Watts and Associates Inc. Crop Insurance Division Watts and Associates Inc. Crop Insurance Division...

Watts and Associates Inc. Crop Insurance Division


Michigan White Wheat Quality Adjustment Update

Presented to:Michigan Wheat Program

Presented by:Alex Offerdahl

Watts and Associates

March 11, 2015

Confidentiality NoticeWatts and Associates, Inc. has developed this material in cooperation with its clients for the sole use of its recipients for use in developing progressive agricultural policy and has exclusive ownership rights in part or all of its format and content. The content of this material, regardless of the format in which it is presented, including orally, in print, or electronically, may not be further disseminated. This material is protected by law.



2Use or disclosure of information or data contained on this sheet is subject to the restrictions on the title page.

Introduction

• Watts and Associates is an Agricultural Economics consulting firm based in Billings, MT

• We are the leading developer of new crop insurance products, including both Federal Crop insurance and private products.

• In Michigan growers have felt the coverage offered by the Federal Crop Insurance Program does not offer adequate or appropriate protection, particularly for quality loss

• We were engaged by the Michigan Wheat Program to develop a study on the relationship between price discount and falling number scores.

• We were also asked to work with the program to assist in working with the agency to change the way quality adjustment is handled for falling numbers.




Michigan Wheat and Crop Insurance

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

80,000,000

90,000,000

100,000,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

Wheat Planted Acres

US MI





1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

0

500,000,000

1,000,000,000

1,500,000,000

2,000,000,000

2,500,000,000

3,000,000,000

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

Wheat Production (Bu)

US MI





1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

0

10

20

30

40

50

60

70

80

f(x) = 0.244366631895044 x + 29.1402903785655

f(x) = 0.899860044142909 x + 39.1509022274738

Wheat Yield (bu/ac)

US Linear (US) MI Linear (MI)





1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

MI Wheat Insurance Participation

Planted Acres Insured Acres Participation Rate





1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

$35,000,000

MI Wheat Insurance Experience

Total Premium

Grower Premium

Indemnity





19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20112012

20132014

0.1

1

10

100

MI Wheat Loss and Payback Ratios

Loss Ratio (%) Payback Ratio




Quality Adjustment in MI White Wheat

Falling NumbersA test for cereal chemical effects of sprout damage

Technically a test for the effects of an enzyme “Alpha Amylase”, which breaks down starch

Industry standard value is 300, with lower values subject to (often variable) discounts





2011 SPOI:

Soft White Wheat will be discounted for falling numbers, regardless of U.S. grade designation as follows:

299-200 0.055

199-0 0.183





2012 SPOI:


299-200 0.054

199-0 0.181





2013 SPOI:


299-200 0.054

199-0 0.179





2014 SPOI:


299-275 0.053

274-250 0.071

249-225 0.089

224-200 0.107

199-0 0.196





Discount Translation:

Cash price for soft white wheat in Breckenridge, MI on 3/04 (Michigan Ag Commodities online posted bid price): $5.31/bu

FN Value RMA Discount Implied Discount

299-275 0.053 $0.28

274-250 0.071 $0.38

249-225 0.089 $0.47

224-200 0.107 $0.56

199-0 0.196 $1.04




Quality Adjustment Example

Quality Adjustment in MI White WheatA grower has an APH of 80 bu/ac and selects a 75% coverage level. RMA reports a projected price of $5.00/bu.

Guarantee = 80 bu/ac x $5.00 x 75% = $300/ac

Grower harvests 50 bu/ac and has a Falling Number score of 245 (Reduction in Value factor of 0.071). Yield is adjusted

50 bu/ac x (1.00 - 0.071) = 46.45 bu/ac

Revenue to Count




Quality Adjustment Example

Quality Adjustment in MI White WheatHarvest price is also $5.00/bu.

Revenue to Count46.45 bu/ac x $5.00/bu = $232.25/ac

Indemnity$300 – 232.25 = $67.75/ac

Without Quality Adjustment, indemnity would have been $50.00/ac.




