Extension and Outreach/Department of Economics
Cattle Crush Margin
Source: ISU Extension
The Crush Margin is the return after the feeder steer and corn costs.Live weight: 1250 pounds Feeder weight: 750 pounds Corn: 50 bushels per head
Extension and Outreach/Department of Economics
U.S. Meat Production & Prices
Source: USDA-WAOB
2014 estimate
2015 forecast
Change from February 10
Change from 2014
Production Billion pounds Percent PercentBeef 24.25 24.06 -0.7 -0.8Pork 22.84 24.12 0.1 5.6Broilers 38.55 40.03 0.2 3.8Turkey 5.76 6.08 0.0 5.5Total meat 92.17 95.07 -0.1 3.1
Prices Dollars/cwtSteers 154.56 161.88 -0.1 4.7Hogs 76.03 55.13 -1.6 -27.5
Cents/lbBroilers 104.9 99.1 -1.1 -5.5Turkey 107.6 104.9 -0.1 -2.5
Extension and Outreach/Department of Economics
Corn Export Shifts
Source: USDA-FAS
Extension and Outreach/Department of Economics
Corn Export Sales
Source: USDA-FAS
Extension and Outreach/Department of Economics
Soybean Export Shifts
Source: USDA-FAS
Extension and Outreach/Department of Economics
Soybean Export Shifts
Source: USDA-FAS
Extension and Outreach/Department of Economics
Crude Oil Prices
Sources: EIA and CME
Extension and Outreach/Department of Economics
Strength of the U.S. Dollar
Source: Federal Reserve
Extension and Outreach/Department of Economics
Corn Grind for Ethanol
Extension and Outreach/Department of Economics
Ethanol Stocks
Extension and Outreach/Department of Economics
Current Corn Futures
Source: CME Group, 3/24/2015
3.74
3.98
Extension and Outreach/Department of Economics
Current Soybean Futures
Source: CME Group, 3/24/2015
10.00
9.27
Extension and Outreach/Department of Economics
2014/15 Crop Margins
Extension and Outreach/Department of Economics
2015/16 Crop Margins
Extension and Outreach/Department of Economics
Corn Prices vs. Costs
Sources: USDA-NASS for Prices, Duffy for Costs
Per Bushel Cost calculated as Per Acre Cost from ISU Extension divided by Actual Yield per Acre
Extension and Outreach/Department of Economics
Soybean Prices vs. Costs
Sources: USDA-NASS for Prices, Duffy for Costs
Per Bushel Cost calculated as Per Acre Cost from ISU Extension divided by Actual Yield per Acre
Extension and Outreach/Department of Economics
Thoughts for 2015 and BeyondSupply/demand concerns
Record corn and soybean crops, but also record demandMarkets are in a holding pattern, waiting for newsWatching South American crop progress and U.S. acreageProjected negative margins for 2014 and 2015 crops
2014/15
USDA
2015/16
USDA
2014/15
Futures
(3/24/15)
2015/16
Futures
(3/24/15)
Corn $3.70 $3.50 $3.74 $3.98
Soybeans $10.20 $9.00 $10.00 $9.27
Extension and Outreach/Department of Economics
Farm Bill: Old vs. New Direct Payments (DP) Countercyclical
Payments (CCP) Marketing Loans (LDP) Revenue
Countercyclical Payments (ACRE)
Countercyclical Payments (PLC)
Marketing Loans (LDP) Revenue
Countercyclical Payments (ARC)
New programs, but they have strong similarities to previous programs
Extension and Outreach/Department of Economics
PLC: Corn Payment Potential
Notes: PLC payments are made on 85% of base acres.
Marketing Year Price ($/bu)
PLC Payment Rate ($/bu)
PLC Payment ($/base acre)
$3.10 $0.60 $76.50
$3.20 $0.50 $63.75
$3.30 $0.40 $51.00
$3.40 $0.30 $38.25
$3.50 $0.20 $25.50
$3.60 $0.10 $12.75
$3.70 $0.00 $0.00
Reference Price = $3.70 per bushelPayment Yield = 150 bushels per acre
Extension and Outreach/Department of Economics
ARC-CO: 2014 Corn Revenue Guarantee
Notes: Revenue Guarantee equals 86% of Benchmark.
