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Crop insurance indemnities rise with drought

Friday, November 22, 2013

Federal crop insurance has become a key component of producer risk management in the United States. Producers participate by purchasing policies from private insurance companies to cover possible losses on the commodities they expect to harvest in a particular crop year, with premium rates set by the Federal Government. Most producers choose revenue loss policies, which cover potential losses to both their average yield and the expected price of the commodity at harvest. The Federal Government pays a share of the producer’s premium. In most years, total premiums (including both the producer and government shares) have been above indemnities (outlays for losses). Severe drought and other weather losses in 2011 and 2012 caused indemnities to rise above premiums in those years. In any given year, individual producers may pay more for their premium than they receive in indemnities, but even in years of low losses, total indemnities have been higher than the premiums paid by producers. For additional information, see the Risk Management topic pages.

Non-converging futures and cash prices likely due to storage-rate difference

Friday, August 30, 2013

From 2005 to 2010, the prices of expiring U.S. grain futures contracts routinely exceeded the corresponding delivery market cash prices. This phenomenon, termed “non-convergence,” was particularly noteworthy in wheat markets. By appearing to simultaneously imply different prices for the same grain, non-convergence can create market uncertainty. What explains this phenomenon? When grain futures contracts expire, the seller gives the buyer a certificate that can be exchanged for a specific amount of grain, rather than transferring the actual physical commodity. Because the buyer can hold these certificates indefinitely, they provide a method to store grain, and futures exchanges charge the buyer a recurring certificate storage fee. During 2005-2010, market conditions often led the price of storing the physical commodity to exceed certificate storage fees, so expiring futures contracts became a more attractive way to store grain than holding physical grain in a warehouse. As a result, the same grain became more valuable when represented by an expiring futures contract, so the price of futures contracts rose above cash market grain prices. Addressing the divergence in storage rates is the most effective way to prevent future episodes of non-convergence. This chart is from ”Solving the Commodity Markets’ Non-Convergence Puzzle,” in ERS’s August 2013 Amber Waves magazine.

Emergency haying and grazing on land in the CRP peaked in 2012

Friday, August 23, 2013

USDA’s Conservation Reserve Program (CRP) engages farmers in long-term (10- to 15-year) contracts to establish conservation covers on environmentally sensitive land. As of June 2013, about 27 million acres of farmland were enrolled in the program. An important provision within CRP is that under certain circumstances, farmers can utilize their CRP lands for managed or emergency haying and grazing. The haying and grazing of CRP land can provide important benefits to farmers, particularly during major droughts when other sources of livestock feed are scarce, and, if done correctly, can also improve the environmental value of the conservation covers. During the 2012 drought, farmers conducted emergency haying and grazing on almost 2.8 million acres and managed haying and grazing on another 700,000 acres. This chart is found in the Amber Waves article, “The Role of Conservation Program Design in Drought-Risk Adaptation,” July 2013.

Simulating the interactions between climate adaptation and conservation program design

Monday, May 20, 2013

Farmers can adapt to their local climate in many ways, including through participation in USDA programs. In regions of the country that face higher levels of drought risk, farmers are more likely to offer eligible land for enrollment in the Conservation Reserve Program (CRP). As a consequence, CRP is both more competitive in these regions and drought-prone counties are more likely to face a binding CRP acreage enrollment cap. When counties are near their enrollment cap, farms are less likely to offer eligible land for CRP because those offers are less likely to be accepted for enrollment. In simulations of offer rates based on observed historical data, a national increase in the county CRP acreage enrollment cap to 35 percent of cropland in each county (from the current level of 25 percent), results in more offers from eligible farmers in drought prone regions of the Great Plains and the Intermountain West. This map is found in the ERS report, The Role of Conservation Programs in Drought Risk Adaptation, ERR-148, April 2013.

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