[By Tom Junge, 2014 | Keywords: Business, Revenue]
Crop Revenue Protection
With commodity prices trending lower, it can be easy to get caught up in the negative talk from farmers. This is the time to remember that most farmers have revenue protection insurance. Following is a quick summary of the most popular policy. It might be wise to talk to your better customers about their specific protection plans.
Farmers have many crop insurance options and choices available to them, including Yield Protection (YP) and Revenue Protection (RP) insurance policies, as well as the level of insurance coverage to choose. The YP policy option provides for yield only insurance protection, based on historic actual production history (APH) yields on a given farm unit. The RP policy option provides for a guaranteed minimum dollars of gross revenue per acre (yield x price), based on yield history (APH) and the average Chicago Board of Trade prices for December corn futures ($4.62) and November soybean futures ($11.36) during the month of February.
All of the different crop insurance options and alternatives have premium costs associated with them. Crop insurance premiums are partially subsidized by the Federal Government, with coverage levels of 80 percent or lower subsidized at a higher level than the 85 percent coverage level.
This cost-sharing arrangement makes it possible for many growers to secure better coverage than they otherwise could afford without government assistance. The result is affordable protection for growers and manageable costs for taxpayers.
Coverage Level 50% 55% 60% 65% 70% 75% 80% 85%
Premium Assistance 67% 64% 64% 59% 59% 55% 48% 38%
Most farmers in Iowa purchase 80-85 percent coverage.
According to Rain and Hail Insurance Society, 86 percent of cropland was protected by crop insurance in 2012, which allowed farmers to bounce back from one of the worst droughts in decades. An additional 52,000 policies were sold in 2013, with a record 296 million acres or 90 percent of insurable cropland covered by crop insurance.
Here is an example for corn RP with 185 APH, 85 percent coverage for 2014.
- 185 bu./acre X 85% x $4.62/bu. = $726.50 per acre guarantee.
- If October futures are at $3.75/bu. at harvest, then 185 bu./acre X $3.75/bu. = $693.75 per acre. Since the revenue is lower than the guarantee, the producer would receive an insurance payment of $32.75/acre.
- If corn prices happen to drop to $3.50/bu., the insurance payment would increase to $79.00/acre.
Here is an example for soybean RP with 48 APH, 85 percent coverage.
- 48 bu./acre X 85% x $11.36/bu. = $463.49 per acre guarantee.
- If October futures are at $10.50/bu. at harvest, then 48 bu./acre X $10.50/bu. = $504.00 per acre. Since the revenue is higher than the guarantee, the producer would not have an insurance claim.
While we know 2014 farm income will be lower, it may not be as bad as it seems due to Crop Revenue Protection.