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2011 Volatility Factor?[1]

Art

Any suggestions on what we should be using for volatility factor for 2011 corn and soybeans “COMBO” premiums at this time? Should we look at 2008?

MG

Dear Mr. G.,

For sales closing on 1/31/11, the current corn price is $5.74 and volatility is 33.  The current soybean price is $12.61 and volatility is 27 for sales closing on 1/31/11.  Those values are posted and are currently being updated on the RMA Website at:

http://www3.rma.usda.gov/apps/pricediscoveryweb/ActiveDiscoveryPeriods.aspx

For sales closing on March 15, I am calculating a similar volatility.  The current RMA volatilities are based on the CME September contract, not the December corn or November soybeans CME contracts.  The current corn volatility is about 32-34 and 23-25 for soybeans for sales closing on March 15.  This could clearly change over the next 60 days.

Art

Dear Art:

I am a crop insurance agent.  One of my companies gave me your email and encouraged me to contact you with a question I have.  My question is if an agent’s book of business in 2011 remained identical in coverage selected by the farmer, acres and crops planted, enterprise unit usage, etc., etc. would the agent realize any increased revenues under the new 2011 SRA?   Basically, I have the opinion that all things remaining identical in 2011 as 2010 the agent will realize no more income unless they get more customers or increase coverage levels because of the national premium threshold provision which reduces agent commissions if national premium volume exceeds an amount, which I believe was based on the national premium in 2006 or 2007?

In short, if you do nothing to your book and the price continues to increase as it is right now, will the agency make equal, more or less amounts of money.

Lastly, it would seem that the Profit Sharing bonus provisions of agency contracts will likely be of little value this year as in 2008.  Prices are going to be high enough in the insurance contract that they very likely will fall thus creating a revenue loss per the terms of a revenue policy.  If it falls dramatically as in 2008 then it will be near to impossible for carriers to make a profit thus eliminating the profit share to the agent.  So, my hunch is that I probably would make more money if the prices were lower than I will make with high prices.  That sounds a little crazy, but I am fearful it is true!

Your thoughts would be appreciated.

Thanks,

Crop Agent

Dear Agent,

I estimated the impact of the SRA on agent commissions last fall for the 4 State crop insurance workshops.  The market is little higher since then so the estimated commission rates posted in table 1 below are likely a little lower than last fall’s estimate.

However, corn and soybean agents gain from higher prices because while the commission rate is lower one multiplies times a higher premium cost.  Also the total Administrative and Operating (A&O) dollars are fixed so commissions are prorated.  Some of this is explained in a paper posted on AgManager.info at:

http://www.agmanager.info/crops/insurance/risk_mgt/rm_pdf10/AB_AgentCommission.pdf

My current estimate of agent commission rates is about 10-11%.  Agents may also pick up nearly a point for doing their own processing.  There may also be a profit share paid.  However, the combined profit share and commission cannot exceed the total A&O by state. 

I think it is too early to estimate any loss or gain on the insurance book, especially based on a lower price forecast.  If one really thinks price is going to fall then one should short the market!  Unless you have some inside information there is no reason to believe the market is wrong and prices are too “high”.

Because the total A&O dollars are fixed at the national level, the effect of higher corn and soybean prices is to shift A&O dollars from States that are insuring commodities with crop insurance prices that have not increased.  Next year’s corn and soybean prices maybe lower and that would reduce commissions from current levels in the Corn Belt.

The estimated A&O estimates are based on current prices and are presented in Table 2 below.  The A&O limit does not apply to GRIP, GRP or to new products.

If sales do not increase, then Corn Belt agents will likely see a 30-40% reduction in commissions.  It will be a smaller percentage reduction for Great Plains’ agents because agent commissions started at a lower level.

Art

Table 1.  Estimated Agent Commission Rates.

Table 2  Estimate of the National A&O for Crop Insurance Companies and Agents