Impact of Popcorn Conversion Factor on Crop Insurance Payments

Impact of the Popcorn Conversion Factor on Popcorn Insurance Liability
(Indemnity) Payments

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Foreword
Thisdocumentdescribeschallengesfacedbyfieldstaff andprocessorsoncontractingacresfor the purpose of
growingcommerciallyusable popcorn. Producersinitially,are excitedaboutthe opportunityof growingpopcornbased
on processor’spopcornpremiumshowever,whenthe producercheckswiththeirCropInsurance agent,the sentiment
changes.

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Contents
Foreword...................................................................................................................................................................1
List of Tables and Figures ............................................................................................................................................3
Discussion..................................................................................................................................................................4
Actual Production History........................................................................................................................................4
Transition Yields .....................................................................................................................................................4
Popcorn Conversion Factor......................................................................................................................................4
First Scenario (Iowa) ...............................................................................................................................................5
Second Scenario (Indiana) .......................................................................................................................................8
Third Scenario(Nebraska) .....................................................................................................................................10
Other Types of Insurance Plans Available ...............................................................................................................12
Questions.................................................................................................................................................................12
Conclusion ...............................................................................................................................................................13
Bibliography.............................................................................................................................................................14

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List of Tables and Figures
Table 1 –Suggested 2011 Premium Guarantees for Popcorn and Corn. ..........................................................................6
Table 2 – 2012 Premium Guarantees for Popcorn and Corn...........................................................................................6
Table 3 – 2013 Premium Guarantees for Popcorn and Corn...........................................................................................7
Table 4 - Suggested 2011 Premium Guarantees for Popcorn and Corn...........................................................................8
Table 5 - 2012 Premium Guarantees for Popcorn and Corn. ..........................................................................................8
Table 6 - 2013 Premium Guarantees for Popcorn and Corn. ..........................................................................................9
Table 7 - Suggested 2011 Premium Guarantees for Popcorn and Corn.........................................................................10
Table 8 - 2012 Premium Guarantees for Popcorn and Corn. ........................................................................................11
Table 9 - 2013 Premium Guarantees for Popcorn and Corn. ........................................................................................11

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Discussion
Actual Production History
Actual ProductionHistory (APH) and YieldProtectionpoliciesinsure producersagainstyieldlossesdue to natural
causes such as drought, excessive moisture, hail, wind, frost, insects, and disease. The farmer selects the amount of
average yieldhe orshe wishestoinsure;from50% to 85%. If the harvestisless thanthe yieldinsured,the farmerispaid
an indemnitybasedonthe difference.Indemnitiesare calculatedby multiplyingthisdifference bythe insuredpercentage
of the selected price. (Shields, 2012)
ProvinganAPHyieldrequiresrecordsforaminimumof fouryearsandamaximumof tenyearsforeachinsurance
unit. Information used to prove crop yields include sale receipts, farm or commercial storage records, and feed
consumptionrecords.The recordsmust be for continuousyears,startingwiththe most recentyear and continuingback
in time. Once a missing year is reached, no history prior to that date may be used. For example, if a producer has nine
yearsof productionrecordsspanningaten-yearperiod,onlythe yearsafterthe missingone are counted.Itisnotallowed
to dropa yieldfromone yearbecause of poorproductioninthatyear.Anexceptionismade if the cropbeinginsuredwas
notplantedinacertainyear.Inthat case,a zeroacreage reportissubmittedandcontinuousrecordsare maintainedeven
withoutdatafor that year.This isimportantfor growerswho rotate crops and those whohave summerfallowacresthat
are normally not planted to the same crop continuously. (Iowa State University, 2012)
Transition Yields
If at least foursuccessive yearsof records are not available, atransitionor T yieldforeach missingyearmustbe
substituted.Each county has a different T yield. It is based on the 10-year historical county average yield.Growers with
no recordsare assigned65 percentof the T yieldastheirAPHyield(see the example).Growerswitharecordforone year
receive 80 percentof the T yieldforthe otherthree years.With two records,theyreceive 90 percentof the T yield,and
withthree records,theyreceive 100 percentof the T yieldforthe one remainingyearneededtocalculate the APH.Once
each year has been assigned a yield, the APH is just a simple average of the four yields. (Iowa State University, 2012)
A newfarmeror one who hasneverplantedthe cropto be insuredwill receive 100percentof the T yieldforthe
APH.If the crop continuestobe plantedforfouryears,the T yieldswillbe replacedwiththe actual productioneachyear.
Newproducerswhohave previouslybeencloselyassociatedwithfarmingaparticularunit,suchaschildrentakingovera
family farm, can use the previous operator’s records to establish an APH yield. (Iowa State University, 2012)
Once four years or more of production history are available, the APH is the simple average of all of the yearly
reportedyields.The fouryearsof historywilleventuallybuildtotenyears.Aftertenyearsof historyare reached,the APH
becomesa movingten-yearaverage yield.Aseachnew year of productionhistoryisadded,the oldestrecordisdropped
out of the calculation. (Iowa State University, 2012)
Popcorn Conversion Factor

