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Getting a Getting a Grip on Grip on GRIPGRIP

Gary SchnitkeyAgricultural Economist

University of Illinois

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TopicsTopics

1. Illinois versus Iowa experience

2. How GRIP works 3. Risks/Returns4. Situations where it works

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GRIPGRIP

GRIP (Group Risk Income Plan) is revenue insurance based on county yields– GRIP-NoHR (No Harvest Revenue option)

– much like RA with base price option– GRIP-HR (Harvest Revenue option) –

much like CRC or RA with harvest price option

GRIP is the revenue counterpart to the county-level yield insurance GRP (Group Risk Plan)

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Group Products Akin Group Products Akin ToTo

Group Akin to Insurance Type GRP APH Yield

GRIP-NoHR IP, RA with Revenue – no base price guarantee

increase

GRIP-HR CRC, RA with Revenue - harvest price guarantee

increase

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Introduced in I statesIntroduced in I states

IntroducedGRP (Group Risk Plan) 1995GRIP-NoHR 1999 (Group Risk Income Plan -- No

Harvest Revenue option)GRIP-HR 2004 (GRIP -- Harvest Revenue option)

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Group Product Use, Group Product Use, Corn, IllinoisCorn, Illinois

0

2

4

6

8

10

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1997 1998 1999 2000 2001 2002 2003 2004 2005P

Year

Per

cen

t o

f In

sure

d A

cres

GRP

GRIPIowa 2005 Use

GRP – 1.2%GRIP – 3.6%

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Group Product Use, Group Product Use, Soybeans, IllinoisSoybeans, Illinois

0

2

4

6

8

10

12

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1997 1998 1999 2000 2001 2002 2003 2004 2005P

Year

Per

cen

t o

f In

sure

d A

cres

GRIP

GRP

Iowa 2005 UseGRP – 1.9%GRIP – 4.7%

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Percent of Iowa Counties Percent of Iowa Counties Receiving GRIP-NoHR Receiving GRIP-NoHR Payments for Payments for CornCorn, 1999 -, 1999 -20042004

---------- Coverage Level ------------Year 90% 85% 80% 75% 70%1999 54% 30% 11% 4% 2%2000 66 22 2 1 02001 72 49 25 11 12002 3 3 3 1

12003 3 0 0 0 02004 82 72 41 16 1

AVG 47% 29% 13% 6% 1%

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Percent of Iowa Counties Percent of Iowa Counties Receiving GRIP-NoHR Receiving GRIP-NoHR Payments for Payments for SoybeansSoybeans, 1999 , 1999 -2004-2004

---------- Coverage Level ------------Year 90% 85% 80% 75% 70%1999 19% 9% 4% 2% 2%2000 69 57 31 18 62001 46 19 8 4 12002 0 0 0 0 02003 30 15 9 7 52004 95 85 71 51 23

AVG 43% 31% 21% 14% 6%

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How GRIP WorksHow GRIP Works

Marshall County, Iowa2005 Example

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Parameters in 2005Parameters in 2005

County: Marshall County, Ia

Crop: CornExpected Yield: 164.3 *Expected Price: $2.38 **

* County specific, set by RMA** Settlement prices during

February (Next year for entire month)

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Farmer choicesFarmer choicesProtection LevelProtection Level

Choice from within rangeGRP GRIP

Max $579 $587Min $323 $346

Max varies by year, based on formula

Max results in highest premiums and highest payments, when they occur

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Farmer choicesFarmer choicesCoverage LevelCoverage Level

70% to 90%

Suggestion:Take highest coverage levelChange payment/premium by lowering protection level

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2005 Per Acre 2005 Per Acre Premiums, Marshall Premiums, Marshall County, Iowa County, Iowa (100% Protection Level, Corn)(100% Protection Level, Corn)

CoverageLevel GRP GRIP-NoHR GRIP-HR70% $3.96 $2.96 $5.5175% 4.80 4.24 7.2280% 6.17 6.90 10.5885% 6.89 10.00

