Understanding Crop Insurance on a short crop

[Farmer Deere]

Spring price guarantee for corn = $5.68  (This could go up in the fall if futures rally, so let's say it ends up at $6.58)

APH = 178 Bu./Acre

80% Coverage

Spring Price Revenue Guarantee = 178 * .8 * $5.68 = $808.83

Fall Price Revenue Guarantee = 178 * .8 * $6.58 = $936.99

So in a worst case scenario with a zeroed out crop, they simply pay you your full revenue guarantee right?

If you haven't presold anything you simply take the money right?

If you have contracts to fill, you have to buy them back and may be out the difference if you sold lower than the market at expiration right?

What about with a 50% crop?  Do they pay you the full rate on the missing 50% and then the difference between the spring and fall rate if the price went up?

Just trying to make sure I understand how all of this works.

[BA Deere]

That`s how I understand it.

[Hobbyfarmer]

WRONG

They only pay on the level you insured at last March. If you have a "half crop" but only spring price and the fall price is higher, you may not have a claim if you are at the 75% level or lower.

If you have the harvest price option then it is still just to the % level of your coverage. You can't insure a 100% crop Just to 85% and that was set by you in the spring.

If you have the harvest price option (most do) then you do not know what your level of coverage is yet . You know the Minimum = spring price x yield x % of elected coverage - priemium = $$$ / acre

If you have harvest price option Then which ever of the spring or fall price is greater will be your coverage (multiplier)

[Farmer Deere]

When I said "half a crop", I meant half of my guarantee, which in this case is half of 142.4, which is 80% of my APH of 178.  Yes, I do have the harvest price option.  So in reality, like you say I only know the minimum coverage at this point for sure.  Maximum will either be the same if harvest price is <= spring price or higher.

[Nebrfarmr]

There are different types of insurance, like CRC, or RA, each can have the 'harvest price' option, etc, etc.

To oversimplify the insurance I have, let's say I have a guarantee of 100 BPA(133 BPA average, at 75% coverage), and harvest price would be $6.

This gives me $600 per acre guarantee.

If I harvest 50 bushels, at $6, insurance would pay me $300.

If I harvest 90 bushels at $6, insurance would pay me $60.

Now, lets say I didn't get the harvest price option, and to keep numbers easy to figure, my spring price was $5.

If I had 50 BPA at $6 harvest price, insurance would pay me $200

If I had 50 BPA at $8 harvest price, insurance would pay me $100

If I had 'half' a crop, meaning 66 or 67 BPA, at $8 harvest price, I would get nothing.

To top it off, had I presold 75% of my crops, at $6, I would be needing to buy out my contracts, at a loss of $2 per bushel, to the tune of 33 BPA, giving me an actual 'loss' of $66 per acre, plus whatever penalties I may incur in breaking the delivery of the contract, and loss due to basis changes.

That is why I think the harvest guarantee, needs to be factored in.  If you pre-sell more than you raise, but still within your insurance guarantee, the cost of buying out your contract, is mostly covered by the harvest price option, in the event of a price spike.

[Red Steele]

The odds are that the harvest price will cover a shortfall,....but......it is limited to 200% of the spring price...if we did get into a killer drought of years duration, and corn went toe $30 or more, forward contractong could be the vehicle that costs you your farm and livelihood

.

[cowfarmer]

Hobbyfarmer hits the nail on the head. Talk to a local BTO most know every way possible to get all they can out of insurance. Our local BTO is under investigation;.

[idalivered]

this is very interesting. My contention has always been that crop insurance coverage and marketing are two very separate issues. Tieing the 2 can (not often) cause some problems.

[daniel looker]

Hobbyfarmer, who said WRONG, is correct. Farmers will get paid once yields fall  below their insured level (APH X coverage level) and at last February's new  crop futures average price. That's if they bought an APH insurance product.  Most farmers in the Corn Belt buy revenue insurance, which has the harvest  price option. Under the new COMBO "Revenue Protection" crop insurance there are no longer two types  of revenue products--CRC and RA + HPO. That's mainly semantics maybe with some subtle ratings differences that insurers know better than I do.

With Revenue Protection, the easiest way to understand it is that you have a certain amount of revenue per acre guaranteed. But farmers won't know that guarantee until this fall when harvest prices are factored in. There's a  chance futures prices could peak this summer and drop back this fall-but probably not to spring levels. That would be my biggest worry right now--what happens if the harvest price option isn't so great. If you're not completely spooked by futures after MF Global, checking with a CTA on ways to lock in this summer's rally before fall might make sense. The harvest price option is a big  help, but it doesn't protect you completely from the market.

Anyone considering futures or options to lock in potentially higher revenue?