Crop insurance is a risk management tool available to agricultural producers.  Crop insurance is a federally supported and regulated program that is sold/serviced through private-sector crop insurance companies. Because crop insurance is heavily subsidized by the federal government, it’s benefits cannot be replicated in the private sector.  Because of this, crop insurance is considered the cornerstone to a good risk management plan.

Policy Types:

Revenue Protection (RP): This policy insures producers against revenue losses caused by losses in price, yield or both. The producer can insure (guarantee) an amount of revenue based on their yield history (APH) and current market prices.   If the actual revenue falls below the revenue guarantee the policyholder receives a payment.  This is by far the most common type of crop insurance purchased.

Revenue Guarantee = APH * Coverage Level * the higher of Base price or Harvest price

Indemnity payment = Revenue Guarantee – Actual Revenue

Revenue Protection w/ Harvest Price Exclusion (RP-HPE): This is the same as a RP policy except the price component is based off the spring price rather than the higher of the spring price or harvest price. Removing the Harvest price option cheapens the premium but this is not a recommended policy due to the limitations for risk management.

Yield Protection (YP): This policy type protects producers against yield losses.  The producer selects from 50-85% of yield to insure.  The producer will receive an indemnity payment if harvested yield is less than yield guarantee.

Yield guarantee = APH * coverage level

Indemnity payment = Yield shortfall (yield guarantee – actual yield) * base price

Area Revenue Protection (ARP): ARP is designed to insure against widespread loss of revenue from the insured crop in a county. Similar to RP in that it protects from a revenue loss, but it insures against a loss at the county level.  If the county revenue falls below the trigger revenue level chosen by the producer, an indemnity is paid.  Payments are not based on individual producer’s crop yields and revenues.  This policy type is generally more appealing to producers who regularly out-produce the county average or who do not have an actual yield history for their fields. The risk is that a yield loss occurs on the producer’s farm but not on the county as a whole.  This policy type is only recommended in certain situations.

Guarantee = Expected County Yield* (Higher of base or harvest price)*Protection factor (80-120%)

Actual (final) County Revenue = actual (final) county yield* harvest price

Trigger Revenue = Exp. county yield * (higher of base or harvest price)* Coverage level (60-90%)

Payment factor = (Trigger Rev. – Final county rev.)/(trigger rev – (exp. county yield * higher of base or harvest price * 0.18))

Indemnity payment = Guarantee * payment factor

Area Revenue Protection w/ Harvest Price Exclusion (ARP-HPE): This is the same as an ARP policy except the price component is based off the spring price rather than the higher of the spring price or harvest price. Similar to RP-HPE this policy type is not recommended.

Area Yield Protection (AYP):  This policy type insures against widespread loss of yield from the insured crop in a county. Similar to YP in that it only protects against a yield loss and not a price loss.  However it insures against a yield loss at the county level.  If the county yield falls below the trigger yield chosen by the producer, an indemnity is paid.  Payments are not based on individual producer’s crop yields.

Guarantee = Expected County Yield* Base price * Protection factor

Trigger Yield = Exp. county yield * Coverage level

Payment factor = (Trigger Yield-final county yield)/(trigger yield – (exp. county yield * 0.18))

Indemnity payment = Guarantee * payment factor

Key Terms:

APH – Actual production history

Sales closing date – last day to apply for coverage

Harvest Price – the average of settlement prices on futures contracts during October.

Projected/Spring Price – the new crop average settlement price during February.

RMA – Risk Management Agency of U.S. Department of Agriculture