Crop Insurance Today Second Quarter 2020 - 17

$4.00, increasing marginally near the middle of
the year and finishing somewhat lower than the
base price. For 2019, the base price was initially
stable around $4.00, trading in a relatively narrow band but ultimately declined and ended the
year at $3.58.
The implied volatility factor (IV) derived
from futures market information serves as a measure of riskiness of expected prices. Each year
RMA calculates the implied volatility factor for
an insured commodity by averaging the implied
volatility of near in-the-money options for a selected futures contract over the final five trading
days of the discovery period for that crop. For example, implied volatilities over the final five trading days in February on the futures contract for
December delivery are used to determine the IV
factor in the major corn producing states. RMA
uses the IV factor to simulate the expected price
distribution for the crop, which is then utilized
to establish the price risk component of the premium rate for revenue insurance plans for the
crop. A high IV indicates a greater likelihood for
large price movements while a low IV implies a
more stable market with futures prices expected
to move within a smaller range. Other things being equal, higher IV factors result in higher premiums on policies insuring the farmer's revenue,
Table 5

Fig. 10

Weekly Corn Futures Prices, December Contract 2012-2019

$/Bu
9.00

2012

8.00

2013
7.00

2014
2015

6.00

2016
2017

5.00

2018
4.00

3.00

2019

5	

1	

9	

13	

17	

21	

25	

29	
Week

33	

37	

41	

45	

49

Data as of April 21,2020
Source: Barchart.com

while lower IV factors result in lower premiums.
Historical values for IVs for selected major
crops are shown in Table 6. In 2016, the IV factors for corn, soybeans, and cotton dropped, indicating that the market was expecting more stable prices. Consistent with this expectation, corn
prices traded within a narrow band throughout
the year as indicated in Figure 10. While the IV

factors for these three crops increased in 2017,
they decreased for both 2018 and 2019, then held
steady for 2020 and are now at or below their
2016 levels. Corn prices traded within narrow
bands throughout 2017, 2018, and 2019, in line
with the expected price stability predicted by the
IV factors.
The 2020 IV factors for rice increased, while

Major Revenue Policy Base Prices1
CROP

2013

2014

2015

2016

2017

2018

2019

2020

Wheat, Winter ($/bu) (KS)
Wheat, Spring ($/bu) (ND)
Corn ($/bu) (IL)
Soybeans ($/bu) (IL)
Upland Cotton ($/bu) (MS)
Rice ($/cwt)

8.78
8.44
5.65
12.87
0.81
15.70

7.02
6.51
4.62
11.36
0.78
13.90

6.30
5.85
4.15
9.73
0.63

5.20
5.13
3.86
8.85
0.62
11.90

4.59
5.65
3.96
10.19
0.73
10.40

4.87
6.31
3.96
10.16
0.75
11.90

5.74
5.77
4.00
9.54
0.74
10.80

4.35
5.56
3.88
9.17
0.70
12.10

2

% CHANGE
2018/19

2019/20

17.9
-8.6
1.0
-6.1
-1.3
-9.2

-24.2
-3.6
-3.0
-3.9
-5.4
12.0

Revenue Protection for 2013-20 as of April 21, 2020.
2
Due to insufficient futures price data, revenue insurance was not available in 2015.
Source: RMA Actuarial Information Browser
1

Table 6

Volatility Factors
Historical Price
Volatility1

CROP
Wheat, Winter ($/bu)
Wheat, Spring ($/bu)
Corn ($/bu)
Soybeans ($/bu)
Upland Cotton ($/bu)
Rice ($/cwt)

Volatility Factor2

1968-2019 2013 2014 2015 2016 2017 2018 2019 2020
0.19
0.22
0.20
0.18
0.23
0.22

0.24
0.15
0.2
0.17
0.17
0.11

0.19
0.14
0.19
0.13
0.15
0.1

0.17
0.15
0.21
0.16
0.15
3

0.22
0.15
0.17
0.12
0.14
0.15

0.18
0.13
0.19
0.16
0.15
0.17

0.16
0.13
0.15
0.14
0.14
0.12

0.19
0.14
0.15
0.12
0.13
0.11

0.17
0.14
0.15
0.12
0.13
0.13

% CHANGE
2018/19

2019/20

18.80
7.70
0.00
-14.30
-7.10
-8.30

-10.50
0.00
0.00
0.00
0.00
18.20

1
Historical volatility values are obtained by fitting log-normal distribution to the time series of the ratio of the harvest price to the base price from 1968 to 2019. For each year in that time period, the harvest
and base prices are calculated by using relevant futures prices in that year. Source: Barchart.com
2
Revenue Protection as of April 21, 2020.
3
Due to insufficient futures price data, revenue insurance was not available in 2015
Source: Various RMA Manager's Bulletins

CROPINSURANCE TODAY®

17


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Crop Insurance Today Second Quarter 2020

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https://www.nxtbook.com/allen/cint/54-1
https://www.nxtbook.com/allen/cint/53-4
https://www.nxtbook.com/allen/cint/53-03
https://www.nxtbook.com/allen/cint/53-02
https://www.nxtbook.com/allen/cint/53-01
https://www.nxtbook.com/allen/cint/52-04
https://www.nxtbook.com/allen/cint/52-03
https://www.nxtbook.com/allen/cint/52-02
https://www.nxtbook.com/allen/cint/52-01
http://www.brightcopy.net/allen/cint/51-04
http://www.brightcopy.net/allen/cint/51-03
http://www.brightcopy.net/allen/cint/51-02
http://www.brightcopy.net/allen/cint/51-01
http://www.brightcopy.net/allen/cint/50-04
http://www.brightcopy.net/allen/cint/50-3
http://www.brightcopy.net/allen/cint/50-2
http://www.brightcopy.net/allen/cint/50-1
http://www.brightcopy.net/allen/cint/49-4
http://www.brightcopy.net/allen/cint/49-3
http://www.brightcopy.net/allen/cint/may2016
http://www.brightcopy.net/allen/cint/february2016
http://www.brightcopy.net/allen/cint/november2015
http://www.brightcopy.net/allen/cint/september2015
https://www.nxtbook.com/allen/cint/may2015
https://www.nxtbook.com/allen/cint/february2015
https://www.nxtbook.com/allen/cint/november2014
https://www.nxtbook.com/allen/cint/september2014
https://www.nxtbook.com/allen/cint/may2014
https://www.nxtbook.com/allen/cint/february2014
https://www.nxtbook.com/allen/cint/november2013
https://www.nxtbook.com/allen/cint/august2013
https://www.nxtbook.com/allen/cint/may2013
https://www.nxtbook.com/allen/cint/february2013
https://www.nxtbook.com/allen/cint/november2012
https://www.nxtbook.com/allen/cint/august2012
https://www.nxtbook.com/allen/cint/may2012
https://www.nxtbook.com/allen/cint/february2012
https://www.nxtbook.com/allen/cint/44-4
https://www.nxtbookmedia.com