Ratings changes made by the Risk Management Agency (RMA) will cause premiums for Group Risk Income Plan with the Harvest Price option (GRIP-HR) to be higher in 2012 as compared to 2011. For 90% coverage level policies, 2012 premiums will average 10% higher than 2011 premium for corn across Illinois and 11% higher for soybeans. Higher GRIP-HR premiums, along with lower COMBO product premiums (see here), suggests that farmers who have purchased GRIP in the past may wish to evaluate crop insurance decisions, as relative costs of the products have changed. The remainder of this article first describes GRIP use, and then details changes to expected yield and premium occurring to GRIP in 2012.

GRIP Use in Illinois

In 2011, 1.3 million acres of corn were insured using GRIP, representing 13% of all corn acres insured. Use of GRIP in corn in 2011 is 60% lower than in 2006, when 3.2 million acres were insured using GRIP. In 2011, 717 million acres of soybeans were insured using GRIP, representing 10% of all soybean acres insured. Soybean use in 2011 is 55% lower than in 2006 when 1.6 million acres were insured using GRIP.

Several reasons have been given for the reduction in use of GRIP including: 1) higher projected prices in recent years lead farmers desiring to protect their own farms, 2) higher volatilities in recent years increased GRIP premiums at 90% coverage levels more than farm-level products, 3) GRIP premiums have increasing increased due to changes in ratings, and 4) introduction of enterprise unit subsidies have lowered the costs of farm-level products. Decreasing use of GRIP may continue due to 2011 premium cost increases.

Expected Yields for Corn

Figure 1 shows each expected yields for corn in Illinois. These expected yields are set by RMA to reflect the most likely yield in a county. Expected yields are used to set GRIP guarantees. Higher expected yields result in higher guarantees and vice versa.

Expected yields for corn follow expected yield patterns in Illinois. Higher yields occur in central and northern Illinois. The five highest expected yields occur in central Illinois counties: Warren (189.0 bushels), Macon (187.2), McDonough (186.8), Woodford (186.1) and Tazewell (186.1) Counties. Lower yields occur in southern Illinois. The five lowest expected yields occur in Perry (110.9), Franklin (121.3), Williamson (121.5), and Jefferson (122.6) Counties.

RMA changed 2012 expected yields from 2011 levels. Overall, expected yields have increased an average of .9 bushels in 2012. Not all counties have increases. Across all Illinois counties, 38 have increases in expected yields in 2012, 36 have the same yield in 2011 and 2012, and 21 have decreases in yields in 2012.

GRIP-HR Premiums for Corn

Figure 2 shows GRIP-HR corn premiums by county. Premiums are for a 90% coverage level at a 100% protection level, choices resulting in the highest GRIP-HR premiums. At a 90% coverage level, GRIP-HR premiums can be reduced by lowering the protection level. The lowest protection level is 60%, which results in premiums that are 60% of those shown in Figure 1. A 60% protection level choice also reduces payments to 60% of the 100% protection level.

Premiums in Figure 1 are shown for a $6.01 projected price and a .29 volatility, values at 2011 levels. Computing 2012 premiums using 2011 projected price and volatilities allows comparison of premium changes from 2011 to 2012 that are caused by adjustments to rates. Changes reflect an assessment of the risks, with premium increases indicating an assessment that risks are higher. Actual 2012 premiums will vary from those shown in Figure 1 because the projected price and volatility will vary from those used in generating premiums in Figure 1.

GRIP-HR premiums range considerably over Illinois. Two counties have premiums over $120 per acre: Wayne ($127) and Hamilton ($121). Five counties have premiums at $110 and $120 per acre: Clay ($112), Franklin ($110), McLean ($110), Washington ($110), and White ($112). At the low end, eight counties had premiums below $70 per acre: Adams ($66), Brown ($69), Clinton ($65), Crawford ($67), Jersey ($69), Lawrence ($66), Macoupin ($69), and Madison ($66) Counties.

On average, GRIP-HR premiums at the 90% coverage level in 2012 are 10% higher than 2011 premiums. Only two counties have premium reductions from 2011 levels: Green (-3%) and Grundy (-1%). The largest increases occurred in Madison (16%) and Richland (15%) counties.

Some of the premium increases are due to higher expected yields. However, even counties with the same or lower expected yields have higher premium. For example, the 36 counties that have the same in expected yields in 2011 and 2012 have an average increase in premiums of 9%. The 21 counties with lower expected yields have a 7% premium increase.

Expected Yields for Soybeans

Figure 3 shows expected yields for soybean. Similar to corn, the highest expected yields are in northern and central Illinois. The five highest expected yields occur in Carroll (56.8 bushels), Piatt (55.8), Champaign (54.8), Douglas (54.9), and Moultrie (54.8) Counties. The lowest yields occur in southern Illinois. The five lowest yields occur in Randolph (36.1 bushels), Perry (36.6), Massac (37.5), and Jefferson (38.9) Counties.

