The Four Percent Rule of Crop Insurance

With a looming farm bill debate, crop insurance stands as the largest single component of the crop farm safety net.  The program provides risk protection from low yield or revenue in return for a premium that producers pay.  These premiums were subsidized by the USDA on average about 63% across all programs in 2016.  The total cost of the subsidy in 2016 was approximately $5.85 Billion.  Figure 1 provides a bit of historical perspective on acres insured and total crop insurance subsidy.  Beginning in the early 1990s a series of legislative changes increased subsidy levels and acreage insured has trended up as well.  We note that recent declines in subsidy primarily result from reduced crop value as prices decline from historic highs.

Figure 1

In the next farm bill debate the amount of subsidy for crop insurance is likely to be a topic of discussion.  A frequent question posed to economist sounds something like this, “If we change the subsidy structure what will happen to crop insurance participation.”  This question has been asked and answered numerous times.  In most, but not all studies, the conclusion has been that crop insurance demand is inelastic.  That is, the percent change in participation will be less than a percentage change in subsidy.  However, many of those studies are older and may reflect a different era of crop insurance.

In this report, we examine some key data associated with RMA corn and soybean program participation.  We do not estimate an elasticity, but rather show evidence of a consistent pattern in in how much farmers are willing to pay for crop insurance.  We use the dramatic changes in crop value between 2011 and 2016 and variation in riskiness across regions to show a remarkable constant in crop insurance demand.  We find that across periods of high and low crop value and across regions of low and high risk – corn and soybean farmers are willing to pay out-of-pocket no more than four percent of the expected value of the crop.  If this is true, it has implications for the demand for crop insurance when subsidy is changed.  We do not provide a theoretical explanation for this finding but believe it may be tied to the degree of risk aversion and farmer budget constraints.

We begin by examining variation across region in the base county premium rate.  The maps in figure 2 and 3 show wide variation the level of yield risk across growing regions.  While most producers purchase revenue insurance, regional variation in premium rates are largely driven by yield risk.

Figure 2

Figure 3

Next we examine the amount of insurance chosen by corn and soybean producers.  Figures 4 and 5 reflect the acre-weighted average coverage level chosen in each county.  We use coverage level to represent the amount of insurance chosen by those who participate in the program.  When figures 4 and 5 are compared to figures 2 and 3, a pattern begins to emerge. Areas of the country with lower per-acre base premium rates also tend to purchase higher coverage levels than areas with higher base premium rates.

Figure 4

Figure 5

Figures 6 and 7 show the 2016 average producer paid premium per acre for corn and soybeans by county.  Note that producer premium is a function of the coverage level, rate, and value of the crops.  In general, low risk-high yield regions pay similar premiums per acre as higher risk-lower yielding regions.  Having said that the lower coverage levels chosen in many higher risk regions results in lower producer paid premium per acre.  Finally, the maps show that producer paid premium for soybeans are generally lower than for corn.  This is in part due to lower per acre expected crop value.

Figure 6

Figure 7

Figures 8 and 9 divides the average producer paid premium by the insured value of the crop to compute the percentage of expected crop value farmers opt to pay in producer paid premium.  This reveals our primary finding.  As can be seen in both figures, the majority of counties are shown to pay between one and four percent of the value the crop in 2016.  Thus, we find that farmers appear to be willing to pay a premium of about four percent of crop value and no more.

Figure 8

Figure 9

To test the robustness of our results in 2016 we also conduct the same analysis using data from 2011.  These results are shown in figures 10 and 11. Note that higher crop price in 2011 resulted in expected crop revenue more than 30% higher in that year than in 2016.  However the premium paid as a percent of crop value maps look quite similar to that of 2016.

Conclusions

While we find quite robust results, it is not clear why producers seem to spend such a constant percent of crop value on crop insurance.  Most likely it is related to the out of pocket cost associated with this program and the perceived benefits. We suggest that models of insurance demand consider the possibility of a budget constraint on crop insurance demand.  Ultimately, the consistency of these results suggests that if crop insurance costs rose past four percent of expected crop value, the producers would reduce insurance expenditure – most likely by reducing coverage levels.

Figure 10

Figure 11

Where have the Generic Acres Gone? Where will they go?