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The Popcorn Revenue Coverage (Pilot) Crop Provisions state that the projected and harvest prices for popcorn
shall be established as the “price for grain type corn determined in accordance with the [CEPP] multiplied by a factor
publishedinthe actuarial documents.”The Special Provisionsof Insurance forPopcornYieldProtectionauthorizesuseof
this same factor in determining the price election. In addition, the factor effectuates a change in the unit of measure,
converting the prices from a grain type corn price per bushel basis to a popcorn price per pound basis. The factor was
provided by the submitter of the Popcorn Revenue Coverage (Pilot) Program. (W & A Crop Insurance Division, 2011)
Since the price of popcornissubstantiallyhigherthanthatof dentcorn,determiningboththe projectedprice and
the harvestprice constitutedakey componentof the developmentof arevenue-basedproductforpopcorn.Fortunately,
popcorn competesstronglyforacreage withdentcorn, and therefore the productionincentivesforthese two crops are
closelylinked.Popcornisgenerallypricedatafixeddifferentialorasapercentageof the priceof fieldcornatthe beginning
of the crop year. The relationshipdoesnotfloatduringthe growingseason;asa resultgrowerscarry price risk.In recent
years, most of contracts have shifted to a “futures factor” model, wherein the price is set as the futures market price,
convertedtodollarsperpound,multipliedbya fixedfactor.Asa result,the developerdeterminedaconstantconversion
factor could be applied to both the base and harvest prices to convert corn futures prices (and therefore the revenue
projected and harvest prices for dent corn) to popcorn values. (W & A Crop Insurance Division, 2011)
The projectedprice fora producerwhochoosesrevenue protectionorrevenue protectionwiththe harvestprice
exclusion equals the projected price for corn determined in accordance with the Commodity Exchange Price Provisions
(CEPP) multiplied by a factor contained in the actuarial documents. (USDA, 2011)
The harvestprice fora producerwhochoosesrevenue protectionwillbe the harvestprice forcorndeterminedin
accordance with CEPP multiplied by the same factor that was used to establish the projected price. (USDA, 2011)
First Scenario (Iowa)
Producer has interested in growing popcorn. Processor calls on the Producer to contract acres Producer states
thathisaverage popcornyieldhistoryis3808 poundperacre.Hisfieldcornaverage bushelsperacre are 173.Farm isnon-
irrigated and wholly owned by the producer. Grower turns down contract based on lack of insurance coverage.
In 2011, the factor was suggestedtobe 0.0459 in Watts & Associates; Popcorn RevenueCoveragePilotProgram
Supporting Materials. Whencomparing popcornto corn, youcan see that the premiumliabilityisjustslightlyhigheron
popcorn than corn. This difference is only about 1% of the total Premium liability per acre.
Premium Guarantee - Popcorn Premium Guarantee - Corn

