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Department of Agricultural and Consumer Economics
University of Illinois
(217) 244-9595; firstname.lastname@example.org
The University of Illinois has developed a new tool for assessing risk
reductions associated with different marketing and crop insurance products.
The Insurance and Marketing Risk (IMR) tool was made possible with funding
from the Risk Management Agency, United States Department of Agriculture.
The IMR tool shows how different crop insurance products and marketing strategies have preformed over time. Insurance products that can be evaluated include Actual Production History (APH), Crop Revenue Coverage (CRC), Revenue Assurance (RA), Group Risk Plan (GRP), and Group Risk Income Plan (GRIP) products. Marketing strategies that can be evaluated include forward contracts and purchases of option contracts.
The tool shows yearly payments from the insurance products from 1972 through 2003. This allows users to compare how payments across insurance instruments. The tool shows frequency of insurance payments, insurance premiums, and net positions of the insurance products. Users can also sort insurance policies by average revenue, lowest revenue, and percent of time the products are below user-specified revenue levels. Often of interest is how various products would have performed in drought years such as 1988. These years often are the years in which farms face the lowest revenue. Hence, evaluating how products perform in these years provides indications of the risk reducing potential of the products.
Insurnace products vary dramatically in their risks reductions and costs. In general, group products such as GRP and GRIP have the lowest costs. In many situations, these group products actually increase revenue. However, these products do not have as great as risk reductions as do individual farm products. Individual farm revenue products such as RA and CRC usually have the highest risk reductions.
Users of IMR can also examine combinations of crop insurance and marketing
For example, users could examine how hedging 50% of expected production works in combination with revenue assurance purchases. In many situations, hedging production without using crop insurance can actually increase the potential of bad years compared to the case of not hedging.
The IMR tool comes with data for case farms in 100 Illinois counties for both corn and soybeans. These case farms include farm yields, insurance premium and other insurance information, and futures prices. By selecting a case farm, results can be obtained quickly for a case representing an average farm in a county. Users can enter yields for their own farms; thereby, tailoring the analysis for a particular farm setting.
IMR is part of the Farm Analysis Solution Tools (FAST). FAST are a series of Microsoft Excel spreadsheets that have been developed by faculty in the Department of Agricultural and Consumer Economics at the University of Illinois. There are over 20 spreadsheets that allow users to perform financial analysis, assess investment decisions and evaluate the economic impacts of various management decisions. FAST will work on any computer that has Microsoft Excel, version 97 or higher. Spreadsheets can be downloaded at no cost from farmdoc (www.farmdoc.illinois.edu).
The IMR tool is part of a continuing effort to bring risk management evaluations to Illinois farmers. The crop insurance section of farmdoc includes much written information about crop insurance. In addition, there are two web-based tools. The first is the Premium Calculator. This tool provides side-by-side comparison of insurance premiums for all products in Illinois. The Insurance Evaluator is a web-based tool that allows evaluation of alternative insurance products.