Two choices are frequently mentioned when discussing ways to ensure commodities like maize, soybeans, and wheat: yield protection (YP) and revenue protection (RP). We’re breaking them down to help you choose the best crop insurance option for your farm.
Yield Protection Crop Insurance: What is it?
YP ensures the quantity of grain produced. You would choose a coverage level based on your actual production history (APH), which would determine the number of bushels you’re guaranteed.
The estimated price, established before the sales closing date based on commodity price averages from the Chicago Board of Trade, would then be multiplied by this (CBOT).
This is the simplest method of crop insurance; however, it simply covers lost output. Here is an example:
If a farm’s APH is 180 bu/ac and has 80% coverage, the yield that the insurance company guarantees will be 144 bu/ac.
If your farm only produced 120 bu/ac, you would divide the difference between the guarantee and the actual yield (144–120 = 24) by the expected price (if it were $4.15, 4.15 x 24 would be 99.60). The price per acre for the farm would be $99.60.
Revenue Protection: What Is It?
While RP guards against lost output, it also has the advantage of protecting against revenue losses brought on by price changes.
The anticipated price discussed above or a second price obtained at harvest using comparable CBOT criteria are the two values that RP uses to determine a dollar amount.
RP uses the highest of these two values to determine your guaranteed income. Here’s that situation once more:
Consequently, using the same figures as before: 144 bu/ac is achieved by using 180 bu/ac APH with an 80% coverage level. You would be certain to make $597.60 ($4.15 144) if the estimated price is $4.15.
If the harvest price were just $3.50, you would be compensated with a loss payment of $177.60 ($597.60 – $420.00 = $177.60) to make up the difference.
Additionally, if prices rose and the harvest price was set at $4.50, you would multiply 144 by $4.50 to arrive at $648. Then, you would receive $108.00 to make up the shortfall in revenue (648.00 540.00 = $108.00).
And in this case, what occurs is as follows:
- Harvest price = projected price. Your guaranteed income does not change.
- Harvest price vs. projected price The harvest price would be used to calculate your guarantee. You wouldn’t be assessed a higher premium due to the increase.
- Harvest price > Projected price With harvest income calculated based on harvest price, your guarantee would be found on the expected price.
How to approach YP and RP in terms of crop insurance service? Here’s how to typically explain it:
We use the money to pay our expenses. Bushels cannot be used to pay bills.
Therefore, RP assures a set monetary value, whereas YP insures many farmers prefer a unit of measurement (which is a bushel), RP.
Anyone who has ever marketed their grain would not be surprised to learn that the price of a bushel of grain can vary from day to day and perhaps from hour to hour.
When it comes to YP, you run the risk of not being able to fulfill your contract and buying yourself out of it if your yields don’t exactly live up to what you anticipated when you contracted it and the price increases during harvest.
In situations like the one above, RP would assist balance out your financial challenges because it offers a stronger possibility for earnings. In the end, RP is intended to give you confidence while contracting your grain.
Conclusion
When it comes to crop insurance in California, farmers have the option of choosing between yield protection and revenue protection. Both options have their pros and cons, so it’s important to understand the difference between them before making a decision. No matter which type of crop insurance you choose, ensure you understand the policy before purchasing it. That way, you’ll know exactly what you’re covered for and not covered for.
Crop Insurance Services by AMS offers complete protection with named peril, multiple perils, commercial ag, revenue protection, and other features. Let’s talk about your crop insurance in California today!
