PPAT Proposed Farm Program: Analysis of Revenue Protection & Integrated Farm Plan, Papers of Algebra

Download PPAT Proposed Farm Program: Analysis of Revenue Protection & Integrated Farm Plan and more Papers Algebra in PDF only on Docsity! 1 1 A New FSA Farm Programs Based on a “Modified GRIP” Design Dr. G. A. “Art” Barnaby, Jr Kansas State University Phone: (785) 532-1515 Email: abarnaby@agecon.ksu.edu Check out our WEB at: AgManager.info 2 What is GRP & GRIP GRP is a “put option” on expected county yield GRIP is a “put option” on county revenue Farmer has the basis risk, difference between county yield % change and farm yield % change 2 3 KS Counties without a Wheat GRP/GRIP Offer 4 Does GRP & GRIP Fit Great Plains Agriculture? GRP/GRIP Does Provide “Reasonable” Protection for: Drought Freeze Excess Moisture 5 9 GRP “Math 101” GRP payment = (Trigger yield- current year county yield/ trigger yield) * Liability (selected $ protection) County has a 25.3% loss from 127.8 expected bu. and farmer suffers a 51% yield loss GRP = (115 – 95.5) / 115 = 17% * $265 = $45.05 MPCI = 125 * 75% bu. Guarantee – 61.2 bu. production = 32.6 bu. * $2.30 = $74.98 10 GRP “Math 101” The increase coverage up to 150% and lower deductible can be used to manage basis risk. GRP = (115 – 95.8) / 115 = 17% * $294 *150% = $441 = $74.97 MPCI = 125 * 75% bu. Guarantee – 61.2 bu. production = 32.6 bu. * $2.30 = $74.98 6 11 GRIP “Math 101” Group Risk Income Protection price based on the last 5 trading days in February for December corn but will be changed to the CRC prices in 2006. Harvest price is the November average of December corn; October average for grain sorghum Grain sorghum prices adjusted by USDA’s GS/corn price ratio GRIP uses the GRP expected county yield for expected county revenue. Like GRP, farmer can suffer a total loss and receive no payment, maybe a lender concern. 12 Cheyenne Wheat Year Volatility 1997 27.4 43.2 7.50 1998 44.2 43.8 7.50 1999 51.9 44.4 7.50 2000 24.8 40.6 6.50 2001 31.5 40.9 6.50 0.20 2002 19.6 41.3 6.50 0.18 2003 30.9 39.1 6.50 0.22 2004 7.8 39.4 6.50 0.19 2005 17.6 35.5 6.83 0.19 2006 23.7 32.0 7.95 0.18 16.23 17.83 2007 25.2 8.13 0.20 14.57 16.12 44.4 25.2 43.2% Maximum Yield from 1997-2007 2007 Yield Percent Reduction in Expected Yield from the Maximum RMA Expected County GRP RATE GRIP Rate GRIP-HRO Rate NASS County Planted Yield 7 13 Rawlins Wheat Year Volatility 1997 35.2 36.9 8.30 1998 47.5 37.2 8.30 1999 47.9 37.5 8.30 2000 28.8 35.0 7.10 2001 40.2 35.1 7.10 0.20 2002 28.7 35.2 7.10 0.18 2003 40.9 36.8 7.10 0.22 2004 5.5 37.0 7.10 0.19 2005 30.0 36.4 7.10 0.19 2006 18.2 33.3 7.81 0.18 9.19 11.22 2007 31.0 8.48 0.20 10.45 12.53 37.5 31.0 17.3% Maximum Yield from 1997-2007 2007 Yield Percent Reduction in Expected Yield from the Maximum NASS County Planted Yield RMA Expected County GRP RATE GRIP Rate GRIP-HRO Rate 14 Ottawa Wheat Year Volatility 1997 56.8 30.8 6.80 1998 52.4 30.8 6.80 1999 44.0 30.8 6.80 2000 39.4 36.2 6.90 2001 37.2 36.4 6.90 0.20 2002 39.9 36.6 6.90 0.18 2003 58.1 38.8 6.90 0.22 2004 47.7 39.1 6.90 0.19 2005 32.3 43.0 6.90 0.19 2006 43.5 46.7 6.90 0.18 8.55 9.79 2007 42.4 6.62 0.20 9.75 10.72 46.7 42.4 9.2% Maximum Yield from 1997-2007 2007 Yield Percent Reduction in Expected Yield from the Maximum NASS County Planted Yield RMA Expected County GRP RATE GRIP Rate GRIP-HRO Rate 10 19 Warning: