Crop Revenue Coverage Insurance – A Way to Guarantee Revenue

Todd D. Davis
Extension Economist

After five consecutive years of drought and lower commodity prices, the need for revenue risk management is clear.  Commodity futures and options are effective in limiting price risk, but they are not effective in protecting you from lower yields.  Crop Revenue Coverage (CRC) insurance provides a way for you to guarantee your revenue before you even start planting.

Crop Revenue Coverage (CRC)

Crop Revenue Coverage (CRC) insures a certain revenue level based on your actual production history (APH) and futures market prices at planting and at harvest.  Producers can choose a 50%, 55%, 60%, 65%, 70% or 75% coverage level of their APH yield for corn and soybeans.  Cotton producers can insure at 80% and 85% of the APH yield. 

An advantage of CRC is that you know the guaranteed revenue level at sign-up.  The base price used in establishing the guaranteed revenue is determined by the closing futures market prices prior to planting.  For corn, the base price is the average of the closing prices of the Chicago Board of Trade September contract from mid-December to mid-January.  The soybean base price is based on the average of the closing prices of the CBOT September soybean futures contract during the month of January while the base price for cotton is the average of the closing prices of the NYCE December cotton contract from mid-January to mid-February.

The minimum guaranteed revenue is the APH yield multiplied by the yield coverage level and by the base price.  CRC coverage does not penalize you if prices increase throughout the production year, as the revenue coverage guaranteed by CRC is increased if prices rise. However, the guaranteed revenue is not affected if the harvest price is lower than the spring base price. 

CRC uses a harvest price, based on the futures market, to determine the harvest guaranteed revenue.  The harvest price for corn is the average of the closing prices of the CBOT September corn futures contract during August while the soybean harvest price is the average of the closing prices of the CBOT September soybean futures contract during August. The cotton harvest price is the average of the closing prices of the NYCE December cotton contract during the month of November.

The harvest price is used to calculate the harvest guaranteed revenue. The harvest guaranteed revenue is the APH Yield multiplied by the yield coverage level and the harvest price.  The final guaranteed revenue is the larger of the minimum guaranteed revenue or the harvest guaranteed revenue and is used in determining if an indemnity payment will be made. 

            The potential indemnity is based on the harvested yield and the harvest price.  The calculated revenue is the harvested yield multiplied by the harvest price determined by the futures market.  The indemnity is the difference between the final guaranteed revenue and the calculated revenue.  Example 1 illustrates how CRC insurance would work for a corn producer.

Example 1.  A corn producer has an APH yield of 75 bu./acre and chooses to insure the crop at 65% of the APH yield with a base price of $2.40/bu.  The harvest price is $2.70/bu. and the harvested yield is 40 bu./acre.

Recall that the Final Guaranteed Revenue is the larger of the Minimum Guaranteed Revenue or the Harvest Guaranteed Revenue.  In this example, the Final Guaranteed Revenue is equal to $132/acre.

The Calculated Revenue, used in determining an indemnity payment, is:

Calculated Revenue = Harvested Yield x Harvest Price = 40 x $2.70 = $108/acre

The indemnity payment is the difference between the final guaranteed revenue and the calculated revenue.

Indemnity Payment = $132 – 108 = $24/acre

Example 1 illustrates how CRC would pay an indemnity due to low yields. Example 2 illustrates how CRC would pay an indemnity due to low prices.

Example 2.  A corn producer has an APH yield of 75 bu./acre and chooses to insure the crop at 65% of the APH yield with a base price of $2.40/bu.  The harvest price is $1.90/bu. and the harvested yield is 55 bu./acre.

The indemnity payment is the difference between the final guaranteed revenue and the calculated revenue.

The indemnity payment for Example 2 is triggered entirely by low prices and not by low yields.  CRC truly protects revenue as indemnities can be triggered by low prices and/or low yields.

Making the Insurance Purchase Decision

            Crop insurance is just one part of a comprehensive risk management program.  Only protecting against low prices will not guarantee a revenue level that will cover your variable and fixed costs.  In commodity agriculture, the ability to produce a large quantity at a low cost is still the key to profitability and to having a successful business.

The deadline for purchasing CRC insurance is February 28, 2003.  Contact your local insurance agent for more information on the insurance products available for your farm business.