Our Study




Our Study

Falling Number

Implied Empirical Discount Factor

SPOI Discount Factor

Above 300 0.000

299-275 0.000 0.053

274-250 0.000 0.071

249-225 0.035 0.089

224-200 0.111 0.107

199-0 0.306 0.196





RMA’s Proposed Approach:

RMA is working to implement an alternative approach to severe falling number situations

FN Value 2014 Discount 2015 (and future)

299-275 0.053 0.053

274-250 0.071 0.071

249-225 0.089 0.089

224-200 0.107 0.107

199-0 0.196 RIV




Reduction in Value

• Reduction in Value (RIV) is used in place of discount factors in certain crop insurance situations. It is a term used in the Special Provisions and Loss Adjustment Stand Handbooks (LASH). Typically it is used for discounts for which there are no discount schedule to account for it, i.e. discounts that “fall off the chart”. To establish an RIV a “Local Market Price” (LMP) must be established.




Example: RIV Vs. Current Discount Schedule approach

• A grower has an APH of 60 bu/ac and purchased a 75 % coverage Level for Revenue Protection. The Projected Price was $6.00/bu. His Guarantee is $270/ac

• A grower harvests 50 bu/ac with a falling number score of 185. The product is subject to quality adjustment, which will reduce the grower’s production to count based on its reduced value.

• The two approaches both calculate Quality Adjustment Factors, which are then applied to determine production to count, and then indemnities




Discount Schedule Approach

• The SPOI display a schedule of falling numbers values and attendant discount factors. Based on a score of 185, the grower’s production to count is discounted by a factor 0.196.

1.000 – Discount Factor = Quality Adjustment Factor1.000 - 0.196 = 0.804

Gross Production x Quality Adjustment Factor = Production to Count

50 bu x 0.804 = 40.2 bu

Falling Number SPOI Discount Factor

Above 300

299-275 0.053

274-250 0.071

249-225 0.089

224-200 0.107

199-0 0.196




Reduction in Value Approach

• The SPOI still display discount factors for values of 200 or above, but for lower values, specify a Reduction in Value approach. At 185, RIV is applied. The grower is discounted $2.00/bu by the local elevator for his/her damaged production.1.000 – Discount Factor = Quality Adjustment Factor

Determine Local Market Price.

Based on calls to local elevators, a LMP of $5.00/bu is established by the Approved Insurance Provider (the loss adjuster).

Reduction in Value / Local Market Price = Discount Factor

$2.00/bu RIV ÷ $5.00 = 0.400

1.000 – Discount Factor = Quality Adjustment Factor

1.000 – 0.4000 = 0.600

Gross Production x Quality Adjustment Factor = Production to Count

50 bu/ac X 0.600 = 30 bu/ac




Comparison

Discount Factor RIVGuarantee $270/ac$270/acGross Production 50 bu/ac 50 bu/acDiscount Factor 0.196 0.400Production to Count 40.2 bu/ac 30.0 bu/acRevenue to Count $201/ac $150/acIndemnity $69/ac$120/ac




Questions?

Alex OfferdahlWatts and Associates4331 Hillcrest RdBillings, MT [email protected]




Innocuous Statistics

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

0

50

100

150

200

250

300

350

Insured Acres

Mil

lio

ns

of

Acr

es





1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000 Liability

Mil

lio

nso

f D

oll

ars





1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

$0.00

$2,000.00

$4,000.00

$6,000.00

$8,000.00

$10,000.00

$12,000.00

$14,000.00

Total Premium

Mil

lio

ns

of

Do

llar

s





1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

$0.00

$2,000.00

$4,000.00

$6,000.00

$8,000.00

$10,000.00

$12,000.00

$14,000.00 U.S. Premium Totals

Premium Subsidy Producer Premium

Mil

lio

ns

of

Do

llar

s





1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

$0.00

$2,000.00

$4,000.00

$6,000.00

$8,000.00

$10,000.00

$12,000.00

$14,000.00

$16,000.00

$18,000.00

$20,000.00

Aggregate Crop Insurance Loss History

Total Premium Indemnity Producer Premium

Mil

lio

ns

of

Do

llar

s

Date post:	14-Jan-2016
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