The 2021 crop insurance projected prices have now been released. Corn projected price came in at $4.58 per bushel while the soybean projected price came in at $11.87 per bushel. The price volatility for corn is 0.23 and for soybeans 0.19. Both the projected prices and price volatility factors are higher than recently experienced. As a result, both guarantees, and premiums will be higher.
What are the chances of prices declining to unfavorable levels between now and this fall? Price levels that may cause us financial harm. To gain insights into this question, we can inspect the price distribution using the projected price and implied price volatility. The price distribution gives a range of price outcomes when the underlying futures contract enters delivery. Entering delivery is December 1st for corn and November 1st for Soybeans. While we can get an idea of the range of where prices could end up this fall, we do not know anything about the path at which they will evolve through the growing season.
Buying a Revenue Protection (RP) crop insurance contract provides you protection from declining and increasing prices. Here, I am going to focus on declining prices. Recall that the crop insurance guarantee is calculated as coverage level*Actual Production History (APH)*Projected price. Assuming 2021 yields equal APH yields we can identify the price at which payments would start (coverage level*projected price) and we call this the payment trigger price. Using the price distribution, we can identify the probability of harvest prices ending up below the payment trigger price. Table 1 displays the trigger price at which payments start and the probability of prices ending below this level at contract expiration.
|Coverage Level||Floor Price||Probability below at contract expiration||Floor Price||Probability below at contract expiration|
Using Table 1, for corn and an 85% coverage level, payments start when the price at contract expiration ends up below $3.89 per bushel. There exists approximately a 23% chance that prices at harvest will be at or below $3.89. The payment trigger price for 80% coverage level is $3.66 per bushel and the probability of prices ending up at or below is 20%. There exists a 7% chance that prices at harvest will be at or below $3.21 per bushel, the 70% coverage level payment trigger price. As prices continue to decline, the probability of the price at contract expiration being at or below also declines. But the probability of low prices this fall still exists.
A similar story exists for Soybeans. Using the soybean projected price of $11.87 per bushel the 85% coverage level will start making payments when prices at contract expiration end up below $10.09 per bushel. There exists a 22% chance that the price at contract expiration will be below $10.09 per bushel. The payment trigger price for the 70% coverage level is $8.31 per bushel and there exists a 7% chance of prices falling below this value this fall.
Crop insurance protects producers from rare financially devastating events. In this article we have given weight to observing financially devastating prices. Readers should keep these prices in mind when evaluating the risks of where prices could end up this fall and the resulting financial outcomes. Buying higher levels of coverage provides a higher level of protection while also improving the probability of receiving a payment.