Farmers should usually at least choose CAT coverage.While CAT does not provide much coverage, its costs are low.If more protection is desired, one of the other products will have to be selected.
Choosing among the products that provide additional coverage can proceed along the line of the major divisions in Figure 1.The first choice is between individual or county coverage.The second choice is whether to choose yield insurance, revenue insurance with no guarantee increase, or revenue insurance allowing the revenue guarantee to increase.
Individual or County Insurance
County level insurance products (GRP and GRIP) are excellent products for farms whose yields closely track county average yields. Tracking occurs when the following two conditions are met.First, the farm's yields are above average when the county yields are above average and vice versa.Second, farm yields do not fall too far below the county yields.If farm yields do not fall 20 percent below county yield, the second condition is met.
Many farms in Illinois meet these two conditions, particularly in the central part of the state.In my opinion, county level products are under-used.Because of lower costs associated with administrating county-level products, GRP and GRIP can provide significant risk reductions at costs lower than individual yield products.The major disadvantage to county-level products is they do not insure an individual farm's results.It is possible for a farm to have poor yield while the county will not have a poor yield.
Yield and Revenue Insurance
The choice between a yield or revenue insurance generally should be dictated by the use of pre-harvest marketing alternatives. Marketing alternatives include forward pricing of grains, selling futures contracts, and buying put options.
If these alternatives are used for less than 20 percent of expected production, revenue products with no guarantee increase are good alternatives (ie. IP, RA base price option, or GRIP).Revenue insurance policies include features similar to hedging.Therefore, these policies substitute for marketing alternatives.Moreover, hedging may offset the pricing provisions of the revenue insurance, thereby increasing risks.Therefore, use of marketing alternatives should be undertaken with caution if revenue insurance is purchased.
If marketing alternatives are used for somewhere between 20 and 50 percent of expected production, yield products are good alternatives (i.e., APH and GRP).The yield insurance will provide protection against yield declines while the marketing alternatives will provide protection against price increases.
If marketing alternatives are used aggressively, revenue products allowing guarantee increases are alternatives (i.e., CRC or RA with the guarantee increase provision).The guarantee increase provision provides protection against instances in which yields are low and prices rise.In these cases, the guarantee increase will offset some or all of the losses associated with the marketing alternatives.This provision does come at a cost.Revenue products allowing for guarantee increases are more expensive than either yield products or revenue products not allowing for guarantee increases.
