February was the beginning of the 2014 crop insurance price discovery period. I thought this would be a good time to review how crop insurance can help farmers manage their risk and maximize their farming operations.
The crop insurance policy I will reference in this blog is the Revenue Protection (RP) policy which is the most commonly purchased policy. The Revenue Protection policy provides coverage for yield loss as well as price protection.
Your initial protection is based on your actual farm’s yield average and the spring price. I will use a yield average of 180 in this example which is around the average for Coles County.
The next component is the spring price. The spring price is figured by using the December corn futures during the month of February. In this example, I will use $4.50 which should be in the ballpark once the price discovery period is over.
The Revenue Protection policy provides a revenue guarantee. The revenue guarantee varies depending on the level of coverage chosen. We will use a coverage level of 85% which is the highest available for revenue protection.
With a yield average of 180 at 85% coverage, the yield guarantee would be 153 (180 x .85). The revenue guarantee is the yield guarantee times the spring price. In this example, the revenue guarantee would be $688.50 (153 x $4.50).
This is an impressive revenue guarantee, but the policy offers even more price protection. In addition to the spring price discovery period, there is also a fall price discovery period. The fall price discovery period is figured during the month of October using the December corn futures price. The Revenue Protection policy gives you the higher of the spring or fall price to give the highest revenue guarantee.
Here are a couple of examples to show how the policy can work:
Let’s say we have a year with an average yield where harvest prices fall. In this example, we will figure the average harvest of 180; but a harvest price of $3.50. Here is how the claim would work: 153 x $4.50= $688.50 revenue guarantee
180 x $3.50= $630 actual farm revenue
$688.50 – $630= $58.50 claim payment
Let’s look at an example with a drought situation where yield is down, and the harvest price is higher than the spring price. We will figure a harvest of 80 with a harvest price of $5.50. Here is how this claim would work: 153 x $5.50= $841.50 revenue guarantee
80 x $5.50= $440 actual farm revenue
$841.50 – $440= $401.50 claim payment
There are many other claim scenarios, but both of these illustrate the excellent protection crop insurance can provide. Please contact me at 345-7063 or by e-mail at email@example.com if you would like to discuss how crop insurance can help your farming operation.