Monday, February 28, 2011
Revenue Protection Shields Farms From Both Yield and Price Declines
Timely planting and perfect growing season weather could result in a record yield on your farm. Throughout the year the demand for corn and soybeans could be high, and despite a good domestic supply, the strong demand market keeps prices at profitable levels. Then about the time you are ready to pull the marketing trigger, some Middle Eastern dictator decides to do something stupid and nervousness spreads through the equity and commodity markets, and suddenly several dollars have been clipped off market prices. Your 2011prospects for profits have evaporated and you are now operating in the red. Oooops!
An “oooops” can be negated with Revenue Protection crop insurance, and the volatile markets that have caused sleepless nights for you necessitate a financial defense plan to protect your operation from stupid politicians in camel cultures. Revenue Protection offered by USDA’s Risk Management Administration for 2011 is a combination of Crop Revenue Coverage, Revenue Assurance, and Income Protection that have been offered since the late 1990’s. Those three products have been rolled into a Revenue Protection plan that guarantees a certain level of revenue, protecting you from a decline in yield and market price. Iowa State University economist William Edwards has produced a factsheet which describes how that guarantee is based on market prices from either February or harvest prices and the actual yield on your farm.
Revenue Protection uses the calculations and coverage from Yield Protection insurance and adds a market price factor. The market price factor can either be the projected February price which uses the daily closing prices of Dec corn or Nov beans during the month of February, or uses the harvest prices for those contracts. The harvest prices are determined by the closing values for Dec corn or Nov beans during the month of October.
Edwards says, “The final revenue guarantee is computed by multiplying the higher of either the projected price or the harvest price by the APH yield for your farm, by your chosen coverage level (50 to 85 percent). Your actual revenue for insurance purposes is computed by multiplying your actual yield by the harvest price described above. You will receive an indemnity payment if your actual revenue falls below your revenue guarantee. The payment is equal to the difference.” That protects you from the stupid political stuff of the dictators on the other side of the globe.
As you would imagine, the option to get a higher price for your crops if the market climbs from February to the fall would probably cost more. Yes, the premiums will be higher, and USDA should have that price by March 4th or 5th. If you want to use the February projected price that will be announced March 4th or 5th, that option is called Revenue Protection with the Harvest Price Exclusion. In past years you may have signed up for Revenue Assurance with the Harvest Price Option, which provided an option to pay more for the higher price. Now, the Revenue Protection crop insurance package automatically provides the harvest price, but you can take the option to keep your premium lower in return for staying with the February pricing.
Edwards reminds farm operators that the purpose of crop insurance is to protect against a price increase, should your marketing plan have already sold grain that was not produced and needs to be replaced. Revenue Protection will provide the revenue to obtain the replacement grain at the going price.
If you are farming in one of the 12 North Central States, obtain a good idea of your premium at the iFarm Premium Calculator.
The former Crop Revenue Coverage (CRC) policy also provided some benefits if the market price increased, but limits were placed on that price increase from February to the fall. Under the terms of the Revenue Protection policy, USDA will not pay a harvest price that is more than double the spring price.
Revenue Protection can be obtained for basic, optional, enterprise, and whole farm units. The final day to sign up is March 15.
Summary:
Revenue Protection crop insurance adds a revenue factor to basic yield-based crop insurance, and provides an operator with the higher price of either a fall delivery contract or a spring guarantee, with the latter available at a lower premium rate. Premium rates and price guarantees will be announced the first week of March, with March 15 being the deadline for signing up. Revenue Protection provides financial shielding from both yield and price declines that are unanticipated during the growing season.
Posted by Stu Ellis on 02/28 at 12:00 AM | Permalink