Revenue Protection Crop Insurance Policies Could Pay Indemnity For Corn
As suggested might happen in the August 5, 2013 edition of Cattle & Corn Comments, the fall corn price for Revenue Protection (RP) insurance policies came in much lower than the spring price established in March 2013. The March average for December 2013 CME Group corn futures, which is the Spring Price guarantee for RP insurance, was $5.65/bu. The average price during October for December 2013 corn futures was $4.39/bu, $1.26/bu less than the Spring Price. This Fall Price is used to determine the fall guarantee for RP insurance policies and to calculate actual revenue.
In the August 5, 2013 Cattle & Corn Comments, an example was used calculate a spring guarantee of $700.60/acre, based on the $5.65/bu Spring Price, 80% coverage level election, and Actual Production History (APH) of 155 bu/acre. The fall guarantee is computed equivalently, only using the $4.39/bu Fall Price instead of the Spring Price. So, for the same example, the fall guarantee would be $544.36/acre (155 bu/acre × 80% × $4.39/bu). With the RP insurance policy, the final guarantee is the higher of the spring or fall guarantee. Therefore, for corn in 2013, the final guarantee is the spring guarantee. Indemnities are paid when actual revenue falls below the final guarantee, in this case $700.60/acre. Actual revenue is calculated by multiplying the Fall Price ($4.39/bu) times the actual yield harvested in 2013. If the farm in this example had an actual yield of 150 bu/acre, then the actual revenue would be $658.50/acre (150 bu/acre × $4.39/bu). As a result, the indemnity would be $42.10/acre ($700.60/acre - $658.50/acre). Conversely, if the farm’s yield had been 170 bu/acre this year, the actual revenue would have been $746.30/acre (170 bu/acre × $4.39/bu). In this case, no indemnity would be paid as the actual revenue exceeded the final guarantee. For this example farm with 80% coverage level and the 155 bu/acre APH, any yield above 159 bu/acre would not generate an indemnity whereas yields below 159 bu/acre would result in an indemnity.
The point of this example is that even at average yields, it may be possible for corn growers to receive an indemnity in 2013 due to the large drop from the Spring Price to the Fall Price. While harvest is ongoing and actual yields aren’t all known yet, anecdotal yield reports would suggest average to above average yields in much of eastern South Dakota, but still within the range that some fields could trigger an indemnity under RP insurance policies. In fact, USDA’s Crop Production report released last Friday estimates the state’s average corn yield at 145 bu/acre, below the trigger point in the example above.
The likelihood of an indemnity payout is higher for higher insurance coverage levels and lower actual yields. It is also important to note that the example is based on an insurance unit, whether it be an optional, basic, or enterprise unit. Given variability of yields this fall, it might be possible for some fields to have yields that will result in an indemnity and some will not. If insuring optional units, it is more likely to collect the indemnity on those lower yielding fields. If enterprise units were elected last spring, the lower yielding fields would be averaged with the higher yielding fields (within the same county and same practice), which would lower the indemnity paid out when compared to the optional unit with a low yield. Due to the increased subsidy in recent years for enterprise units, more growers have elected enterprise units in the last couple of years, making this a relevant consideration this fall.
Will there be an RP insurance indemnity for soybeans too? Only if actual yields fall below insured yield levels (APH times the coverage level). That’s because the Fall Price of $12.87/bu was exactly the same as the Spring Price. Thus, the fall guarantee and spring guarantee are identical. In the example in the August 5, 2013 Cattle & Corn Comments, a farm with an APH of 39 bu/acre elected a coverage level of 80%, putting the spring guarantee at $401.54/acre. This turned out to be the fall guarantee (and final guarantee) as well. For this farm, whenever the actual yield falls below 31.2 bu/acre, an indemnity is triggered. This is the yield needed to produce exactly the final revenue guarantee at the Fall Price of $12.87/bu. It is also the APH insured times the coverage level (39 bu/acre × 80%).
Producers who think they could receive a crop insurance indemnity for 2013 corn and soybeans should keep careful yield production records for each field during harvest and then discuss a possible claim with their crop insurance agent.
The information in this report is believed to be reliable and correct. However, no guarantee or warranty is provided for its accuracy or completeness. This information is provided exclusively for educational purposes and any action or inaction or decisions made as the result of reading this material is solely the responsibility of readers. The author and South Dakota State University disclaim any responsibility for loss associated with the use of this information. There is substantial risk of loss in trading commodity futures contracts and traders should consult their brokers for a full disclosure of these risks to determine whether such trading is suitable for them in light of their circumstances and financial resources.