REVENUE GUARANTEES ON CROP INSURANCE PRODUCTS
Assurance (RA), Crop Revenue Coverage (CRC), and Income Protection (IP) are multi-peril
crop insurances that provide revenue guarantees. When indemnified revenue falls
below the revenue guarantee, these revenue products make payments equal to revenue
guarantee minus indemnified revenue. Payments bring revenue back up to the level
of the revenue guarantee.
The revenue guarantee and indemnified revenue
are calculated using futures prices. Futures prices are usually above cash prices
farmers receive for their grain. Hence, the "cash flow" protection offered
by crop insurance is less than the stated revenue guarantee offered by the crop
insurance product. This article describes why this occurs and how to calculate
the difference between the revenue and "cash flow" guarantee.
Guarantees in Crop Insurance Products
The minimum revenue guarantee
offered in crop insurance products is based on three factors:
1. APH yield.
The APH yield is specific to a farm or a unit. It usually is based on a unit's
2. Base price. Base prices are calculated using Chicago
Board of Trade (CBOT) futures contracts. For corn, the base price equals the average
of settlement prices of the December corn contract during the month of February.
For soybeans, the base price equals the average of settlement prices of the November
soybean contract during the month of February.
3. Coverage levels. A farmer
selects a coverage level.
The calculation of a revenue guarantee is illustrated
for a farm insuring corn that has a 150 bu. APH yield. The base price is $2.40
and the farmer has selected a 75 percent coverage level. The revenue guarantee
for this farm equals $270 per acre (150 bu. APH x $2.40 base price x 75% coverage
Two of the products - RA with the harvest price option and CRC -
allow this minimum guarantee to increase when the harvest price is above the base
price. More detail on revenue guarantee increase provisions, as well as other
features of crop insurance, are described under the "Product Descriptions"
tab in the crop insurance section of farmdoc (www.farmdoc.uiuc.edu).
that will be compared against the revenue guarantee to determine if whether and
insurance payment occurs equals the actual yield from the farm times a harvest
price. Like the base price, the harvest price equals the average of settlement
prices of CBOT futures contracts.
Cash Flow Guarantee
prices typically are above cash prices that farmers receive for grain. The basis
(cash price minus futures price) should be used to adjust the revenue guarantee
in order to arrive at a more accurate representation of the "cash flow"
guarantee offered by crop insurance.
Take the example of a $270 per acre
revenue guarantee based on an 150 bu. APH yield, a $2.40 base price, and a 75
percent coverage level. Given a $2.40 future price, the cash price often is $.20
below the future price. (See the Illinois Regional Basis Tool in the marketing
section of farmdoc for basis differences around Illinois.) A $.20 per bu. basis
reduces revenue by $30 per acre. Hence, the $270 revenue guarantee offered by
the insurance products works out to be a "cash flow" guarantee of $240
per acre ($270 - $30).
Worksheet 1 provides a format for calculating cash
flow guarantee that considers the basis and the premium of the crop insurance
1 was used to calculate cash flow guarantees for the above example farm given
that it was located in LaSalle County. The Premium Calculator at farmdoc was used
to obtain the premium per acre. Cash flow guarantees are shown in the following
awareness of the difference between the revenue guarantee and the cash flow guarantee
may influence coverage level choices. Farmers may want to increases coverage levels
to account for the fact that the cash flow guarantee is below the revenue guarantee.
Also, farmers should be aware that actual revenue can be less than that stated
by the revenue guarantee in the insurance contract and should plan accordingly.
Issued by: Gary Schnitkey, Department
of Agricultural and Consumer Economics