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3808 Lbs. / Acre 173 Bushels/Acre
75% Percentage Coverage Level 0.75 Percentage Coverage Level
2856 PoundsCovered/ac 130 Bu. Covered/Acre
$ 5.65 ProjectedPrice perbu.of Corn $ 5.65 ProjectedPrice perbu.of Corn
0.0459 PopcornConversionFactor 1 Corn Conversion
$ 0.26 Price perLb. of Popcorn $ 5.65 Price perBu of Corn
2856 Poundscovered/ac 130 Bu. Covered/Acre
$ 0.26 Price perLb. of Popcorn $ 5.65 ProjectedPrice perbu.of Corn
$ 741 Premium Liability per Ac $ 733 Premium Liability per Ac
Table 1 –Suggested2011 Premium Guarantees for Popcorn and Corn.
In CY 2012, the CEPP changedthe conversionfactorfrom the suggested 0.0459 (W & A Crop Insurance Division,
2011) to 0.0400 (USDA, 2011), effectively reducing the conversion factor nearly 13%. In the example given below, this
reduction calculates out to an $88 loss in guaranteed dollars per acre.
$ 5.65 ProjectedPrice perBu.of Corn $ 5.65 ProjectedPrice perbu.of Corn
2856 PoundsCovered/Acre 130 Bu. Covered/Acre
In
CY 2013, the CEPP changedthe conversionfactorfrom0.0400 (USDA,2011) to 0.0368 (USDA,2012), an 8% reduction
fromthe previousyearandnearly 20% reductionfromthe firstyear. Thisreflectsa$147 lossinguaranteeddollarsper
acre fromthe suggested 2011 factor to CY 2013.
Table 2 – 2012 Premium Guarantees for Popcorn and Corn.

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0.75 Percentage Coverage Level 0.75 Percentage Coverage Level
$ 5.65 ProjectedPrice perBu.of Corn $ 5.65 ProjectedPrice perbuof Corn
$ 0.21 Price perLb. of Popcorn $ 5.65 ProjectedPrice perbuof Corn
$ 594 Premium Liability per Acre $ 733 Premium Liability per Ac
Table 3 – 2013 Premium Guarantees for Popcorn and Corn.

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Second Scenario (Indiana)
Long time popcornproducerhas interestinpassingthe farm downto his son. Processorcallson the Producerto
contract acres.Theirfarmyieldsaverage yieldsof 3843 lbs./ ac popcornand 175 bu./ ac FieldCorn. Farmisnon-irrigated
and whollyownedbythe producer. Growerdecidesnottogrow basedonthe lackof insurance coverage guaranteewhen
meeting with his Load Officer for this year’s Operation Loan.
Supporting Materials. Whencomparing popcornto corn, youcan see that the premiumliabilityisjustslightlyhigheron
popcorn than corn. This difference is only about 1% of the total Premium liability per acre.
Table 4 - Suggested 2011 Premium Guarantees for Popcorn and Corn.
In CY 2012, the CEPP changedthe conversionfactorfrom the suggested0.0459 (W & A Crop Insurance Division,
Table 5 - 2012 Premium Guarantees for Popcorn and Corn.

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In CY 2013, the CEPP changed the conversion factor from 0.0400 (USDA, 2011) to 0.0368 (USDA, 2012), an 8%
reduction from the previous year and nearly 20% reduction from the first year. This reflects a $148 loss in guaranteed
dollars per acre from the suggested 2011 factor to CY 2013.
0.75 Percentage Coverage Level 0.75 Percentage Coverage Level
$ 599 Premium Liability per Acre $ 742 Premium Liability per Ac

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Third Scenario (Nebraska)
Potential Grower is interested in growing popcorn and wants to grow. When he meets with his crop insurance
agent, he finds out that his county, Dodge, isn’t listed on the Popcorn Pilot Program. Crop Insurance agent, not familiar
with popcorn, states that there is not insurance coverage for Dodge count for Popcorn.
Coverage in other counties may also be available by individual written agreement if certain criteria are met,
including records for at least three years of actual production history (APH). Contact a crop insurance agent for more
information. (USDA,2013) Crop Insurance agentswill oftenlookatT-Yieldsof adjacentcountiesthatare listedunderthe
Popcorn Pilot Program or have history growing popcorn. For this scenario, we will look at Colfax County,Nebraska. The
averages in this county are 4198 lbs. / ac of popcorn and 176 bu. / ac of field corn.
Supporting Materials. When comparing popcorn to corn, you can see that the premium liability is about 9% higher on
popcorn than corn. This comes out to approximately $71 / acre premium over corn.
Table 7 - Suggested 2011 Premium Guarantees for Popcorn and Corn.