The 2012 expected soybean yields average .9 bushels higher than 2011 expected yields across all Illinois counties. Three counties have expected yield decreases: Grundy (-1.3 bushels), Massac (-.60 bushels), and Union (-.10 bushels). Thirteen counties have no change in expected yields while 81 have expected yield increases.

GRIP-HR Premiums for Soybeans

Figure 4 shows GRIP-HR premiums at a 90% coverage level and 100% protection level. Premiums range across counties. Five counties have premiums $80 per acre of over: Piatt ($83 per acre), Jo Daviess ($83), Carroll ($83), Champaign ($80), and Stephenson ($80). The six counties with the lowest premiums are Randolph ($48 per acre), Bond ($51), Johnson ($54), Washington ($54), Williamson ($54), and Monroe ($54) Counties.

At 2011 projected price and volatility levels, 2012 premiums for GRIP-HR 90% coverage levels polices average 11% higher than 2011 premiums. The highest increase of 14% occurs in ten counties: Jefferson, Winnebago, Perry, Wayne, Stephenson, Peoria, Monroe, Lee, Whiteside, and Marion Counties. The six counties with the lowest increases are Saline (3%), Henderson (4%), Edwards (5%), Fayette (5%), McDonough (5%), and Warren (5%) Counties.

Summary

Even given these premium increases, payments received from corn GRIP products averaged over time likely will exceed premiums that are paid by famers. This is possible because of risk subsidies associated with these multi-peril crop insurance products. Compassions of historical yields suggest that average payments will not exceed premiums for soybean products.
While expected payments exceed premium for corn, recent premium increases make GRIP relatively less attractive compared to the farm-level COMBO products. Moreover, COMBO product premiums have decreased, further providing an incentive to switch to COMBO products. Farmers who have purchased GRIP should evaluate whether the returns, costs, and risk reductions still favor GRIP.

The corn market was surprised by the USDA's final 2011 corn production estimate and the estimate of December 1, 2011 corn stocks. The March 2012 futures price declined by $0.52 per bushel in the two sessions following the release of the reports.

At 9.642 billion bushels, December 1 corn stocks were 425 million bushels smaller than those of a year ago and the smallest in 5 years, but were about 240 million bushels larger than the average of the reported trade guesses. Those guesses were in an extremely wide range of 500 million bushels. Three of the 15 analyst guesses reported by Dow Jones were 9.55 billion bushels or larger, so not everyone was surprised by the USDA estimate.

Part of the surprise in the magnitude of December 1 stocks came as a result of the average expectation of a smaller 2011 crop estimate. With the absence of any supporting evidence, it is not clear why, on average, analysts expected a 30 million bushel reduction in the estimated size of the crop. The USDA estimate was a very modest 48 million bushels (0.4 percent) larger than the November 2011 forecast. The 78 million bushel difference between expected and actual production accounts for about one third of the surprise in the stocks estimate. The remainder of the surprise is the result of incorrect expectations about the level of feed and residual use of corn during the first quarter of the 2011-12 marketing year.

The market anticipated a high level of use to be revealed, perhaps partly to correct what was perceived as an under-estimate of feed and residual use in the previous quarter. The surprisingly large estimate of September 1, 2011 stocks implied a very low level of feed and residual use during the final quarter of the 2010-11 marketing year and for the entire marketing year. Some believed that the low (and incorrect) estimate of feed and residual use last year had resulted in an unrealistically low forecast of use for the current year. It was thought that the December 1 stocks estimate would "correct" the past errors and show a high level of use during the September-December quarter, resulting in a larger projection of use for the year. That did not happen. Instead, implied use during the quarter was consistent with the USDA forecast of 4.6 billion bushels so the forecast was not changed. Calculated feed and residual use of 1.838 billion bushels during the quarter represents 40 percent of the projected total for the year. The percentage of total use during the first quarter last year was an unusually large 43.2 percent. In the previous 4 years, use during the first quarter averaged 39.3 percent of the marketing year total, in a range of 38.2 to 40.7 percent.

The seasonal pattern and the total implied feed and residual use of corn during the 2010-11 marketing year is still troublesome. Explanations for the low level of use center on the potential for over-estimating the amount of corn used to produce ethanol, increased feeding of distiller's grains, and/or an underestimate of the size of the 2010 crop. None of those explanations, however, addresses the inconsistent seasonal pattern of implied use. In addition, the implied sharp decline in feed and residual use of corn, all grains, and all feeds (including an estimate of distillers grain) per animal unit during the last half of the marketing year is without explanation.

