Premiums for revenue crop insurance products will be 40% or more higher in 2007 than in 2006, according to a University of Illinois Extension study.
“At the same time, coverage offered by revenue products will be considerably higher than in previous years,” says the study's author, Gary Schnitkey, U of I Extension farm financial management specialist. “On many farms, it will be possible to insure revenues at levels assuring profits, a situation that occurs rarely when using crop insurance.”
The complete study, “Higher Prices and Crop Insurance: A Double-Edged Sword,” can be accessed on U of I Extension's farmdoc Web site: http://www.farmdoc.uiuc.edu/manage/newsletters/fefo07_02/fefo07_02.html.
Base prices used to set guarantees on revenue crop insurance products likely will be considerably higher in 2007 than in 2006, he explains. Base prices are set by averaging daily settlement prices during February of Chicago Board of Trade contracts – the December contract for corn and the November contract for soybeans.
“In 2006, base prices were $2.59 for corn and $6.18 for soybeans,” says Schnitkey. “At the time this report was prepared, the respective futures contracts were trading in the high $3 range for corn and in the mid-to-high $7 range for soybeans. It is likely that 2007 base prices for both corn and soybeans will be over $1 higher than 2006 levels.
“Higher base prices will result in higher guarantees for revenue products, a positive for farmers purchasing insurance. However, higher prices will result in higher insurance premiums, a negative for individuals purchasing insurance.”
Base prices enter into the calculation of revenue guarantees for both Crop Revenue Coverage (CRC) and Revenue Assurance (RA). Also affected will be Group Risk Income Plan (GRIP) policies.
“RA and GRIP insurance premiums will increase,” he says. “My estimates would put the increases higher for RA and GRIP policies than for CRC policies. Both CRC and RA-HP – a revenue assurance policy with a harvest price option – are revenue policies that allow the guaranteed to increase if the harvest price is above the base price.
“It is likely that CRC premiums will have considerably lower premiums than RA policies. Most will find using CRC less costly than RA if an individual desires an individual farm policy with a guarantee increase.”
Schnitkey says a future report will address questions about the use of GRIP policies given the projected large increase in premiums.