NOT a K-State Slide Year P la nt ed Y ie ld ,b u/ a 80 90 100 0 10 20 30 40 50 60 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 Wheat Planted Yield for Ottawa County, KS 1972-2005 20 2007 exp yield as % of 33-year average yield; no practice specified 11 21 GRP/GRIP Summary Little/no Protection for Hail, wind, flood or other spot losses No Prevented Planting or Re-plant Protection GRP insured growers worried about Rust may want to change to APH Farmer can suffer a total loss and receive no payment, maybe a lender concern. 22 Policy Issues The Corn Belt has generated underwriting gains Those gains allow RMA to hit the targeted loss ratio If the those farmers shift from APH to GRIP, then RMA may (will ?) lose a major region with consistent underwriting gains Farm Bill based on a “GRIP” type program? 12 23 Does GRP & GRIP Fit Your Farm? Trend yields that sets expected county yield is the key for GRP, GRIP, and proposed farm programs. Use county, crop reporting district, state, or national trend yields. Do yields trend only upward? 24 Disclaimer on Two Proposed Farm Programs by National Corn Growers Association – Public Policy Action Team and by Dr. Carl Zulauf, Ohio State University and American Farmland Trust The following analysis of the two programs are based on limited public information and off the record phone conversations. Both programs should be consider “works in progress” or “drafts”. 15 29 PPAT Proposed Farm Program based on “Modified GRIP” and Farm Level Coverage PPAT is silent how BRP would be paid for if it does not replace crop insurance. However PPAT does state: “BRP and RCCP would have generated more payments on an irrigated and a dryland corn farm in Sheridan County, Kansas than the current set of safety net programs that include, loan deficiency payments (LDPs), countercyclical payments (CCPs), and crop insurance”. 30 PPAT Proposed Farm Program based on “Modified GRIP” and Farm Level Coverage Based on FAPRI price estimates PPAT does state: “RCCP is estimated to generate 80 percent more in aggregate corn payments than LDPs and CCPs over the period 2006 to 2010”. PPAT concedes if prices are weaker then LDPs and CCPs will be larger than RCCP. 16 31 PPAT Proposed Farm Program based on “Modified GRIP” and Farm Level Coverage PPAT state BRP: “net income insurance allows a higher effective coverage level than gross income insurance”. KSU Agrees, if the farm does not have multiple yield loss years during the past 5 years. PPAT states BRP: “optional unit coverage could be made available under a supplemental crop insurance product”. But would farmers pay for top end coverage with no subsidy or even if subsidies are provided? PPAT concedes under BRP: “A series of low farm yields will reduce the guarantee level significantly”. 32 PPAT Proposed RCCP based on a “Modified GRIP” Design and Farm Level Coverage A combined 100% county based “Modified GRIP” paid on planted acres and a 70% Farm Level Net Revenue Guarantee. County “Modified GRIP” RCCP coverage based on effective target price and National NASS 7 month average price. All farmers in the county will received the same payment per planted acre under RCCP. 17 33 Zulauf Proposed Farm Program based on “Modified GRIP” and Crop Insurance A combined 100% National yield based “Modified GRIP” paid on expected farm revenue and continues subsidized crop insurance. Replaces CC and Loan It is assumed farmers would continue to receive the Direct Payment and Conservation Reserve Payments. 