Crop Insurance Today May 2015 - (Page 13)

Table 3. Volatility Factors Historical Price Volatility1 Volatility Factor2 % CHANGE 1968-2013 2008 2009 2010 2011 2012 2013 2014 2015 2012-13 2013-14 Wheat, Winter ($/bu) Wheat, Spring ($/bu) Corn ($/bu) Soybeans ($/bu) Cotton ($/lb) RICE 0.20 0.23 0.21 0.18 0.24 0.23 0.24 0.33 0.27 0.33 0.26 0.24 0.19 0.17 -20.8 -10.5 0.33 0.25 0.24 0.25 0.19 0.15 0.14 0.15 -6.7 7.1 0.30 0.37 0.28 0.29 0.22 0.20 0.19 0.21 -5.0 10.5 0.31 0.31 0.20 0.23 0.18 0.17 0.13 0.16 -23.5 23.1 0.20 0.27 0.21 0.40 0.19 0.17 0.15 0.16 -11.8 6.7 0.15 0.22 0.19 0.22 0.14 0.11 0.10 3 -9.1 3 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 2014. 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 for 2011-15 and Revenue Assurance for prior years. 3 Due to insufficient futures price data, revenue insurance is not available in 2015 Source: Various RMA Manger's Bulletins with 15 percent and 20 percent deductibles for producers whose yields were about equal to their actual production history. Rising supplies were also the story behind the soybean, cotton, rice and spring wheat harvest price declines. The winter wheat harvest price was established before the large 2014 outturn was known for other grains and oilseeds, and its increase relative to its base price reflects the 11 percent decline in the 2014 winter wheat crop. [Information sources for this section include: USDA, Foreign Agricultural Service, P,S&D data base; USDA, Office of the Chief Economist, World Agricultural Supply and Demand Estimates Report (WASDE), various issues; USDA, NASS Quick Stats; RMA Manager's Bulletins and the Price Discovery Application.] Federal Crop Insurance Program Experience Reflecting the improved weather and large harvests, the actuarial performance of the Federal Crop Insurance Program improved moderately in 2014. After back-to-back years of gross underwriting losses (defined as gross indemnities exceeding gross premiums) in 2012 and 2013, the program had a gross underwriting gain (gross premiums exceeding gross indemnities) in 2014. The sharp decline in farm and base prices and volatility factors, as described in the prior section, reduced the total insured liability to about $110 billion in 2014, $14 billion lower than the record high set in 2013. Accordingly, gross premium was $10.1 billion in 2014, down $1.7 billion from the prior year. Although lower prices reduced insured production values and premiums, Figure 12. Prices for 2014 RP and RP-HPE Plans of Insurance $/Lb. $/Bu. 13.36 Base 9.65 10.00 8.00 7.02 7.17 6.51 6.17 4.62 12.00 12.60 10.00 8.00 6.00 3.49 4.00 2.00 2.00 0.00 0.78 0.64 to n at Co t he p. rin g W he Sp W in te rW ea n yb So at s 0.00 n 13.90 Harvest ce 4.00 Base 14.00 U 6.00 Harvest 16.00 Ri 12.00 Co r the riskiness of prices expected for the coming crop year. The factor is estimated using the Black-Sholes model of implied volatility, which is based on observed prices for futures market options contracts. RMA uses the volatility factor to derive an expected price distribution for the crop. That distribution is then used to simulate price risk and establish the component of the premium rate for revenue plans that reflects the price risk. The volatility factor is shown in Table 3. When base prices decline, as they did in 2013 and 2014, insured liability declines, provided other factors affecting liability are unchanged, and total premium declines. If volatility factors also decline, as they did for 2014 and 2015, premium rates decline which adds to the drop in total premium caused by the lower base prices. For 2014, the volatility factors for major crops all declined, with a notable 24 percent drop for soybeans. The options market was signaling that price risk may be lower in 2014. However, prices dropped considerably for major crops, as noted in Figure 11 for corn, and price declines were a contributing cause of loss on many policies. The changes in futures prices during 2014 from the time base prices were established to the harvest period are shown in Figure 12. The harvest prices shown are the average daily prices in the harvest month for the futures contract used to establish the base prices. These prices are used to calculate revenue to count to establish the level of indemnity for an RP policy. A second consecutive year of record corn production in 2014 explains the decline in harvest price to $3.49 per bushel, a 24 percent drop from the base price. Such a drop was enough to trigger indemnities on policies CROPINSURANCE TODAY® 13 http://www.Barchart.com

Crop Insurance Today May 2015

Table of Contents for the Digital Edition of Crop Insurance Today May 2015

“Leg Godt,” or as the Danes would say, “Play Well” (Legos and Crop Insurance)
2014 Year in Review
Florida Hosts Industry Leaders
Four Presented with Industry Awards
Dean Benson Receives Outstanding Service Award
Jeff Meyer Receives NCIS Industry Leadership Award
NCIS Hosts Committee Leaders
Crop Insurance in Action Kiodette and Rich Stroh, Powell, Wyoming
Crop Insurance Today May 2015 - Cover1
Crop Insurance Today May 2015 - Cover2
Crop Insurance Today May 2015 - “Leg Godt,” or as the Danes would say, “Play Well” (Legos and Crop Insurance)
Crop Insurance Today May 2015 - 2
Crop Insurance Today May 2015 - 3
Crop Insurance Today May 2015 - 2014 Year in Review
Crop Insurance Today May 2015 - 5
Crop Insurance Today May 2015 - 6
Crop Insurance Today May 2015 - 7
Crop Insurance Today May 2015 - 8
Crop Insurance Today May 2015 - 9
Crop Insurance Today May 2015 - 10
Crop Insurance Today May 2015 - 11
Crop Insurance Today May 2015 - 12
Crop Insurance Today May 2015 - 13
Crop Insurance Today May 2015 - 14
Crop Insurance Today May 2015 - 15
Crop Insurance Today May 2015 - 16
Crop Insurance Today May 2015 - 17
Crop Insurance Today May 2015 - 18
Crop Insurance Today May 2015 - 19
Crop Insurance Today May 2015 - 20
Crop Insurance Today May 2015 - 21
Crop Insurance Today May 2015 - 22
Crop Insurance Today May 2015 - 23
Crop Insurance Today May 2015 - Florida Hosts Industry Leaders
Crop Insurance Today May 2015 - 25
Crop Insurance Today May 2015 - 26
Crop Insurance Today May 2015 - 27
Crop Insurance Today May 2015 - 28
Crop Insurance Today May 2015 - 29
Crop Insurance Today May 2015 - Four Presented with Industry Awards
Crop Insurance Today May 2015 - 31
Crop Insurance Today May 2015 - 32
Crop Insurance Today May 2015 - Dean Benson Receives Outstanding Service Award
Crop Insurance Today May 2015 - 34
Crop Insurance Today May 2015 - 35
Crop Insurance Today May 2015 - Jeff Meyer Receives NCIS Industry Leadership Award
Crop Insurance Today May 2015 - 37
Crop Insurance Today May 2015 - NCIS Hosts Committee Leaders
Crop Insurance Today May 2015 - 39
Crop Insurance Today May 2015 - 40
Crop Insurance Today May 2015 - 41
Crop Insurance Today May 2015 - 42
Crop Insurance Today May 2015 - Crop Insurance in Action Kiodette and Rich Stroh, Powell, Wyoming
Crop Insurance Today May 2015 - 44
Crop Insurance Today May 2015 - Cover3
Crop Insurance Today May 2015 - Cover4
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