Jane Dotson
Crop insurance is a valuable tool for farmers to reduce income variability and protect against yield and price risks. It is especially useful for producers who forward price their production before harvest and for livestock producers who need to purchase extra grain in short crop years. In the event of crop revenue losses, farmers may receive indemnity payments to compensate for the difference between their actual revenue and their revenue guarantee. To calculate crop insurance payments, farmers must consider their chosen coverage level, the APH yield for their farm, the harvest price, and their actual yield. The calculation of indemnity payments varies depending on the specific insurance policy and the type of farm, with online tools available to assist farmers in estimating potential payments.
| Characteristics | Values |
|---|---|
| Purpose | To protect revenue and manage risk |
| Who it's for | Producers with crop revenue losses |
| What it covers | Yield and price risk, including reduced yields and harvest price drops |
| Types of insurance | Multiple-peril crop insurance, Revenue Protection (RP) crop insurance, Revenue Protection with Harvest Price Exclusion (RP-HPE) |
| Calculation method | Multiply projected price by APH yield and chosen coverage level (50%-85%); indemnity payment = revenue guarantee – actual revenue |
| Trigger | When actual revenue falls below the revenue guarantee |
| Payment amount | Equal to the difference between revenue guarantee and actual revenue |
| Considerations | Number of insured crops, number of acres, type of farm, type of crop insurance, documentation of yield losses |
| Tools | Yield calculator, spreadsheets, information sheets |
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What You'll Learn
Calculating risk management
One key factor in calculating risk management is historical data analysis. This involves examining past events, such as weather patterns, crop yields, and market prices, to identify trends and potential risks. For example, in the upper Midwest, excess rainfall, drought, and price declines have impacted corn and soybean production in the past, increasing the likelihood of crop insurance indemnity payments in 2024.
Another important consideration is the type and level of crop insurance coverage. Farmers need to understand the different options available, such as Revenue Protection (RP) crop insurance, which covers both yield and price risks. RP policies have a guaranteed revenue level, and if the actual revenue falls below this guarantee, an indemnity payment is made to compensate for the loss. The calculation of this payment is based on the difference between the guaranteed revenue and the actual revenue.
To initiate RP crop insurance payments, the "threshold yield" must be calculated. This is done by multiplying the APH yield, crop insurance spring price, and coverage level, then dividing by the estimated fall harvest price. The formula provides a baseline for when insurance payments are triggered. After determining the "threshold yield", the actual farm yield is subtracted, and the difference is multiplied by the projected harvest price to estimate the gross crop insurance indemnity payment.
Additionally, it is crucial to consider the number of crops covered by the insurance policy. Some policies require the inclusion of at least two crops, each making up 10% or more of the total insured planted acres. The revenue guarantee is then calculated as a weighted average of the revenue per acre for each crop. This ensures that the insurance coverage is adequately diversified and reflects the overall risk of the farm.
Overall, calculating risk management in crop insurance involves a combination of data analysis, understanding insurance coverage options, and applying formulas to determine potential indemnity payments. By effectively managing risk, farmers can protect their livelihoods and ensure the stability of their operations in the face of unpredictable events and market fluctuations.
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Revenue Protection policies
Revenue Protection (RP) insurance guarantees a certain level of revenue rather than just production. It protects farmers from declines in both crop prices and yields. The guarantee is based on market prices and the actual yield on the farm. The production portion of the revenue guarantee is based on the farmer's Actual Production History (APH), which is an historic average of their actual yields.
RP insurance protects farmers from the combined effects of yield and price risk. It is a valuable tool for reducing year-to-year income variability. A variety of coverage levels and options are available, allowing farmers to design the protection they want for their own operation.
The premium for an RP policy is calculated using the projected price. If the harvest price is higher, the amount of insurance coverage increases, but the premium does not change. The harvest price used to set the guarantee cannot be more than 100% above the projected price established in February.
The final revenue guarantee is computed by multiplying the higher of either the projected price or the harvest market price by the APH yield for the farm, by the chosen coverage level (50% to 85%). The actual revenue for insurance purposes is computed by multiplying the actual yield by the harvest price. An indemnity payment is received if the actual revenue falls below the revenue guarantee. The payment is equal to the difference.