34 Zulauf Proposed IFRP based on a “Modified GRIP” Design and Farm Level Coverage National “Modified GRIP” coverage based on effective CRC defined futures prices and WASDE forecasted yield. IFRP payments would be deducted from any crop insurance payments. Assumes reduced crop insurance payments would be offset with higher guarantees or lower premiums. 20 39 Draft of PPAT Proposed Farm Program Calculations -$84.76 - -$155.51 = $70.75 2006 BRP Payment Net Farm Revenue Guarantee Net Farm Revenue to Count Farm Level Payment 40 Draft of PPAT Proposed Farm Program Calculations Year 2002 28.7 2.32 66.54 236.18 -169.64 2003 33.3 2.42 80.67 236.18 -155.51 2004 135.7 2.06 279.57 236.18 43.39 2005 114.1 1.90 216.83 236.18 -19.35 2006 33.3 2.42 80.67 236.18 -155.51 2007 Olympic Average Farm Net Revenue -$110.12 2007 Farm Level BRP Guarantee Farm Yield MYA Price Farm Revenue ERS Variable Costs Net Farm Revenue 21 41 Draft of PPAT Proposed Farm Program Calculations -$110.12 70.0% = -$143.16 2007 Farm Level BRP Guarantee Olympic Average Net Farm Revenue Net Farm Revenue GuaranteeCoverage 42 Draft of PPAT Proposed Farm Program Calculations Revenue Counter Cyclical Program (RCCP) Calculations, A Marshal County, Kansas Corn Example 22 43 Draft of PPAT Proposed Farm Program Calculations 94.1 X $2.35 X 100% = $221.14 Maximum Payment 94.1 X $2.35 X (1 - 70%) = $66.34 Stop Loss Revenue Counter Cyclical Program (RCCP) Expected County Yield Effective Target Price Coverage County Level Guarante 44 Draft of PPAT Proposed Farm Program Calculations Revenue to Count Against RCCP Guarantee 2006 33.3 X $2.42 = $80.67 Observed County Yield Example MYA Price Revenue to Count 25 49 Draft of Zulauf Proposed Farm Program Calculations $385.91 - $357.37 = $28.54 / $385.91 = 7.4% IFRP Percent National Revenue Loss National Percent Revenue Loss National Expected Revenue National Revenue to Count National Revenue Loss National Expected Revenue 50 Draft of Zulauf Proposed Farm Program Calculations APH 97.2 X $2.59 = $251.75 X 7.4% = $18.62 IFRP Farm Payment Feb Avg Dec CBOT Price National Percent Revenue Loss Farm Expected Revenue IFRP Farm Payment 26 51 Draft of Zulauf Proposed Farm Program Calculations APH 97.2 X $2.59 = $251.75 X 70% = $176.22 IFRP Farm Payment + Crop Insurance Payment Feb Avg Dec CBOT Price Percent Coverage Farm Expected Revenue RA Gurana- tee 52 Draft of Zulauf Proposed Farm Program Calculations 33.0 X $2.42 = $79.86 Revenue to Count Against RA Guarantee Example Observed Farm Yield Nov Avg Dec CBOT Price Revenue to Count 27 53 Draft of Zulauf Proposed Farm Program Calculations $176.22 - $79.86 = $96.36 2006 Revenue Assurance Payment RA Revenue Guarantee Farm Revenue to Count RA Payment 54 Draft of Zulauf Proposed Farm Program Calculations $96.36 - $14.78 - $18.62 = $62.96 Less IFRP Payment Equal Net RA Payment RA Farmer Paid Premium IFRP Farm Payment RA Payment Net RA Payment 30 59 70% Coverage 100% MYA Plant Havst Yr Yd Yd Price 96 147 146 160.8 2.35 2.71 0.00 160.8 0.00 0.00 97 140 139 151.9 2.35 2.43 16.40 151.9 0.00 16.40 98 140 139 150.9 2.35 1.94 92.63 150.9 2.88 95.51 99 166 165 175.4 2.35 1.82 66.18 175.4 0.00 66.18 00 145 144 152.6 2.35 1.85 103.12 152.6 13.37 116.49 01 153 152 159.3 2.35 1.97 71.67 159.3 0.00 