AYP makes payment when county yield is below the trigger yield. In the example, the yield is below the For the example is. The payment factor is multiplied by the final policy protection to arrive at the indemnity payment. The final protection factor equals the expected county yield times the projected price times the protection factor.
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Planting must occur by the final planting date. Planting by a final planting date was nor required under Group policies. The ARPI policy does not include prevented planting or replant provisions.
This does not differ from Group policies. Producers must complete acreage reports and turn in production reports. Production reporting requirements were not required under the Group policies. Similar to Group policies, farmers must follow good farming practices while planting and maintaining crops.
ARPI will make payments after county yields are announced, usually after March or April of the year following production for corn and soybeans. This is the same as under Group policies.
The expected yield for corn in Sangamon County is The harvest price will not be known until the fall, well after the March 15 th deadline for signing up for crop insurance. Since this plan is based on county yields and not individual yields. Like the other area plans, ARP is based on the experience of the county rather than individual farms. Coverage is provided against loss of revenue due to a county level production loss, a price decline, or a combination of both.
Upside harvest price protection is included which increases the policy protection at the end of the insurance period if the harvest price is greater than the projected price and if there is a production loss. ARP will pay a loss when the final county revenue is less than the trigger revenue which is calculated using the higher of the projected price or harvest price.
Maintaining the insured's actual production history is now mandatory and maybe used by HMA as a data source to establish and maintain the area programs. An ARP- HPE policy provides protection against loss of revenue due to a county level production loss, price decline, or a combination of both. This plan only uses the projected price and does not provide upside harvest price protection.
Since this plan is based on county revenue and not individual revenue, the insured may have a loss in revenue on their farm and not receive payment under ARP-HPE.
APH is the oldest product listed on this comparison. The APH plan of insurance provides protection against a loss in yield due to nearly all natural disasters. Like YP, the APH plan of insurance guarantees a yield based on the individual producer's actual production history. An indemnity is due when the value of the production to count is less than the liability. ARPI is an area based coverage that protects against widespread loss of revenue, yield, or a combination of both in a county.
This means that whenever there are significant farm-level losses, there will also be significant county-level losses. The technical terms describing this situation are that losses on corn in Iowa are primarily driven by systemic factors such as widespread drought or excess rainfall factors affecting many farms in the area at the same time and not by poolable factors such as wind, hail, or disease factors affecting only individual farms.
The results in Figure 2 and Figure 3 show that insurance losses on North Dakota wheat and Texas cotton are driven by both systemic and poolable factors. For both the wheat and cotton examples, we estimate that there would have been positive net average payouts for RA but negative net payouts for GRIP in 6 out of the 25 years.
This illustrates that for these crops, poolable risk is much more important than it is for Iowa corn. These illustrations show that whether GRIP is the right crop insurance choice for a farmer depends in part on whether a farmer's losses are driven primarily by poolable risk or systemic risk.
One way to estimate the importance of the two is to graph a farm's historical yield against the county average yield. If the scatter plot forms close to a straight line with a positive slope, then farm yields and county yields are highly correlated and GRIP may provide good risk management benefits. If the scatter plot is widely variable with no real discernable pattern, then poolable risk is important and the farmer ought to think twice before buying GRIP.
Besides the risk management benefits, crop insurance products can boost average farm incomes because of the premium subsidies. The Risk Management Agency tries to set the total premium at a level that would generate sufficient premiums to just cover losses over the long term.
That is, they hope that if many farmers buy their products over many years, then the indemnities paid out would about equal the total premium. In other words, the total premium is supposed to represent an actuarially fair premium. That is, the expected rate of return from investments in farmer-paid premiums should be percent 1.
Table 1 reports the historical rates of return for the products and time periods illustrated in Figures 1, 2, and 3.
The average rate of return for GRIP over this period across the three examples equals percent. Given the way that GRIP premium rates were developed, all three crops would have generated approximately percent rates of return if the historical period had been extended back to The rates of return to RA and CRC are all positive, indicating that farmers should expect to receive more in indemnities than they pay in premiums.
But they are also all less than percent, which could indicate premium rates that are in excess of actuarially fair levels.
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