Year Yield MYA Price ARC Price
2009 141.0 $3.55 $3.70
2010 149.0 $5.18 $5.18
2011 128.0 $6.22 $6.22
2012 138.0 $6.89 $6.89
2013 115.0 $4.46 $4.46
Oly. Ave. 135.7 $5.29
Benchmark Revenue = $717.85 per acreARC Revenue Guarantee = $617.35 per acre
Extension and Outreach/Department of Economics
ARC-CO: 2014 Potential Corn Payment
Price: $3.00 $3.50 $4.00 $4.50
Yield: 100 $61.02 $61.02 $61.02 $61.02
125 $61.02 $61.02 $61.02 $46.62
150 $61.02 $61.02 $14.75 $0.00
175 $61.02 $4.12 $0.00 $0.00
200 $14.75 $0.00 $0.00 $0.00
ARC Revenue Guarantee = $617.35 per acreARC Max Payment Rate = $71.79 per acreBut ARC-CO is paid on 85% of base acres
and 85% of $77.92 is $61.02
Extension and Outreach/Department of Economics
ARC-IC: 2014 Corn & Soybean Combined Revenue Guarantee
YearCorn Yield
ARC Price Revenue
Soy Yield
ARC Price Revenue
2009 157.0 $3.70 $580.90 43.0 $9.59 $412.37
2010 186.0 $5.18 $963.48 55.0 $11.30 $621.50
2011 187.0 $6.22 $1163.14 56.0 $12.50 $700.00
2012 163.0 $6.89 $1123.07 50.0 $14.40 $720.00
2013 156.0 $4.46 $695.76 46.0 $13.00 $598.00
Oly. Ave. $927.44 $639.83
In 2014, if the farm is planted 60% to corn and 40% to soybeans, thenBenchmark Revenue = $812.40 per acreRevenue Guarantee = $698.66 per acre
Extension and Outreach/Department of Economics
ARC-IC : 2014 Potential Corn & Soybean Combined Payment
Actual 2014 farm yields: Corn 180 bushels per acreSoy 50 bushels per acre
Marketing year prices: Corn $4.00 per bushelSoy $10.50 per bushel
Calculated revenues: Corn $720.00 per acreSoy $525.00 per acre
ARC Revenue: 60%*$720.00 + 40%*$525.00 = $642.00
ARC-IC is paid on 65% of base acres
ARC-IC Payment = $36.83 per acre (65% of $698.66-$642.00)
Extension and Outreach/Department of Economics
Neither pay
Both pay
PLC pays, ARC does not
ARC pays, PLC does not
Extension and Outreach/Department of Economics
Three ChoicesPLC + SCO
Price protection with top-up county-level insurance protection
ARC-CountyCounty-level revenue protection based on historical
averages
ARC-IndividualFarm-level revenue protection based on historical
averages
Choice holds for 2014-2018 crop years
Extension and Outreach/Department of Economics
Corn Marketing Year Average Price Projections
Extension and Outreach/Department of Economics
Soybean Marketing Year Average Price Projections
Extension and Outreach/Department of Economics
Supplemental Coverage Option (SCO)An additional policy to cover “shallow losses”
Shallow loss = part of the deductible on the producer’s underlying crop insurance policy
SCO has a county-level payment trigger
Indemnities are paid when the county experiences losses greater than 14%
Premium subsidy: 65%
Starts in 2015
Can’t have ARC and SCO together
Extension and Outreach/Department of Economics
RPRPHPE
YP
SCO
Supplemental Coverage Option (SCO)
Extension and Outreach/Department of Economics
Crop InsuranceOne 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
Extension and Outreach/Department of Economics
Why Crops Fail
44%
4%22%
3%
6%
8%
13% Drought
Heat
Excess Moisture
Cold Wet Weather
Freeze
Hail
Other
Extension and Outreach/Department of Economics
Federal Crop Insurance
Federal Crop Insurance Corporation – 1938 Government’s initial move in crop insurance
Federal Crop Insurance Act of 1980 Premium subsidies
Federal Crop Insurance Reform Act of 1994 Catastrophic coverage and higher subsidies
Agricultural Risk Protection Act of 2000The 2008 and 2014 Farm Bills
Extension and Outreach/Department of Economics
Federal Crop Insurance:A Public/Private Partnership
The Federal Government works with private insurance companies to offer crop insurance.
Since 1998, all federal crop insurance products are sold and serviced by private companies.
The Federal Government sets and/or approves premium rates and insurance terms.
Both entities share risks and returns from crop insurance.