RP insurance can be written so that the level of the revenue guarantee is determined solely by the February futures prices, and does not increase even if the futures price rises by harvest. The producer may elect to purchase insurance without the harvest price option (RP-HPE).
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Prevented planting payments
For example, let's consider a situation where a farmer has an insurable unit of 500 acres, with 400 acres planted with corn. If the remaining 100 acres are not planted with a second crop, the yield used in calculating the Actual Production History (APH) will be based on the production from the 400 planted acres divided by 400. However, if soybeans are planted on those 100 acres after 25 days from the final planting date, the prevented planted acres will be assigned a per-acre yield of 60% of the APH yield for the unit. This calculation is crucial for determining the overall production for the unit and, ultimately, the yield for the year.
It is important to note that prevented planting payments are not available for all crops or insurance policies. For instance, Group Risk Plan (GRP) and Group Risk Income Plan (GRIP) do not offer prevented planting payments. Additionally, certain crops, such as specialty-type commodities, may have lower prevented planting coverage factors due to their higher insurance liabilities.
To further complicate matters, the calculation of prevented planting payments has evolved over time. In 2010, the higher of the projected or harvest price was used, whereas, in 2011, only the projected price was considered. Moreover, the timing of planting can impact the payment amount. If a farmer plants after the final planting date, they may not be eligible for a prevented planting payment, and the guarantee may be reduced by a certain percentage for each day of delay.
When it comes to drought conditions, prevented planting coverage is available, but it is limited to losses caused by the effects of drought in the current crop year. Multi-year droughts may reduce the eligible acreage for prevented planting if the irrigation water shortage persists into the insurance period. In such cases, only the acres that could have been irrigated under normal weather conditions during the insurance period would qualify for prevented planting coverage.
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Harvest price
The harvest price is a key component in calculating crop insurance payments, particularly for Revenue Protection (RP) policies. It is the price used to calculate the value of the actual harvested yield, also known as the actual revenue for insurance purposes.
A harvest price is determined by averaging the new crop futures prices during a specified month, typically October, for specific crops. For example, for corn and soybeans, the harvest price is determined by averaging the new crop futures prices for both commodities during October. This average is then used to set the final revenue guarantee. The final revenue guarantee is computed by multiplying the higher value between the projected price and the harvest market price by the Actual Production History (APH) yield for the farm and the chosen coverage level, which can range from 50% to 85%.
The actual revenue for insurance purposes is then calculated by multiplying the actual yield harvested by the harvest price. If the actual revenue falls below the revenue guarantee, an indemnity payment is made to the producer. This payment is equal to the difference between the actual revenue and the revenue guarantee.
It is important to note that the harvest price used to set the guarantee cannot exceed 100% of the projected price established in February. In other words, it cannot be more than double the projected price. This restriction ensures that the premium for an RP policy remains unchanged even if the harvest price increases.
The harvest price is a critical factor in RP crop insurance as it provides protection against price risks. By using the harvest price to calculate the actual revenue, producers are safeguarded against potential losses due to price fluctuations.
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Indemnity payments
For example, if a farmer has a revenue guarantee of $500 per acre and their actual revenue is $430 per acre, they will receive an indemnity payment of $70 per acre. This payment helps to offset the financial loss experienced by the farmer due to factors such as natural disasters or market price fluctuations.
The calculation of indemnity payments can vary depending on the type of crop insurance policy chosen. The Actual Production History (APH) plan, the oldest federal crop insurance plan, guarantees the farmer a yield based on the historical performance of their crops. If the production is less than the guaranteed amount, an indemnity payment may be due. The Yield Protection (YP) plan is similar to the APH plan but is only available for crops eligible for Revenue Protection. It uses the projected price established by the applicable board of trade or exchange to calculate guarantees and potential indemnity payments.
The Revenue Protection (RP) plan provides protection against losses due to price increases, decreases, or a combination of both. It uses two price discovery periods, with the projected price being determined before harvest and the harvest price being released near harvest time. If the harvest price is higher than the projected price, the revenue guarantee is recalculated using the harvest price. An indemnity payment may be triggered if the calculated revenue (insured's production multiplied by the harvest price) is less than the revenue protection guarantee for the crop acreage.
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