As the cotton industry asks for a new Title I program in the next Farm Bill, the question of what becomes of generic base becomes a central issue.  In this report, we summarize a USDA/FSA report summarizing the program crops to which generic base has been applied in 2015.  Note that an acre of generic base applied to a program crop then receives the payments associated with that crop.  Nationally 10.6 million acres of generic base were applied to program crops in 2015.  Of that total 33% were applied to soybean acres.  However, the Mid-south pulled up the national average where over 60% of generic acres were applied to soybean acres.

2015 Crops Planted on Generic Acres Percent of Planted Generic Acres
Total Acres WHEAT RICE-LONG GRAIN CORN GRAIN SORGHUM PEANUTS SOYBEANS
Grand Total 10,675,012 22.9% 0.2% 19.0% 14.0% 8.7% 33.2%
TEXAS 3,281,424 39.2% 0.0% 18.4% 34.9% 3.7% 0.7%
MISSISSIPPI 1,316,641 3.9% 0.3% 21.1% 3.6% 2.0% 68.9%
ARKANSAS 1,020,523 5.4% 1.3% 14.7% 10.0% 0.7% 67.7%
GEORGIA 871,613 7.3% . 16.5% 1.7% 59.0% 13.6%
LOUISIANA 830,276 4.8% 0.1% 30.3% 2.7% 0.0% 61.9%
NORTH CAROLINA 643,072 13.3% . 18.2% 1.7% 7.2% 58.9%
TENNESSEE 609,802 10.7% . 20.6% 7.8% 0.0% 60.8%
OKLAHOMA 455,071 89.8% . 1.5% 4.6% 0.6% 1.2%
ALABAMA 407,582 15.7% . 19.6% 1.8% 24.7% 36.5%
MISSOURI 351,708 8.0% 0.6% 16.2% 7.1% 0.3% 67.7%
CALIFORNIA 276,897 51.9% . 27.8% 8.4% . .
SOUTH CAROLINA 251,367 11.2% . 29.9% 1.9% 19.3% 36.8%[1]

 

In Texas, the state with the most generic acres, wheat and grain sorghum captured the highest percentage of generic acres.  Nationally wheat was the second highest percentage of generic acres pulled up by states like Oklahoma and California where almost 90% and 52% of generic acres went to wheat, respectively.

Many have suggested generic base was moving to peanuts.  Nationally, only 8.7% of generic base has moved to peanuts.  However, that shift is more common in Southeastern states where peanuts are a larger player such as Alabama, South Carolina and especially Georgia where 59% on generic base went to cotton.

Final thoughts

  • With projected declines in soybean and corn ARC payments in the future, perhaps these crops will become less attractive for generic base planting.
  • With the cotton industry push for a cottonseed program, what will become of the generic base is a key question for the farm bill.
  • Generic base was born of the ‘planted acre versus base acre’ debate during the last farm bill and will be integral to that conversation again.

[1] Source: https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/arc-plc/pdf/2015%20and%202014%20Crops%20Planted%20on%20Generic%20Base%20Acres%20%20Oct%2024%202016.pdf

Cattle Market Update: Week Ending January 7, 2017

Posted by Brian Williams for Josh Maples

First off, let me introduce myself. My name is Josh Maples, a new Assistant Professor & Livestock Extension Economist in the Agricultural Economics Department at MSU. I will be focusing on Livestock economics which will allow Brian Williams to spend more of his time on crops. I grew up on a cattle farm in Elkmont, AL and graduated from MSU. I just completed a PhD in Agricultural Economics at Oklahoma State University in December 2016 where I focused on Livestock production and marketing.

We are always looking for ways to be more helpful to producers. As I get started here at MSU, I’ll be looking for ways to improve and add to the information that you need. If there is anything that you would like to see from a livestock marketing or production standpoint, please let me know at josh.maples@msstate.edu. I look forward to meeting many of you in the coming months and working with you to make sure we at MSU are providing you with the information you need.

Now, on to this week’s cattle market update…

Cash Cattle:

Cash traded fed cattle started the new year on an upswing with the five-area fed steer price for the week of December 29 – January 5 averaging $117.67 for live sales, and $187.98 for dressed; up $2.53 and $17.67, respectively, over the last reported week of 2016 (week ending December 23rd). Total volume sold was up 4,000 head from a week ago and up 45,000 head from last year.

The Christmas and New Year holidays limited reporting for Feeder steer cattle and calves over the past two weeks. The last reported prices in 2016 were for the week of December 23rd when Oklahoma City 500-550 pound steers averaged $152.24 while 750-800 pound steers averaged $132.36. During the same week in Mississippi auctions, lighter weight feeders weighing 450-500 pounds averaged $140.00, while heavy steers averaged $110.00. The first reported prices for 2017 will surface next week.