With year-ending stocks of U.S. corn still expected to be a relatively low 6.7 percent of projected use, a lot of price uncertainty remains. The immediate focus may be on the size of the South American corn crop and the implications for U.S. corn exports. The USDA lowered the projected size of the Argentine crop from 1.14 to 1.02 billion bushels in last week's report. Recent and upcoming precipitation will help stabilize that crop, but the extent of damage may exceed that reflected in the current forecast. The forecast of the Brazilian crop was unchanged at 2.4 billion bushels. The USDA now expects U.S. corn exports to reach 1.65 billion bushels during the current marketing year. Nineteen weeks into the year, export inspections have averaged 32.7 million bushels per week (adjusted for Census export estimates through November). Inspections need to average 30.9 million per week from now through August in order for the total to reach the projection. A further reduction in the size of the South American crop, as occurred in the drought of 2008-09, could boost U.S. exports above the current projection, particularly if China continues the current pattern of small weekly purchases.

Beyond the South American crop, corn prices will be influenced by 2012 U.S production prospects. In general, analysts are anticipating more acres, higher yields, and a much larger crop than in 2011. Such a large crop has not yet been priced into the market. Potential crop size will be gradually reflected from spring through harvest, beginning with the USDA's February baseline projections and including the March 30 Prospective Plantings report. Oh, and don't forget the March Grain Stocks report to be released on the same day.

This fall, the U.S. Department of Labor's Wage and Hour Division proposed new regulations for children working agricultural jobs. The Wage and Hour Division (WHD) worked with the National Institute for Occupational Safety and Health to craft the first proposed updates to agricultural child labor regulations in over forty years. The purpose of the proposed regulations is to increase the safety of children who work in agriculture align the rules with those of other high-risk occupations, such as manufacturing.

Current federal, agricultural child labor standards primarily concern the age at which children become eligible to perform various activities on the farm. Generally, a child must be 16 or older to work on a farm during school hours and 14 years old to perform farm work when school is not in session. 29 C.F.R. § 570.2. 12 and 13 year olds may work on a farm either with their parents or with parental consent. Children younger than 12 may only work on their parents' farms or on small farms exempted from the federal statute. Children ages 10 to 12 can work on farms not owned by their families only in rare circumstances, and the employer must show that the business would be severely disrupted without the child labor. 29 C.F.R. §§ 575.1-575.9

Federal law also prohibits children under 16 from performing hazardous activities unless they are employed by their parents or working on their parents' farm. Hazardous activities include, but are not limited to, operating large farm machinery, working in enclosed spaces with dangerous animals (studs and new mothers), working on a ladder or scaffold more than 20 feet high, working inside certain spaces such as manure pits, and handling hazardous farm chemicals. 29 C.F.R. § 570.71 contains the full list of activities considered hazardous.

Although the proposed rule changes cover a wide range of safety concerns–it is important to note that none of the WHD's proposed regulations would apply to a child working on a farm owned in whole or in part by his or her parents. Additionally, the new rule would not affect a child's participation in 4-H and FFA. The WHD has specifically stated that under the new rules a child will be able to raise his or her 4-H or FFA animal, even if the animal is being raised on a working farm. The child participating in these activities would not be an employee, and thus the new regulations would not apply. The WHD's entire proposal and links to more in-depth analysis can be found on the WHD's website.

One proposed change would prevent children from working with animals in timber operations, manure pits, storage bins, and pesticide handling. Other elements of the proposal would prohibit children under 16 from operating nearly all power driven vehicles (a similar rule has been in effect for non-agricultural labor for over 50 years). Perhaps the least controversial proposal would prohibit children from using electronic communication devices while operating power driven vehicles, a prohibition that several states already enacted. The proposal with perhaps the widest impact on commercial agriculture would prohibit children under 18 from working in "country grain elevators, grain bins, silos, feed lots, stockyards, livestock exchanges and livestock auctions." A side-by-side fact sheet of the current and proposed rules is available here.

The WHD believes that these new regulations will increase the safety of children employed in agricultural jobs. However, children, as well as adults, who live and work in rural communities may find them life changing, and not in a positive way. In some farming communities, the prohibited places of employment are the largest employers, and a minor who wants to work in agriculture when he or she is an adult, would obviously benefit from having work experience in those places. On the other hand, the Department of Labor proposed these rules because the "fatality rate for young agricultural workers is four times greater than that of their peers employed in nonagricultural work places" and "injuries suffered by young farm workers tend to be more severe than those suffered by nonagricultural workers." Moreover, current agricultural child labor rules are more than forty years old and have never been updated. For an interesting thirty minute audio podcast discussing the impacts of the proposed rule, see here.