71.67 02 142 140 146.0 2.35 2.32 46.65 146.0 0.00 46.65 03 185 184 188.4 2.35 2.42 0.00 188.4 0.00 0.00 04 181 179 182.2 2.35 2.06 10.06 182.2 0.00 10.06 05 164 163 164.6 2.35 1.90 72.58 164.6 0.00 72.58 065 164.0 109.57 58% 15% 58% 30.19 3.36 33.55 52.43 22.19 58.28 40.61 15.59 50.42 115.62 39.50 155.12 1.38 2.88 1.38 996 111 1,107 6% 13.64 County Harvt Farm Yield Trend Adj to a 2006 yield1 Stop Loss Minimum Payment DRAFT; NCGA-Public Policy Action Team's Farm Program Based on 2006 RMA Expected Champaign County, IL Corn Yield of 164.0 Bushels Generating Simulated Revenue Payment per Acre based on 33 Years of prices and Historical Yields Adjusted for Trend to a 2006 Equivalent Yield.* Total For PPAT Pymt Plan RCCP Pymt $ Paid Per Ac2 Protection (BRP) Revenue Counter Cyclical Program (RCCP) Net Payments BRP Farm Level Pymt2 Tar- get Price Trend Adj Plant Co. Yield to 20061 RMA 2006 Corn Yield Est./ APH Frequency of Claim Frequency of 70% Stop Lossy Coverage Average of Claim and Non-Claim Yrs Average Severity of Claim Standard Deviation of Claim Maximum Payment 60 2Estimated farm program payments are based on a Farm Bill plan proposed by National Corn Growers Association-Public Policy Action Team. The design is similar to Group Risk Income Protection (GRIP) based on county yield and NASS prices rather than futures prices. RCCP losses are triggered only by county revenue losses and individual farm level losses are not considered but farmers will also receive a 70% coverage Base Revenue Protection (BRP) based on a 5 year Olympic farm level net revenue guarantee based individual farm yields, NASS harvest prices, effective target price, and ERS cost of production. DRAFT; NCGA-Public Policy Action Team's Farm Program Based on 2006 RMA Expected Champaign County, IL Corn Yield of 164.0 Bushels Generating Simulated Revenue Payment per Acre based on 33 Years of prices and Historical Yields Adjusted for Trend to a 2006 Equivalent Yield.* *Prepared by G. A. (Art) Barnaby, Jr., Professor, Department of Agricultural Economics, K-State Research and Extension, Kansas State University, Manhattan, KS 66506, October 24, 2006, Phone 785-532-1515, e-mail - barnaby@ksu.edu 1The observed annual county and farm yields were adjusted for trend to a 2006 equivalent yield for comparison with 2006 guarantees. 31 61 70% Coverage 100% MYA Plant Havst Yr Yd Yd Price 73 76 68 121.2 2.35 2.55 0.00 121.2 0.00 0.00 74 42 22 74.3 2.35 3.02 0.00 74.3 0.00 0.00 75 49 43 93.3 2.35 2.54 0.00 93.3 0.00 0.00 76 60 37 85.8 2.35 2.15 36.59 85.8 0.00 36.59 77 45 30 76.6 2.35 2.02 66.32 76.6 0.00 66.32 78 76 65 110.9 2.35 2.25 0.00 110.9 0.00 0.00 79 76 62 106.1 2.35 2.52 0.00 106.1 0.00 0.00 80 41 15 57.7 2.35 3.11 41.70 57.7 0.00 41.70 81 85 76 116.8 2.35 2.50 0.00 116.8 0.00 0.00 82 87 74 113.0 2.35 2.55 0.00 113.0 0.00 0.00 83 41 30 67.0 2.35 3.21 6.14 67.0 0.00 6.14 84 69 50 85.4 2.35 2.63 0.00 85.4 0.00 0.00 85 100 95 129.2 2.35 2.23 0.00 129.2 0.00 0.00 86 91 89 121.8 2.35 1.50 38.50 121.8 0.00 38.50 87 110 110 141.1 2.35 1.94 0.00 141.1 0.00 0.00 88 64 64 93.6 2.35 2.54 0.00 93.6 0.00 0.00 89 64 63 90.6 2.35 2.36 7.38 90.6 0.00 7.38 90 76 72 98.1 2.35 2.28 0.00 98.1 0.00 0.00 91 53 41 65.1 2.35 2.37 66.34 65.1 0.00 66.34 92 127 115 137.8 2.35 2.07 0.00 137.8 0.00 0.00 93 67 50 71.2 2.35 2.50 43.20 71.2 0.00 43.20 94 101 92 111.4 2.35 2.26 0.00 111.4 0.00 0.00 95 88 76 93.4 2.35 3.24 0.00 93.4 0.00 0.00 Farm Yield Trend Adj to a 2006 yield1 Total For PPAT Pymt Plan BRP Farm Level Pymt2 DRAFT; NCGA/AgRisk Management, Inc.'s Farm Program Based on 2006 RMA Expected Marshall County, KS Corn Yield of 94.1 Bushels Generating Simulated Revenue Payment per Acre based on 33 Years of prices and Historical Yields Adjusted for Trend to a 2006 Equivalent Yield.