Friday, February 25, 2011
GRIP: Higher Premiums, But Does It Manage Your Risk?
For quite a few years, GRIP has had a good grip on many farmers. It is a crop insurance policy that is easy to deal with, and it usually pays, despite how good of a crop you had. GRIP is the Group Risk Income Policy that is based on county averages, and if calculated revenue was below the projection at the early part of the year, GRIP policy holders would get an indemnity check. Some farmers have backed away from GRIP because premiums were going up. That happened in 2008 and is happening again this year as it becomes more costly to insure a higher value crop. But GRIP may still be good insurance.
Since premiums are based on the value of the insured grain and that value will not be known until after the end of February, the exact premium will not be known. But University of Illinois economists Gary Schnitkey and Bruce Sherrick are estimating the premium and say, “Even with these increased premiums, the estimated expected payments exceed farmer-paid premium in most counties of Illinois.” Their analysis of GRIP was limited to the State of Illinois, but many parallels can be drawn for the benefit of other Cornbelt farmers. Schnitkey and Sherrick say GRIP with the harvest price option will be about 75% higher for the 2011 crop than the 2010 crop. Their estimate is based on $6 corn, but you will only have to wait until about March 4th for the USDA to finalize premiums and price guarantees.
When they looked at the state of Illinois, the economists found that premiums would range from $57 to $115 per acre to obtain GRIP with the harvest price option. The policies provided a 90% yield coverage level with 100% price protection level, based on a $6 per bushel price. Lowering both of those levels, will lower the premium. Schnitkey and Sherrick found a number of cases where adjacent counties had widely divergent premium rates, such as $115 and $66. Theoretically those premiums could be paid on farms separated only by a fence row, or a township road. The economists report, “Difference in premium may influence crop insurance decisions. Farmers in counties which have lower premiums likely will find GRIP more attractive than farmers in counties where premiums are higher.
Why the higher premiums this year? The economist say there are four reasons for the higher premium rates on GRIP with the harvest option:
1. Higher rates. The Risk Management Agency (RMA) increased the rates associated with GRIP-HR policies. These higher rates account for 2% of the estimated increase in 2011 premiums over 2010 premiums.
2. Higher expected yields. In many counties, RMA increased the expected yields between 2011 and 2010. An increase in the expected yield increases the guarantee associated with GRIP, thereby also leading to increases in premium. Higher expected yields account for 4% of the estimated increase in 2011 premiums over 2010 premiums.
3. Higher projected prices. Projected prices in 2011 are estimated at $6.00 per bushel while the 2010 corn price was $3.99 per bushel. The higher projected prices result in 76% of the estimated increase in 2011 premiums over 2010 premiums.
4. Higher volatility for grain prices. Higher price variability increases the chance that payments will be made under revenue products. As a result, RMA increases the premium when volatility is estimated to be higher. The estimated 2011 volatility of .29 is above the 2010 volatility of .26. The increased volatility accounts for 22% of the premium increase.
So your premiums will be going up because of those reasons, but what about the potential for an indemnity check? Four out of five counties studied by the economists would get an indemnity check with payments anywhere from $5 per acre to $143. The remaining counties would miss a payment by anywhere from $3 to $27. The latter group would have lesser yield expectations, but were paying some of the higher premiums. Schnitkey and Sherrick say most of the counties would get a payment, “This is as it should be. GRIP-HR, as are all multi-peril crop insurance programs offered by RMA, is subsidized such that farmers pay less for the product than the product is expected to pay.” But they are quick to say that GRIP will not have a positive return every year, and half of the time, no payment will be received.
Summary:
GRIP with the harvest price option will cost more this year because of higher grain prices that have to be insured, along with higher expected yields, greater futures price volatility, and higher rates being charged by USDA. GRIP will be preferred by farmers more concerned with price risk than yield risk. With the 90% coverage option, there is better price protection than with the farm-based products, compared to the county-based GRIP policy.
Posted by Stu Ellis on 02/25 at 12:00 AM | Permalink