Extension and Outreach/Department of Economics Market Outlook, Farm Bill, and Crop Insurance...

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

[email protected]


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


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


Corn Yields

Source: USDA-NASS

Top: 2014 YieldBottom: Change from last yearUnits: Bu/acre


Soybean Yields

Source: USDA-NASS

Top: 2014 YieldBottom: Change

from last monthUnits: Bu/acre


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


World Soybean Production

Source: USDA-WAOB

Country or Region

2013/14 estimate

2014/15 forecast


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


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


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


U.S. Meat Production & Prices

Source: USDA-WAOB

2014 estimate

2015 forecast


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


Corn Export Shifts

Source: USDA-FAS


Corn Export Sales

Source: USDA-FAS


Soybean Export Shifts

Source: USDA-FAS


Crude Oil Prices

Sources: EIA and CME


Strength of the U.S. Dollar

Source: Federal Reserve


Corn Grind for Ethanol


Ethanol Stocks


Current Corn Futures

Source: CME Group, 3/24/2015

3.74

3.98


Current Soybean Futures

Source: CME Group, 3/24/2015

10.00

9.27


2014/15 Crop Margins


2015/16 Crop Margins


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


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


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


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


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


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


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


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


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)


Neither pay

Both pay

PLC pays, ARC does not

ARC pays, PLC does not


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


Corn Marketing Year Average Price Projections


Soybean Marketing Year Average Price Projections


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


RPRPHPE

YP

SCO

Supplemental Coverage Option (SCO)


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


Why Crops Fail

44%

4%22%

3%

6%

8%

13% Drought

Heat

Excess Moisture

Cold Wet Weather

Freeze

Hail

Other


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


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.


Federal Crop Insurance


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)


Federal Crop Insurance:Total Acres Insured


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


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


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


Types of Crop InsuranceIndividual Yield (YP)

Individual Revenue (RP and RPE)

Area Yield (AYP)

Area Revenue (ARP and ARPE)


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)


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)


Yield Insurance Payout Graph

No Payout

Payout


Yield Insurance is like an Option


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


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



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



RPE Payout Graph

Payout

No Payout


Rev. Insurance is like an Option


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


Harvest Price Option


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


RPE PaysNeither Pay

Both Pay

YP Pays

RP Payout Graph

RP Pays

No Payment


Corn Insurance Prices


Soybean Insurance Prices


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


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%


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


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


Corn Acres Insured in 2014

87% of all corn acresare insured


Soy Acres Insured in 2014

88% of allsoybean acresare insured


2014 Corn and Soy Coverage Levels


Coverage Levels for YP


Coverage Levels for RPHPE


Coverage Levels for RP


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/

Extension and Outreach/Department of Economics Market Outlook, Farm Bill, and Crop Insurance...

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