* Revenue Counter Cyclical Program (RCCP) Protection (BRP) Trend Adj Plant Co. Yield to 20061 Stop Loss RCCP Pymt $ Paid Per Ac2 County Tar- get Price Harvt 62 70% Coverage 100% MYA Plant Havst Yr Yd Yd Price 96 110 105 121.2 2.35 2.71 0.00 121.2 0.00 0.00 97 105 99 113.6 2.35 2.43 0.00 113.6 0.00 0.00 98 120 114 127.4 2.35 1.94 0.00 127.4 0.00 0.00 99 94 87 98.8 2.35 1.82 41.27 98.8 0.00 41.27 00 112 100 110.0 2.35 1.85 17.63 110.0 0.00 17.63 01 118 101 109.4 2.35 1.97 5.70 109.4 0.00 5.70 02 35 22 28.7 2.35 2.32 66.34 28.7 84.87 151.22 03 36 28 33.3 2.35 2.42 66.34 33.3 70.75 137.09 04 145 132 135.7 2.35 2.06 0.00 135.7 0.00 0.00 05 119 113 114.1 2.35 1.90 4.30 114.1 0.00 4.30 065 94.1 (84.76) 42% 6% 42% 15.39 4.72 20.10 36.27 77.81 47.38 24.45 9.99 46.08 66.34 84.87 151.22 4.30 70.75 4.30 508 156 663 9% 88.25 y Coverage Maximum Payment Minimum Payment Net Payments Frequency of 70% Stop Loss Frequency of Claim Average of Claim and Non-Claim Yrs Average Severity of Claim Standard Deviation of Claim RMA 2006 Corn Yield Est./ APH Farm Yield Trend Adj to a 2006 yield1 Total For PPAT Pymt Plan BRP Farm Level Pymt2 DRAFT; NCGA/AgRisk Management, Inc.'s Farm Program Based on 2006 RMA Expected Marshall County, KS Corn Yield of 94.1 Bushels Generating Simulated Revenue Payment per Acre based on 33 Years of prices and Historical Yields Adjusted for Trend to a 2006 Equivalent Yield.* Revenue Counter Cyclical Program (RCCP) Protection (BRP) Trend Adj Plant Co. Yield to 20061 Stop Loss RCCP Pymt $ Paid Per Ac2 County Tar- get Price Harvt 32 63 IFRP and RCCP; Similar to GRIP Item PPAT Zulauf IL KS USA IL KS RMA/WASDE Yd 164.0 94.1 149.0 Claim Freq 58% 42% 73% APH 163.2 99.23 Avg Claim Pymt $52.43 $36.27 14.31% $63.56 $38.65 St. D. of Claims $40.61 $24.45 6.93% $35.17 $21.39 Max. Pymt $115.62 $66.34 24.10% $145.52 $88.48 Min. Pymt $1.38 $4.30 2.94% $11.60 $7.05 Total Pymt $996 $508 $1,525 $928 Avg Pymt/Yr $30.19 $15.39 $46.23 $28.11 64 Farm Level Coverage BRP and RA (Enterprise) Item PPAT 70% RA (Enterprise) IL KS IL KS Oly Avg Net Rev 109.6 (84.8) Claim Freq 15% 6% 3% 12% APH 163.2 99.2 Avg Claim Pymt $22.19 $77.81 $26.60 $53.62 St. D. of Claims $15.59 $9.99 $40.31 Max. Pymt $39.50 $84.87 $26.60 $89.73 Min. Pymt $2.88 $70.75 $26.60 $18.03 Total Pymt $110.97 $155.63 ($74.68) $158.45 Avg Pymt/Yr $3.36 $4.72 $0.00 $4.80 35 69 Discussion: RCCP & BRP Proposed Farm Program Would likely eliminate some forms of private insurance products leaving only a hail industry. With only a hail industry left, farmers would need to depend on the government to provide risk protection in the future. Do farmers see USDA as a stable partner for providing that protection? 70 Discussion: IFRP (Zuluaf) Proposed Farm Program IFRP payments are deducted from crop insurance payments. In past USDA did not reduce disaster payments for insured farmers (except 2003). Assumes lower premiums or higher coverages. 