13.8590% 8.60 15.92 20.25

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Per Acre Guarantees,Per Acre Guarantees,90% Coverage Level90% Coverage Level

GRP GRIP-NoHR GRIP-HRType Yield Revenue Revenue Coverage level .90 .90

.90x Expected yield 164.3 164.3 164.3x Price xxx $2.38 $2.38 @ Guarantee 147.9 bu $352 $352 @@

@ Higher of expected or harvest price@@ Will be higher when harvest price > expected

price

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Payment examplePayment example“Typical” Year“Typical” Year

Actual yield = 170 bu. Harvest price = $2.00 Guarantees on previous slide (90% cov level)

Shortfall = (Guarantee – Actual)/Guarantee when Guarantee > Actual GRP: .000 (147.9 guarantee < 170 actual) GRIP-NoHR: ($352 - (170*2)) / $352 = .034 GRIP-HR: ($352 - (170*2)) / $352 = .034

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Payments (Max Protection Payments (Max Protection Level, 90% Coverage Level, 90% Coverage Level)Level)

GRP GRIP-NoHR GRIP-HR

Prot. level $579 $587 $587X shortfall .000 .034 .034X price factor xxx xxx

1.00 *Payment $0 $20 $20

* Higher of (harvest price / expected price) or 1

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Payment examplePayment example“Drought” Year“Drought” Year

Actual yield = 130 bu. Harvest price = $3.00

Shortfall = (Guarantee – Actual)/Guarantee when Guarantee > Actual GRP: (147.9 – 130) / 147.8 = .121 GRIP-NoHR: .000 Guarantee < actual

($390) GRIP-HR: ($443 - (130x3)) / $443

= .120

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Per Acre Guarantees, Per Acre Guarantees, RevisedRevised90% Coverage Level90% Coverage Level

GRP GRIP-NoHR GRIP-HRType Yield Revenue Revenue Coverage level .90 .90 .90x Expected yield 164.3 164.3 164.3x Price xxx $2.38 $3.00 @ Guarantee 147.9 bu $352 $443 @@

@ Higher of expected or harvest price@@ Will be higher when harvest price > expected

price

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Payments (Max Protection Payments (Max Protection Level, 90% Coverage Level, 90% Coverage Level)Level)

GRP GRIP-NoHR GRIP-HRProt level $579 $587 $587X shortfall .121 .000 .120X price factor xxx xxx 1.26

@Payment $70 $0 $89

@ Higher of (harvest price / expected price) or 1(3.00 harvest price / 2.38 expected price) = 1.26

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GRP Shortfalls, Marshall GRP Shortfalls, Marshall County, Iowa, Corn (90% County, Iowa, Corn (90% coverage level)coverage level)

Expected Final GRPYear Yield Yield Shortfall

(90%)1995 131.1 133.7 01996 133.2 139.4 01997 133.2 136.4 01998 135.3 144.5 01999 136.5 153.8 02000 137.6 144.0 02001 146.7 150.5 02002 146.7 181.8 02003 150.1 175.9 02004 158.4 183.2 0

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Marshall County, Corn Marshall County, Corn YieldsYields

0

20

40

60

80

100

120

140

160

180

200

Year

Bu

. p

er

Acre

19771988

1993

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GRIP Shortfalls, Marshall GRIP Shortfalls, Marshall County, Iowa, Corn (90% County, Iowa, Corn (90% coverage level)coverage level)

Expected Harvest GRIPYear Price Price Shortfall (90%)1999 2.40 1.96 02000 2.54 2.11 .0342001 2.45 2.05 .0462002 2.30 2.43 02003 2.38 2.37 02004 2.93 1.99 .127

Shortfalls the same for GRIP-NoHR and GRIP-HR.

