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How Does Crop Insurance Work?

Posted August 08, 2012 in Advice Column, Greene County

Since this is an unusually dry year, and we’re a rural community, it appeared fitting to talk about crop insurance.

The two most popular policies are revenue protection (which considers both yield and price) and yield protection (which considers only yield, at a set price).

Each year, the farmer reports his yields to his crop agent, for each of his farms. Those yields make up the Actual Production History (APH), a simple average of up to 10 years of actual production.

He can choose a level of coverage, from 50 percent to 85 percent of that APH.

The closing prices for the fall contracts (November beans and December corn), on the Chicago Mercantile Exchange, are averaged during February, to determine the “Projected Price.”

For 2012, they were set at $5.68 per bushel for corn and $12.55 per bushel for beans.

Corn example
180 bu APH  x 80 percent Level of Coverage = 144 bu x $5.68/bu = $818 coverage per acre.

With yield protection, he simply gets paid $5.68 for each bushel less than 144. The prices at harvest have no bearing. The most he can collect is $818 per acre.

With revenue protection, a “harvest price” (determined during October, for the fall contracts) comes into play. It pays the higher of the two prices, for the bushels he’s short (unless the harvest Price protection is excluded).

As I write this article, December corn, on the Chicago Board, is about $8. With revenue protection, the coverage per acre increases (144 bu x $8.00/bu =  $1,152). That’s $334 more coverage, per acre, than yield protection (set at $818). The farmer pays no additional premium, but has the protection, should the price be higher at harvest.

This is an unusual year. We don’t normally have a drought.  Had we raised a bumper crop this year, we might have had a $4 harvest price. The revenue coverage can pay, if the harvest price is lower. The bushels he raises are valued at that lower price, and if that doesn’t add up to the $818 coverage per acre he purchased, he’ll receive a payment.

If he’d raised the 144 bushels, but the harvest price was $4 per bushel, we’d value his crop as follows: 144 bu x $4.00/bu = $576.

But, he purchased $818 coverage.  $818 – 576 = $242 payment per acre with revenue protection.  There would be no payment with yield protection, because he raised 144 bushels of corn.

For 2012, about 90 percent of the insured corn and soybean acres in Iowa are covered by revenue protection. Only about 7 percent are covered by yield protection. In my opinion, the difference between the two policies will be evident this year.

Information provided by Joan St.Clair, MacDonald Insurance Agency, 1117 Main St., Scranton, 712-652-3344.

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