36 71 Discussion: IFRP (Zuluaf) Proposed Farm Program RMA is slow to recognize reduced claims and lower premiums in their experience rating method. Current subsidy system reduces subsidy rate with higher coverages. 72 Policy Issues: Crop Insurance Delivery Costs Babcock & Hart conclude in their CARD paper, taxpayers have paid $15.1 billion to deliver $8.82 billion in net crop insurance payments. They concluded USDA could provide the coverage for less. 37 73 Policy Issues: Compare Crop Insurance Delivery Cost with Private P/C Insurance Private Auto Insurer’s Expense rate 33.4% of Premium Private Auto Insurer’s 68.7% of premium paid in claims RMA Data Presented in Private Insurance Format1 Total Year A&O ($ Millions) ($ Millions) ($ Millions) ($ Millions) ($ Millions) ($ Millions) 2001 626 342 968 2,962 3,930 24.6% 2,960 75.3% 2002 743 -52 691 2,916 3,607 19.2% 4,067 112.8% 2003 859 378 1,237 3,431 4,668 26.5% 3,259 69.8% 2004 869 848 1,717 4,186 5,903 29.1% 3,207 54.3% Totals 3,097 1,516 4,613 13,495 18,108 25.5% 13,493 74.5% simple average 24.8% 78.1% % of Total Premium Paid Out in Indem- nities + Company Underwrit ing Gains2 % of Premium A&O exp- ense & Gain = Total $ Earned by Comp- anies Pure Premium Total Premium + A&O +Gain 1Source of data: Doctors Bruce Babcock and Chard Hart, "Crop Insurance: A Good Deal for Taxpayers?" posted on the CARD WEB site at: http://www.card.iastate.edu/iowa_ag_review/summer_06/article1.aspx 2The underwriting grain does not include the 5% quota share that companies started paying to RMA in 2005 that would have reduced the four year underwriting gains by about $76 million. 74 accident and health (1997 only) 83 commercial auto 67 passenger auto 66 homeowners 67 product liability 72 medical malpractice 57 workers’ compensation 63 private crop hail 60-70 federal crop insurance1 74 Cost of Risk Reduction with Insurance: 1995-1997 (% of total premium paid in claims) 1Includes A&O, underwriting gain, and premium subsidy in total RMA premium for 2001- 2004 (Babcock & Hart). Does not include the reduction in company underwriting gain from the 5% quota share started in 2005. 40 79 What Cost will be Retained with either Plan? Will effective guarantees be allowed to go to zero with multiple year losses in a 5 year Olympic average? If Policy makers put in a limited coverage to equal cost or some other value and not allow the effective guarantee to approach zero (equal zero) will that make the policy out of compliance with WTO? How will new farmers or farmers planting a new crop be covered? Currently “T” yields for crop insurance. 80 What Cost will be Retained with either Plan? PPAT will require cost of production from ERS. Currently cost of production covers multiple states and does not separate irrigated from dryland crop acres. Will this be acceptable? If cost of production values must be localized and separated by practices then ERS cost will increase. 41 81 ERS Cost of Production Regions 82 Major Debate Issues PPAT will eliminate insurance agents and insurance companies from selling Federal crop insurance. Zulauf will deduct farm payments from crop insurance indemnity payments. How will the two plans effect other regions and crops? Both programs will need to under go cost reviews from OBM. 42 83 Thank You DR. G. A. “ART” BARNABY, JR. KANSAS STATE UNIVERSITY PHONE: 785-532-1515 EMAIL: abarnaby@agecon.ksu.edu Check out our WEB page at http://www.AgManager.Info