We are still waiting for a comprehensive Hemp Crop Insurance program. While we wait we wanted to take the time to explain how Crop Insurance works, so you can be one step ahead when a program becomes available.
If this is your first time to our blog I would recommend reading up on our previous posts:
- Intro to APH –
- APH and the YA Option –
- Coverage Levels –
- Unit Structure
- Projected and Harvest Prices –
Now that you have a basic understanding of Crop Insurance let’s now figure out how that translates into coverage. When it comes to Federal Crop Insurance there are two programs to consider: Yield Protection and Revenue Protection. To help explain how each program works we will have some assumptions.
Assumptions
- Farmer’s APH for Summer Fallow Winter Wheat is 50 bushels per acre
- Farmer’s Coverage Level is 70%
- Projected Price for Winter Wheat is $4.74 per bushel
- Harvest Price for Winter Wheat is $3.74 per bushel
Yield Protection (YP)
Guaranty = APH times Coverage Level
Using the above assumptions:
50 bushels per acre TIMES 70% = 35.0 bushels per acre.
If the Farmer harvests less then 35.0 bushels per acre he/she will have a loss.
Revenue Protection (RP)
Guaranty = APH times Coverage Level TIMES the greater of the Projected Price or the Harvest Price.
– – In Revenue Protection everything is converted to revenue – –
Using the above assumptions:
50 bushels per acres TIMES 70% TIMES $4.74 = $165.90 per acre.
Loss Scenario (Harvest Price goes down)
Farmer harvests 30 bushels per acre, and the Harvest price is set at $3.74 per bushel vs the Projected Price of $4.74 per bushel.
Yield Protection Loss:
Guaranty of 35.0 bushels per acre MINUS 30.0 bushels = 5.0 bushel per acre loss. Multiply this by the Projected Price of $4.74 and the Producer’s loss is $23.70 per acre.
Revenue Protection Loss:
Guaranty of $165.90 per acre (guaranty stays at this amount even though the Harvest Price is lower then the Projected Price as the guaranty is always the Greater of those two numbers).
You then take the bushels produced and multiply them by the Harvest Price, so 30.0 bushels per acre x $3.74 per bushel = $112.20 per acre. The Producer’s loss is then $165.90 – $112.20 = $53.70!
Loss Comparison:
Yield Protection Loss = $23.70 per acre.
Revenue Protection Loss = $53.70 per acre.
Loss Scenario (Harvest Price goes up)
The Producer cuts 30 bushels per acre, and the Harvest Price is set at $5.74 per bushel.
Yield Protection Loss:
Guaranty of 35.0 bushels per acre MINUS 30.0 bushels = 5.0 bushel per acre loss. Multiply this by the Projected Price of $4.74 and the Producer’s loss is $23.70 per acre – no change as Yield Protection only utilizes the Projected Price which does not change during the Crop Year.
Revenue Protection Loss:
The Guaranty is now $200.90 per acre (since the Harvest Price is higher then the Projected Price we now use this figure to factor our guaranty. The premium, however, does not change as a result of the higher guaranty FYI.)
You then take the bushels produced and multiply them by the Harvest Price, so 30.0 x $5.74 = $172.20. The Producer’s loss is then $200.90 – $172.20 = $28.70.
Loss Comparison:
Yield Protection Loss = $23.70 per acre.
Revenue Protection Loss = $28.70 per acre
Loss Scenario (Harvest Price stays the same as the Projected Price)
This is a fairly uncommon circumstance. I am sure it has happened, but I cannot recall a time that it did.
Yield Protection Loss:
Same as the above two examples. No change. $23.70 per acre loss.
Revenue Protection Loss:
Exact same as Yield Protection loss as the Price did not change. $23.70 per acre loss.
Loss Comparison:
No difference – $23.70 per acre loss.
Continue to check out our blog as we dive deeper into Crop Insurance to help educate you.