[ … For Livestock Prices and Production data and trends CLICK HERE …  **Please note: there is quite a bit of missing data this week due to the limited reporting during the holidays**]

Futures:

Live cattle futures and feeder futures took a step back this week. February live cattle were down $1.23 on the week at $114.82, while April live cattle were down $0.37 to $114.20 from last week. January feeder cattle were down $1.95 from last Friday at $128.50 while March futures are down $1.07 on the week at $124.03. March corn futures are up $0.06 from a week ago at $3.58 while May futures are up $0.07 to $3.65.

Beef:

Wholesale boxed beef prices are up slightly compared to a week ago. Choice boxes averaged $201.84, up $0.04 from a week ago. Select boxes ended the week with an average of $193.62, an increase of $0.83 over last week. The choice-select spread narrowed from $9.01 a week ago to $8.22 this week.

Note: all cattle and beef prices are quoted in dollars per hundredweight and corn prices are quoted in dollars per bushel, unless stated otherwise.

Cattle Market Notes: Week Ending December 9, 2016

Cash Cattle:

Cash traded fed cattle were lower this week. The five-area fed steer price for the week of December 1 – December 8 averaged $108.89 for live sales, and $169.96 for dressed; respectively, down $5.25 and $4.99. Total volume sold was down 5,000 head from a week ago and up 30,000 head from last year.

Feeder steer cattle and calves were mixed across the U.S. this week. Oklahoma City 500-550 pound steers were up $0.38, averaging $156.95 while 750-800 pound steers were down $3.18 averaging $133.10. In Mississippi auctions, lighter weight feeders weighing 450-500 pounds were averaging $140.00, up $2.50 from two weeks ago, while heavy steers were averaging $107.50, up $2.50 from two weeks ago.

[ … For Livestock Prices and Production data and trends CLICK HERE … ]

Futures:

Live cattle futures and feeder futures were higher this week. December live cattle were up $0.70 on the week and $13.48 lower than a year ago at $108.90, while April live cattle were up $1.35 from last week and down $16.13 from a year ago at $110.23. Feeder cattle were higher this week with January futures up $1.27 from last Friday and down $23.43 from a year ago at $125.98 while March futures are up $0.95 on the week at $122.60. March corn futures are up $0.11 from a week ago at $3.58 while July futures are also up $0.10.

Beef:                                                                                           

Wholesale boxed beef prices are steady compared to a week ago. Choice boxes averaged $189.85, up $0.30 from a week ago. Select boxes ended the week with an average of $172.26, down $0.55 from last week. The choice-select spread widened from $16.74 a week ago to $17.59 this week.

Note: all cattle and beef prices are quoted in dollars per hundredweight and corn prices are quoted in dollars per bushel, unless stated otherwise.

Cattle Market Notes: Week Ending December 2, 2016

Cash Cattle:

Cash traded fed cattle were higher this week. The five-area fed steer price for the week of November 24 – December 1 averaged $114.14 for live sales, and $174.95 for dressed; respectively, up $3.08 and $2.04. Total volume sold was up 65,000 head from a week ago and up 56,000 head from last year.

Feeder steer cattle and calves were higher across the U.S. this week. Oklahoma City 500-550 pound steers were up $6.00, averaging $156.57 while 750-800 pound steers were up $2.00 averaging $136.28. In Mississippi auctions, lighter weight feeders weighing 450-500 pounds were averaging $137.50, up $9.50 from two weeks ago, while heavy steers were averaging $105.00, up $2.50 from two weeks ago.

[ … For Livestock Prices and Production data and trends CLICK HERE … ]

Futures:

Live cattle futures and feeder futures were lower this week. December live cattle were down $2.55 on the week and $15.75 lower than a year ago at $108.20, while April live cattle were down $2.69 from last week and down $20.68 from a year ago at $108.88. Feeder cattle were lower this week with January futures down $2.52 from last Friday and down $34.10 from a year ago at $124.70 while March futures are down $1.70 on the week at $121.65. March corn futures are down $0.08 from a week ago at $3.47 while July futures are also down $0.09.

Beef:                                                                                           

Wholesale boxed beef prices are lower compared to a week ago. Choice boxes averaged $189.55, up $3.25 from a week ago. Select boxes ended the week with an average of $172.81, up $2.98 from last week. The choice-select spread widened from $16.47 a week ago to $16.74 this week.

