HARVEST PRICE OPTION: VALUABLE OR NOT?

Lindsay Mitchell

Oct, 27, 2017  |  Today's News |  Additional Research

In a recent Farm Doc Daily article, University of Illinois and Ohio State University economics reviewed the Harvest Price Option (HPO) historical performance.  Understanding performance is key to knowing how farmers could be impacted if attempts to eliminate HPO in the coming Farm Bureau are taken seriously.

 

A quick review of the information reveals that HPO is purchased most on corn acres than on other commodities reviewed, though it yields the least benefit.

 

Please read the full article here.  But for a quick summary:

 

  • Historically, HPO insurance has been justified as protection for farmers who forward sell crops and for livestock producers who produce their own crops. This perspective presents HPO as a replacement value feature when yield declines and price increases from planting to harvest.
  • While impossible to know until harvest if the harvest price will be higher, insurance price at harvest has exceeded the projected insurance price in 37% to 47% of years since 1974 for the crops examined in this study.
  • Triggering HPO increases the insurance coverage price for that crop year. Averaged across all years since 1974, HPO increased the average coverage price by 6.2% to 7.8% for the crops examined in this study.
  • By overwhelmingly electing HPO protection and paying a higher premium for it, farmers have indicated that they value HPO. Reasons include the increasing coverage offered by HPO and the replacement value for forward sales and farm-grown feed needs. Not all farms make forward sales and not all farms feed livestock; however, all farms have the potential to benefit from the increased coverage offered by HPO. Other reasons for its popularity may also exist.
  • The HPO insurance mechanism implies that using the projected insurance price to calculate insured liability understates insured liability provided by HPO insurance.
  • From a historical perspective, HPO was the first of what has been a series of policy initiatives to increase insured coverage by means other than by electing a higher coverage level. These initiatives include trend-adjusted yield, minimum yield value, and yield exclusion.

 

Zulauf, C., G. Schnitkey, J. Coppess, and N. Paulson. "Harvest Price Option: Historical Assessment." farmdoc daily (7):197, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, October 26, 2017.