Trend-Adjusted APH Yield Endorsement Update

Trend-Adjusted APH Yield Endorsement Update

Adjusted rates for Actual Production History yields should lower most 2012 crop insurance premiums. Here's an update on this new feature.

A new crop insurance feature for the 2012 spring planted crops is called the Trend-Adjusted APH Yield Endorsement. This endorsement is available for either yield protection (YP) or revenue protection (RP) policies, at all levels of guarantee.

The product is not available catastrophic (CAT) and group policies, such as GRIP and GRP. The group products have used trend-adjusted county yields since they were introduced, and that procedure will not change. The Trend-Adjusted APH Yield Endorsement must be indicated by the insured farmer to their crop insurance provider by the spring sales closing date (sign up deadline) each year, which is March 15 for corn and soybeans in Iowa in 2012.

Figure 1.

Here's the latest information regarding this new feature, as explained by Steve Johnson, an Iowa State University Extension farm management specialist. His source is the USDA Risk Management Agency and his fellow ISU Extension economists.

What is this new TA Option, and should I sign up for it?

This new Trend-Adjusted APH Yield Endorsement, often called the TA Option was 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 USDA's National Agricultural Statistics Service (NASS) each year.

Each yield reported for the individual insurance unit's APH history is adjusted upward by the trend adjustment factor. This number is then multiplied times the number of years that have passed since the yield was recorded.

Example of Actual APH vs. Trend Adjusted APH Yield

The table accompanying this article shows an example for an actual insurance unit with the most recent 10 years of yield history for corn. The simple average yield of 174.7 bushels per acre represents the actual APH average yield.

Assume that the trend adjustment factor in the county where the unit is located is 2.38 bushels per acre. So, 2.38 bushels are added to actual yield for each of the most recent 10-year yield history. Trend-adjusted yields range from 2.38 bushels for 2011 to 30.94 bushels per acre for the oldest yield in the 10-year database, or 1999. This 30.94 bushel yield adjustment represents 13 years times 2.38 bushels per acre.

The Trend-Adjusted Yield is now the average of the adjusted yields, 193.5 bushels per acre, instead of the unadjusted average of 174.7 bushels per acre. Either yield can be selected to calculate the unit's crop insurance revenue guarantee for 2012.

Source: Crop Insurance Industry, February 2012

In some cases the farm 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 TA Option. 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.

In some cases a maximum or cap will be applied to the trend-adjusted 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 198 bushels per acre (2004), so the cap would be equal to 198 bushels plus 2.38 bushels, or 200.38 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.

Disadvantage in taking the Trend Adjusted Option

The TA yield may end up lower than what the approved yield would be with a yield floor or yield cup applied. However, yield floors and cups do not apply when the TA Option is used. This will rarely be a problem, as yield floors are used when the average

yield is much lower that the county T-Yield. With only one year of records the floored yield is 70% of T-Yield, 2-4 years it is floored at 75% of T-Yield, and 5 or more years it is floored at 80% of T-Yield.

Since the decision to take the TA Option is made on the units insured on a county basis, the farmer would need to determine if having a lower TA yield on one unit would be worth the benefit of the TA Option on all units insured in the county.

Look at the advantages of the Trend Adjusted Option

Most farmers will benefit from the TA Option as the higher yields provide a larger revenue guarantee. With the rerating of crop insurance products for 2012, the premiums in Iowa were already expected to decrease by 13% for corn and 9% for soybeans, respectively.

The larger revenue guarantee benefit provides a larger "farm safety net" should a natural disaster occur, but also from the ability to pre-harvest market even more bushels for delivery. This is especially true when using revenue protection (RP) coverage which guarantees both the yields (APH X level of
coverage) and price (higher of the projected price or harvest price).

Conclusion: The premium impacts for 2012 will depend on the projected price and volatility factors determined in the month of February and released in early March. Another consideration when electing to take the TA Option will be the potential to benefit from the higher revenue guarantee, or move to a lower level of coverage and benefit from a higher percentage of subsidies used to calculate the final premium.

For farm management information and analysis, go to ISU's Ag Decision Maker site and ISU Extension farm management specialist Steve Johnson's site

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