Note: all cattle and beef prices are quoted in dollars per hundredweight and corn prices are quoted in dollars per bushel, unless stated otherwise.

Cattle Market Notes: Week Ending November 18, 2016

Cash Cattle:

Cash traded fed cattle were higher this week. The five-area fed steer price for the week of November 10 – November 17 averaged $107.92 for live sales, and $169.92 for dressed; respectively, up $5.20 and $10.92. Total volume sold was up 19,000 head from a week ago and up 58,000 head from last year.

Feeder steer cattle and calves were higher across the U.S. this week. Oklahoma City 500-550 pound steers were up $9.00, averaging $146.14 while 750-800 pound steers were up $2.00 averaging $127.54. In Mississippi auctions, lighter weight feeders weighing 450-500 pounds were averaging $128.00, up $1.50 from a week ago, while heavy steers were averaging $102.50, up $4.50 from last week.

[ … For Livestock Prices and Production data and trends CLICK HERE … ]

Futures:

Live cattle futures and feeder futures were higher this week. December live cattle were up $2.60 on the week and $21.33 lower than a year ago at $108.30, while April live cattle were up $2.85 from last week and down $23.50 from a year ago at $109.00. Feeder cattle were higher this week with January futures up $4.33 from last Friday and down $37.60 from a year ago at $125.38 while March futures are up $3.60 on the week at $121.10. December corn futures are up $0.06 from a week ago at $3.46 while March futures are also up $0.04.

Beef:                                                                                           

Wholesale boxed beef prices are lower compared to a week ago. Choice boxes averaged $182.98, down $2.49 from a week ago. Select boxes ended the week with an average of $167.63, down $2.59 from last week. The choice-select spread widened from $15.25 a week ago to $15.35 this week.

Note: all cattle and beef prices are quoted in dollars per hundredweight and corn prices are quoted in dollars per bushel, unless stated otherwise.

Cattle Market Notes: Week Ending November 11, 2016

Cash Cattle:

Cash traded fed cattle were lower this week. The five-area fed steer price for the week of November 3 – November 10 averaged $102.72 for live sales, and $159.00 for dressed; respectively, down $1.75 and $3.59. Total volume sold was up 4,000 head from a week ago and up 54,000 head from last year.

Feeder steer cattle and calves were mixed across the U.S. this week. Oklahoma City 500-550 pound steers were steady, averaging $137.30 while 750-800 pound steers were down $2.00 averaging $125.73. In Mississippi auctions, lighter weight feeders weighing 450-500 pounds were averaging $126.50, up $1.50 from a week ago, while heavy steers were averaging $98.00, unchanged from last week.

[ … For Livestock Prices and Production data and trends CLICK HERE … ]

Futures:

Live cattle futures and feeder futures were higher this week. December live cattle were up $2.98 on the week and $27.20 lower than a year ago at $105.70, while April live cattle were up $1.80 from last week and down $26.18 from a year ago at $106.15. Feeder cattle were higher this week with November futures up $0.15 from last Friday and down $46.93 from a year ago at $125.78 while March futures are up $2.18 on the week at $117.50. December corn futures are down $0.09 from a week ago at $3.40 while March futures are also down $0.09.

Beef:                                                                                           

Wholesale boxed beef prices are lower compared to a week ago. Choice boxes averaged $185.47, down $1.56 from a week ago. Select boxes ended the week with an average of $170.22, down $3.21 from last week. The choice-select spread widened from $13.60 a week ago to $15.25 this week.

Note: all cattle and beef prices are quoted in dollars per hundredweight and corn prices are quoted in dollars per bushel, unless stated otherwise.

Cattle Market Notes: Week Ending October 28, 2016

Cash Cattle:

Cash traded fed cattle were higher this week. The five-area fed steer price for the week of October 20 – October 27 averaged $103.13 for live sales, and $161.77 for dressed; respectively, up $4.89 and $7.75. Total volume sold was up 11,000 head from a week ago and up 60,000 head from last year.

Feeder steer cattle and calves were mostly higher across the U.S. this week. Oklahoma City 500-550 pound steers were up $1.00, averaging $133.76 while 750-800 pound steers were up $4.00 averaging $121.25. In Mississippi auctions, lighter weight feeders weighing 450-500 pounds were averaging $119.00, up $8.00 from a week ago, while heavy steers were averaging $92.50, up $9.50 from last week.

