The 2012 crop insurance program for corn and soybeans will include a trend-adjusted yield endorsement that will affect actual production history or APH yield. USDA's Risk Management Agency developed the endorsement as a way to deal with yield lag and RMA made the announcement recently.
Iowa State University Extension ag economist William Edwards offers the following explanation and observations. The trend adjustment is made by county. "It's another choice to make when you sign up for crop insurance on or before March 15, 2012," he notes. "That's the deadline for signing up for crop insurance. Ask your crop insurance agent about this before you sign up."
It's a pilot program for corn and soybeans only, although it is a big pilot being made available in 14 states. If the actuarial data works, it will be expanded to other states and other crops. Edwards says there are no additional premium costs for farmers who chose to use the trend yield adjustment.
Why farmers asked RMA to make this yield endorsement available
Many farmers feel the 10-year average Actual Production History (APH) yields used to determine their multiple peril crop insurance guarantees do not accurately reflect their current yield potential, due to improved crop genetics and cultural practices that have been introduced in recent years. A new feature called the Trend-Adjusted APH will address this concern, starting in the 2012 crop year.
Trend-Adjusted APH has been approved by the Federal Crop Insurance Corporation (FCIC) Board for both corn and soybeans in most of the Corn Belt, including all counties in Iowa. Basically, a trend adjustment factor is estimated for each county. This factor is equal to the estimated annual increase in yield, and is based on county average yields determined by the National Agricultural Statistics Service (NASS) each year. Each yield reported in the individual insurance unit's APH history is adjusted upward by the trend adjustment factor, times the number of years that have passed since the yield was recorded.
Here's how the crop insurance APH can be adjusted for lag
Table 1 (which accompanies this article) shows an example for an insurance unit with 10 years of yield history for corn and an average yield of 163 bushels per acre. Assume that the trend adjustment factor in the county where the unit is located is 2.0 bushels per acre per year. So, 2.0 bushels are added to each yield for every year since it was recorded. Adjustments range from two bushels for the immediate past year to 20 bushels for a yield that was recorded 10 years ago. The adjusted APH yield is now the average of the adjusted yields, 174 bushels per acre, instead of the unadjusted average of 163 bushels per acre. That is the yield that will be used to calculate the unit's crop insurance guarantee in 2012.
If a farmer has substituted a yield equal to 60% of the county trend-yield in some year when a very low actual yield was reported, the trend adjustment is applied to the substitute yield instead of the actual yield.
What if a crop wasn't planted each year or no records available?
In some cases the land in the insurance unit may not have an actual yield for every year, either because the crop was not planted that year, no production records were available, or other factors. The unit must have an actual yield for at least one year out of the last four to be eligible for the yield trend adjustment. If actual yields are available for fewer than four years in the last 12, the annual trend adjustment factor is reduced.
For three years of actual yields, yields are increased by only 75% of the trend factor; for two years of actual yields, yields are increased by 50% of the trend factor; and for one year of actual yields, yields are increased by only 25% of the trend factor. So, if the yield adjustment factor for the county is 2.0, the actual adjustment would be 1.5 bushels when three years of actual yields are available, 1.0 bushels when two years of actual yields are available, and 0.5 bushels when one year of actual yields is available.
In some cases a maximum or cap will be applied to the trend-adjusted average yield. The cap is equal to the highest yield in the years of yield history for the unit, plus the annual trend adjustment. Thus, in the example above the highest yield is 197 bushels per acre (2011), so the cap would be equal to 197 bushels plus 2 bushels, or 199 bushels per acre. This is higher than the average trend-adjusted yield, so the cap is not applicable. The cap will most likely apply in cases where an insurance unit has had very stable or declining yields over time.
The Trend-Adjusted APH is available for either yield protection or revenue protection policies, at all levels of guarantee except catastrophic (CAT) coverage (50% yield guarantee). Group policies, such as GRIP and GRP, have used trend adjusted county yields since they were introduced, and that procedure will not change. The Trend-Adjusted APH election must be made by the insured producer by the sales closing date each year, which is March 15 for soybeans and corn in Iowa.
For farm management information and analysis, go to ISU's Ag Decision Maker site www.extension.iastate.edu/agdm and ISU Extension farm management specialist Steve Johnson's site www.extension.iastate.edu/polk/farmmanagement.htm.