Extension and Outreach/Department of Economics
Federal Crop Insurance
Extension and Outreach/Department of Economics
Product InnovationAgricultural insurance products developed by private companies, reviewed and approved by FCIC
Examples: Crop Revenue Coverage (CRC) Revenue Assurance (RA) Income Protection (IP) Group Risk Income Protection (GRIP) Livestock Risk Protection (LRP) Livestock Gross Margin (LGM)
Extension and Outreach/Department of Economics
Federal Crop Insurance:Total Acres Insured
Extension and Outreach/Department of Economics
Crop Insurance Top 10sCrop Acres (million)Corn 78.94Soybean 73.76Pasture 52.78Wheat 47.90Cotton 10.35Sorghum 5.30Forage 3.07Rice 2.66Barley 2.18Canola 1.70
State Acres (million)Texas 44.44North Dakota
23.45
Iowa 22.21Illinois 19.20Kansas 18.82Minnesota 17.68Nebraska 17.63South Dakota
15.95
Montana 10.44Indiana 9.33
Extension and Outreach/Department of Economics
Crop Insurance Top 10s
CropPremiums($ billion)
Corn 3.65Soybean 2.26Wheat 1.45Cotton 0.72Sorghum 0.21Pasture 0.20Apples 0.10Potatoes 0.10Rice 0.09Dry Beans 0.08
StatePremiums($ billion)
Texas 0.98North Dakota
0.91
Iowa 0.74South Dakota
0.72
Illinois 0.68Kansas 0.67Minnesota 0.66Nebraska 0.58California 0.39Missouri 0.38
Extension and Outreach/Department of Economics
Crop Insurance Top 10s
CropLiabilities ($ billion)
Corn 43.94Soybean 27.45Wheat 9.26Cotton 4.04Almonds 2.19Rice 1.78Nursery 1.56Grapes 1.49Orange Trees 1.31Potatoes 1.17
StateLiabilities ($ billion)
Iowa 13.28Illinois 10.89Minnesota 8.76Nebraska 7.83California 7.71North Dakota
5.54
Indiana 5.15South Dakota
4.86
Kansas 4.82Texas 4.74
Extension and Outreach/Department of Economics
Types of Crop InsuranceIndividual Yield (YP)
Individual Revenue (RP and RPE)
Area Yield (AYP)
Area Revenue (ARP and ARPE)
Extension and Outreach/Department of Economics
Example Farm
A 100 acre corn farm in Anoka County, Minnesota with a 5-year average yield of 150 bu/acre
Purchases insurance at the 80% coverage level
Spring price: $4.15/bu (average of Feb. prices for Dec. corn futures)
Extension and Outreach/Department of Economics
Individual Yield Insurance (YP)
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 $83.00 per acre = $4.15/bu * (80% * 150 bu/ac - 100 bu/ac)
Extension and Outreach/Department of Economics
Yield Insurance Payout Graph
No Payout
Payout
Extension and Outreach/Department of Economics
Yield Insurance is like an Option
Extension and Outreach/Department of Economics
Individual Revenue Insurance(RP or RPE)
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
Extension and Outreach/Department of Economics
In our example, the farmer has insured $498.00 of revenue per acre
(80% * $4.15/bu * 150 bu/ac)
Final value of the crop determined by average futures prices over harvest period
Individual Revenue Insurance(RP or RPE)
Extension and Outreach/Department of Economics
If yields are 100 bushels per acre and harvest prices average $3.50, the farmer receives $148.00 per acre
=0.80*$4.15/bu.*150 bu./acre - $3.50/bu.*100
bu./acre
Individual Revenue Insurance(RP or RPE)
Extension and Outreach/Department of Economics
RPE Payout Graph
Payout
No Payout
Extension and Outreach/Department of Economics
Rev. Insurance is like an Option
Extension and Outreach/Department of Economics
Individual Revenue Insurance (RP)
This policy has 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
Extension and Outreach/Department of Economics
Harvest Price Option
Extension and Outreach/Department of Economics
Individual Revenue Insurance (RP)
If yields are 100 bushels per acre and harvest prices average $5.50, the farmer
receives $110.00 per acre
=0.80*$4.15/bu.*150 bu./acre - $5.50/bu.*100 bu./acre
5.50
Extension and Outreach/Department of Economics
RPE PaysNeither Pay
Both Pay
YP Pays
RP Payout Graph
RP Pays
No Payment
Extension and Outreach/Department of Economics
Corn Insurance Prices
Extension and Outreach/Department of Economics
Soybean Insurance Prices
Extension and Outreach/Department of Economics
What Units to Choose?
• Optional Units: Each farm is separate
• Basic Units: Combine owned and cash rented acres in same county
• Enterprise Units: Combine all acres of the same crop in same county
• Whole Farm: Combine all crops in county
Extension and Outreach/Department of Economics
Current Subsidy RatesCoverage
levelBasic Units
Optional Units
Enterprise Units
Whole Farm Units
60% 64% 80% not avail.
65% 59% 80% 80%
70% 59% 80% 80%
75% 55% 77% 80%
80% 48% 68% 71%
85% 38% 53% 56%
Extension and Outreach/Department of Economics
2015 Insurance Premiums Per Acre Premiums ($ per acre)
Cov. Level YP RPHPE RP_ 50% 6.76 6.35 8.26 55% 9.08 8.67 11.26 60% 11.03 10.79 13.98 65% 15.07 15.08 19.41 70% 17.89 18.10 23.27 75% 23.08 23.42 30.18 80% 31.11 31.89 40.98 85% 42.89 44.44 56.85
For our example farm in Anoka County, MN for corn
Extension and Outreach/Department of Economics
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
Extension and Outreach/Department of Economics
Corn Acres Insured in 2014
87% of all corn acresare insured
Extension and Outreach/Department of Economics
Soy Acres Insured in 2014
88% of allsoybean acresare insured
Extension and Outreach/Department of Economics
2014 Corn and Soy Coverage Levels
Extension and Outreach/Department of Economics
Coverage Levels for YP
Extension and Outreach/Department of Economics
Coverage Levels for RPHPE
Extension and Outreach/Department of Economics
Coverage Levels for RP
Extension and Outreach/Department of Economics
Thank you for your time!
Any questions?
My web site:http://www.econ.iastate.edu/~chart/
Iowa Farm Outlook:http://www.econ.iastate.edu/ifo/
Ag Decision Maker:http://www.extension.iastate.edu/agdm/