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The Individual Productivity Index Explained

AManitoba Agricult ural Services Corporation official assured some skeptical Keystone Agricultural Producers members recently that using individual indexing is an accurate way to determine crop insurance coverage.

Paul Bonnet, vice-president of research and program development, said the individual productivity index (IPI) smoothes out adjustments to each farmer’s probable yield.

So if a farmer has several years of above-or below-average yields, it takes longer to be reflected than it would if coverage was based on a straight 10-year average yield.

“It doesn’t really matter theoretically if a producer is above or below the (risk) area average or which risk area he or she is in, they should get the same probable yield guarantee at the end of the day,” Bonnet said.

“I think IPI does a really good job of providing accurate yields and yet buffering so when you have bad years, especially when you’re just starting out, it doesn’t show up right away in your average,” Bonnet said. “I think IPI works quite well.”

Some farmers suspect that in big-risk areas, such as Risk Area 12, which takes in most of the Red River Valley, the area average yield distorts the IPI calculation and individual farmers’ probable yields.

For example, some farmers in the southern part of Risk Area 12 fear their probable yields are lower because of poor yields due to excessive moisture in northern parts of the area last year. But Bonnet said it doesn’t matter if a farmer’s average yield is above or below the area average because, over time, the yields based on the IPI calculation will be close to the farmer’s 10-year average yield.

The IPI is calculated by comparing the farmer’s 10-year average yield to the 10-year average yield for the risk area. That figure is then multiplied by the area average yield to get the individual farmer’s probable yield.

Here’s an example. Say a farmer’s individual red spring wheat yield is 33 bushels an acre and the area average yield is 30. This farmer’s IPI is 1.1 or 110 per cent higher than the area average (33 30 = 1.1).

This farmer’s probable yield of 33 bushels an acre is calculated by multiplying the IPI by the area average (1.1 X 30 = 33). It’s the same as the farmer’s straight 10-year average yield.

Risk areas have been with crop insurance since its creation. They are areas where crop production risk based on soil type, climate and topography, are similar, Bonnet said.

Within risk areas, average yields are based on soil zones. So for example, in Risk Area 12 the probable yield for flax on a C12 soil is 23.5 bushels an acre, while it’s only 14.8 on an H22 soil.

Risk areas could be as small as rural municipalities and it wouldn’t make any difference to farmers’ probable yields, Bonnet said.

Just to be sure, in 2007 MASC studied farmers’ probable yields in Risk Area 12 and compared them to farmers’ straight 10-year average yields. The probable yields calculated using the IPI for 91 per cent of the area’s 900 red spring wheat producers were within four bushels an acre of individual farmers’ straight 10-year average yields.

Ninety-six and 98 per cent of the canola and flax probable yields, respectively, were within four bushels of the 10-year average yield, Bonnet said.

It takes 10 years of yield history before a probable yield, determined using the IPI, and the straight 10-year average yield will fully converge. That, and the fact there are three types of “yield buffering” involved with the IPI approach, accounts for the small differences between the two, Bonnet said.

A straight, 10-year average yield is calculated by adding up yields from the previous 10 years and dividing by 10.

The three forms of buffering under the IPI approach are as follows:

Yield losses due to hail, wildlife or third parties, such as spray drift, are not counted.

For any given year, the annual index cannot drop below 70 per cent or rise above 130 percent of the previous year’s IPI.

The risk area average cannot go up or down by more than five per cent a year.

Basing crop insurance coverage on each farmer’s own 10-year average yield is potentially another option, Bonnet said. In fact, that’s the system MASC uses for crops such as grain corn, vegetables and forage seed.

“Using the IPI is the best of both worlds,” Bonnet said in an interview. “It’s accurate and it does this buffering and smoothing at the same time so we think that’s pretty good.”

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“IPIdoesareallygoodjobofprovidingaccurateyieldsandyetbufferingsowhenyouhavebadyears,especiallywhenyou’rejuststartingout,itdoesn’tshowuprightawayinyouraverage.”

– PAUL BONNET

About the author

Reporter

Allan Dawson

Allan Dawson is a reporter with the Manitoba Co-operator based near Miami, Man. Covering agriculture since 1980, Dawson has spent most of his career with the Co-operator except for several years with Farmers’ Independent Weekly and before that a Morden-Winkler area radio station.

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