[ … For Livestock Prices and Production data and trends CLICK HERE … ]

Futures:

Live cattle futures and feeder futures were higher this week. December live cattle were up $2.45 on the week and $28.68 lower than a year ago at $104.40, while April live cattle were up $2.15 from last week and down $37.85 from a year ago at $104.28. Feeder cattle were higher this week with November futures up $2.08 from last Friday and down $69.00 from a year ago at $121.90 while March futures are up $0.10 on the week at $113.08. December corn futures are up $0.03 from a week ago at $3.55 while March futures are also down $0.01.

Beef:                                                                                           

Wholesale boxed beef prices are higher compared to a week ago. Choice boxes averaged $182.00, up $2.01 from a week ago. Select boxes ended the week with an average of $168.70, down $0.83 from last week. The choice-select spread widened from $10.46 a week ago to $13.30 this week.

Note: all cattle and beef prices are quoted in dollars per hundredweight and corn prices are quoted in dollars per bushel, unless stated otherwise.

Crop Market Update: October 25, 2016

Corn was down last week with Greenville cash corn currently trading $0.01 lower than a week ago and $0.35 lower than a year ago at $3.48/bu on Friday. December futures contracts are $0.02 lower on the week at $3.53/bu. Nationally, about 61% of the U.S. corn crop is harvested, behind a year ago and behind the five year average of 62%.

Soybean are trading higher this week, with Greenville soybeans trading $0.20 higher at $9.72/bu on Friday. A year ago, Greenville soybeans were trading for $9.26/bu. Nearby November soybean futures are trading $0.21 higher than a week ago. Mississippi’s soybean harvest is ahead of the 5-year average as well as a year ago with 92% of the crop harvested compared to 89% a year ago and also a five year average of 89%. The U.S. soybean harvest is right on pace with 76% of the crop harvested compared to a 5-year average of 76%.

December wheat futures are down $0.07 from a week ago at $4.15 while Greenville wheat prices are also down $0.06 on the week at $3.75/bu on Friday. Mississippi producers have 17% of their wheat crop planted, well behind a year ago and the 5-year average of 27%. The U.S. winter wheat crop is progressing well with 79% planted, slightly behind last year and the 5-year average of 82%.

Cotton prices finished the week lower with South Delta cash prices trading $1.50/cwt lower than a week ago at $68.57/cwt and $6.80/cwt higher than a year ago. Nearby cotton futures are higher with December cotton futures closing at $69.07, down $1.50/cwt from last week. Mississippi producers currently have about 81% of the state’s cotton crop harvested, ahead of a year ago and the 5-year average of 72%. Nationally, 39% of the cotton crop is harvested, slightly ahead of the 5-year average of 37%.

For more detail on crop futures and Mississippi local cash prices click here.

Cattle Market Notes: Week Ending October 21, 2016

Cash Cattle:

Cash traded fed cattle were higher this week. The five-area fed steer price for the week of October 13 – October 20 averaged $98.24 for live sales, and $154.02 for dressed; respectively, up $0.65 and $0.09. Total volume sold was up 1,000 head from a week ago and up 46,000 head from last year.

Feeder steer cattle and calves were mixed across the U.S. this week. Oklahoma City 500-550 pound steers were up $1.00, averaging $133.76 while 750-800 pound steers were down $4.00 averaging $121.25. In Mississippi auctions, lighter weight feeders weighing 450-500 pounds were averaging $111.00, down $1.50 from a week ago, while heavy steers were averaging $83.00, down $7.00 from last week.

[ … For Livestock Prices and Production data and trends CLICK HERE … ]

Futures:

Live cattle futures and feeder futures were hihger this week. October live cattle were up $5.27 on the week and $39.50 lower than a year ago at $101.23, while December live cattle were up $4.58 from last week and down $44.40 from a year ago at $101.95. Feeder cattle were higher this week with October futures up $1.10 from last Friday and down $73.65 from a year ago at $121.20 while November futures are up $4.48 on the week at $119.82. December corn futures are down $0.02 from a week ago at $3.52 while March futures are also down $0.02.

Beef:                                                                                           

Wholesale boxed beef prices are lower compared to a week ago. Choice boxes averaged $179.99, down $2.44 from a week ago. Select boxes ended the week with an average of $169.53, down $3.36 from last week. The choice-select spread widened from $9.54 a week ago to $10.46 this week.

Note: all cattle and beef prices are quoted in dollars per hundredweight and corn prices are quoted in dollars per bushel, unless stated otherwise.