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In CY 2012, the CEPP changedthe conversionfactorfrom the suggested0.0459 (W & A Crop Insurance Division,
In CY 2013, the CEPP changed the conversion factor from 0.0400 (USDA, 2011) to 0.0368 (USDA, 2012), an 8%
reduction from the previous year and nearly 20% reduction from the first year. This reflects a $162 loss in guaranteed
dollars per acre from the suggested 2011 factor to CY 2013.
4198Lbs. / Acre 176Bushels/Acre
0.75Percentage Coverage Level 0.75Percentage Coverage Level
3149PoundsCovered/ac 132Bu. Covered/Acre
$ 5.65ProjectedPrice perBu.of Corn $ 5.65ProjectedPrice perbu.of Corn
0.0368PopcornConversionFactor 1Corn Conversion
$ 0.21Price perLb. of Popcorn $ 5.65Price perBu of Corn
3149PoundsCovered/Acre 132Bu. Covered/Acre
$ 0.21Price perLb. of Popcorn $ 5.65ProjectedPrice perbu.of Corn
$ 655PremiumLiabilityper Acre $ 746PremiumLiabilityper Ac

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Other Types of Insurance Plans Available
Group Risk Plan (GRP) insuresagainstwidespreadlossof productionbasedon countyaverage yields.Whenthe
countyyield (T-Yield) forthe insuredcrop,asdeterminedbythe National Agricultural StatisticsService (NASS),fallsbelow
the triggerlevel chosenbythe farmer,an indemnityispaidregardlessof the individual farmer’sactual yield.Yieldlevels
are available forupto 90% of the expectedcountyyield.GRPprotectioninvolveslesspaperworkandcosts lessthanthe
farm-level coverage described above. However, individual crop losses may not be covered if the county yield does not
suffera similarloss.Thisinsurance issuitable forfarmerswhose croplossestypicallyfollow the countypattern. (Shields,
2012)
Group Risk Income Protection(GRIP) makesindemnitypaymentsonlywhenthe average countyrevenue forthe
insuredcropfallsbelowthe revenue chosenbythe farmer. (Shields,2012)
Revenue Protection(RP) insuresproducersagainstyieldlossesdue tonatural causes such as drought,excessive
moisture, hail, wind, frost, insects, and disease, and revenue losses caused by a change in the harvest price from the
projectedprice.The producerselectsthe amountof average yieldhe orshe wishestoinsure;from50% to 75% (in some
areas to 85%). The projected price and the harvest price are 100% of the price determined by futures contracts. The
amount of insurance protectionisbasedon the greaterof the projectedprice or the harvestprice.If the harvestedplus
any appraisedproductionmultipliedbythe harvestprice islessthanthe amountof insurance protection, the produceris
paid an indemnity based on the difference. (Shields, 2012)
Revenue ProtectionWithHarvest Price Exclusion insuresproducersinthe same mannerasRevenue Protection,
exceptthe amountof insurance protection isbasedonthe projectedprice only(i.e.,the amountof insurance protection
isnot increasedif the harvestprice isgreaterthanthe projectedprice). (Shields,2012)
Questions
1. Why the reductioninPopcornConversionFactor?
2. What factors are takenintoconsiderationtoalterthe PopcornConversionFactor?
3. What data isutilizedincalculatingthe conversionfactor?
4. Is the additionof countiestothe pilotprogram(insurance coverage)possible?

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Conclusion
In resultof the data providedinthisreport,there hasbeenadramaticdropin the conversionfactorreducingthe
overall liabilityforthe cropinsurance agenciestoprovide cropinsurance coverageperacre forpopcorn. The reductionof
the conversionfactorbynearly20% inthe IndianaandIowaexamples effectivelyreducesthe guaranteeddollarsperacre
for the producerby the same amount. The Nebraskaexample showedasimilardropin coverage but not as drastic. This
reductionincoverage influencesthe decisionof the individual producer when deciding which crops to grow next year.

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Bibliography
IowaState University.(2012). Proven Yields and InsuranceUnitsforCrop Insurance. IowaState University.
Shields,D.A.(2012). Federal Crop Insurance:Background. CongressionalResearchService.
USDA. (2011). InformationalMemorandum:PM-11-055.KansasCity.
USDA. (2011). Popcorn RevenueInsuranceStandardsHandbook:2012 and Succeeding Crop Years.
USDA. (2012). InformationalMemorandum: PM-12-058.KansasCity.
USDA. (2013). 2013 Nebraska CommodityInsuranceFactSheet - Popcorn. RMA.
W & A CropInsurance Division.(2011). Popcorn RevenueCoveragePilotProgramSupportingMaterials.

Impact of Popcorn Conversion Factor on Crop Insurance Payments

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