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GRP Shortfalls, Marshall County, GRP Shortfalls, Marshall County, Iowa, Soybeans (90% coverage Iowa, Soybeans (90% coverage level)level)

Expected Final GRPYear Yield Yield Shortfall

(90%)1995 45.2 50.6 01996 46.6 49.2 01997 46.6 50.4 01998 47.7 51.6 01999 51.8 50.3 02000 52.6 45.2 .0452001 53.4 49.7 02002 52.5 53.5 02003 53.1 31.7 .3362004 53.6 51.6 0

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GRIP Shortfalls, Marshall GRIP Shortfalls, Marshall County, Iowa, Corn (90% County, Iowa, Corn (90% coverage level)coverage level)

Expected Harvest GRIPYear Price Price Shortfall (90%)1999 4.95 4.85 02000 5.36 4.72 .1292001 4.59 4.37 .0132002 4.53 5.45 02003 5.23 7.32 .0582004 7.27 5.26 .183

Shortfalls the same for GRIP-NoHR and GRIP-HR.

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Risk/returnsRisk/returns www.farmdoc.uiuc.edu/cropins/index.htwww.farmdoc.uiuc.edu/cropins/index.html ml

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Crop Insurance Crop Insurance Evaluator:Evaluator:

For an example farm in each county for corn and soybeans shows the following for different insurance product:

Frequency of payments Premiums Average payments Net costs Ability to prevent disasters

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Marshall County, Marshall County, CornCorn

“Average” farm for county 159 bu. APH yield, average

variability Evaluations shown for 2005

year Evaluations based on

maximum protection level

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Frequency of payments

Example of tables from Evaluator

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1% VAR1% VAR

A 1% VaR of $200 means that 1% of the time revenue will be below $200

Measure of risk reduction

Want VaRs to be as high as possible

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1% VaR from Evaluator1% VaR from Evaluator$ per acre, Corn$ per acre, Corn

Level APH CRC GRP GRIP-NoHR GRIP-HR65% 203 21275% 221 231 198 205

20485% 243 247 205 216 21790% 213 223 226

Group products lower risk less than Individual products

Low coverage Individual not as “good” as high coverage Group

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Net CostsNet Costs

Average payments over time minus premium

High levels indicate high costs, negative levels mean expect more insurance payments than premium over time

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Net Costs from Net Costs from EvaluatorEvaluator$ per acre, Corn$ per acre, Corn

Level APH CRC GRP GRIP-NoHR GRIP-HR65% 1.45 2.2675% 1.74 2.04 .78 -3.94 -

4.6585% 3.76 4.77 -4.65 -12.50 -17.8790% -9.77 -17.13 -26.47

Individual products have higher costs than Group products

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Marshall County, Marshall County, SoybeansSoybeans

“Average” farm for county 50 bu. APH yield, average

variability Evaluations shown for 2005

year Evaluations based on

maximum protection level

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1% VaR from Evaluator1% VaR from Evaluator$ per acre, Soybeans$ per acre, Soybeans

Level APH CRC GRP GRIP-NoHR GRIP-HR65% 166 17475% 183 192 159 162 16485% 203 207 165 173 17590% 168 179 180

Group products lower risk less than Individual products Low coverage Individual not as “good” as high

coverage Group

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Net Costs from Net Costs from EvaluatorEvaluator$ per acre, Soybeans$ per acre, Soybeans

Level APH CRC GRP GRIP-NoHR GRIP-HR65% .57 1.0675% .81 .93 -.56 -2.66 -

2.6885% 1.48 2.89 -3.18 -7.96 -8.9590% -5.31 -10.52 -12.60

Individual products have higher costs than Group products

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Risk/Returns Risk/Returns SummarySummary Group products cost less than

individual products. Over time, group products may average more in payments than paid in premiums

Group products reduce risk less than individual farm products

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Situations Where Group Situations Where Group Products Work:Products Work:

Farm-yields either:1. Closely follow county-yields (i.e.,

large farm), or2. Are above county-yields

Farm has low APH Farm is in relatively strong

financial position Tend to work best in “good”

producing counties

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Situations Where Group Situations Where Group Products Do Not Work as Products Do Not Work as Well:Well: Highly leveraged farms

Farms where re-planting occurs often

Hail is a major concern

Farms with high-risk farmland

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SummarySummary

GRIP does fit certain situations

Represent another option in the risk management tool kit