Comparing MPCI and CRC Insurance Products in Protecting 2001 and 2002 Cotton Revenue – Did Insurance Help?

Todd D. Davis
Extension Economist

The 2001 and 2002 cotton crops illustrate how crop insurance can protect revenue during a year with a low price (2001) and a year with a low yield (2002).  Multiple Peril Crop Insurance (MPCI) products, explained in MMM 422, protect against low yields.  In contrast, Crop Revenue Coverage (CRC), explained in MMM 423, protects against both low prices and low yields.  This memo compares the use of both insurance products in protecting cotton revenue in 2001 and 2002.

State-average cotton yield data were used in calculating the MPCI and CRC insurance premiums and the production loss used in calculating indemnity payments.  The cash price and loan deficiency payments (LDP’s) are harvest time prices and LDP’s from 2001 and 2002.  The total revenue per acre is calculated as:

Crop Insurance Provided Protection in 2001 and 2002

The state-average cotton yield for 2001 was 686 lbs./acre and did not trigger an indemnity payment for the MPCI policies.  Therefore, CAT coverage generated larger revenues than the other MPCI coverage levels (Table 1).  However, because of the low commodity prices at harvest, indemnity payments for the CRC policies were triggered at the 65% levels and greater (Table 1).  Revenue was almost $20 per acre greater at the CRC 75% level than at the CAT level (Table 1).  Notice that the largest revenue for 2001 is with the CRC 80% coverage level.  The larger premium for the additional coverage cost more than the indemnity received from the additional coverage.

The 2002 crop year, with a yield of 328 lbs./acre, triggers indemnity payments for both the MPCI and CRC policies (Table 1).  Producers purchasing MPCI at the 55% or greater yield coverage levels obtained larger revenues than the CAT coverage level (Table 1).  Similarly, CRC at the 60% coverage level or greater generated larger revenue than the CAT coverage level (Table 1).  Because the CRC harvest price was larger than the base price, CRC indemnities were triggered by lower yields and not by lower prices.  Since CRC premiums are larger than MPCI premiums, the revenues from purchasing MPCI are greater than CRC for 2002 (Table 1). 

Making the Insurance Purchase Decision

            Why should I purchase crop insurance when the 2002 Farm Bill continued the marketing loan program and loan deficiency payments? Loan deficiency payments (LDP’s) are effective in limiting price risk by placing a ‘floor’ on prices.  However, loan deficiency payments are of limited benefit during years with low yields.  The 2001 and 2002 cotton crops illustrate this.  The 2001 cotton state average yield of 684 lbs./acre and LDP of $0.284/lb. provided a loan deficiency payment of $194.82/acre.  In contrast, the 2002 cotton state average yield of 328 lbs./acre and $0.147/lb. LDP provided a loan deficiency payment of $48.22/acre.  LDP offer limited revenue protection when there are low yields.

            What if I purchase crop insurance and I do not receive an indemnity.  Did I make a bad decision?  Absolutely not!  It is important to remember that insurance allows you to share your production risk with an insurance company.  Your premium is the cost of sharing this risk, and the benefit of sharing this risk is realized when you receive an indemnity.  Recognize that insurance is one of the few things that you purchase in life that you never hope to use.  For example, do you hope to get into a car accident just to collect an indemnity from your car insurance?

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

Table 1.  Cotton Revenue Net of Insurance Premiums based on 2001 and 2002 South Carolina State Average Yields ($/Acre).

	2001 1/	2002 2/
No Insurance	$386	$183
CAT 3/	385	182
APH 50/100 4/	379	177
APH 55/100	377	195
APH 60/100	375	226
APH 65/100	371	254
APH 70/100	367	282
APH 75/100	358	306
APH 80/100	351	332
APH 85/100	342	356
CRC 50%	379	178
CRC 55%	377	185
CRC 60%	375	199
CRC 65%	390	211
CRC 70%	404	222
CRC 75%	414	230
CRC 80%	417	233
CRC 85%	410	229

^1/ The APH is assumed to be 632 lbs./acre. The FCIC price is $0.63 per pound, the base and harvest price for CRC is $0.6069 and $0.3356, respectively.  The harvested yield is 686 lbs./acre, the harvest cash price and harvest LDP is $0.278 and $0.284 per pound, respectively.
^2/ The APH is assumed to be 632 lbs./acre. The FCIC price is $0.52 per pound, the base and harvest price for CRC is $0.4313 and $0.4783, respectively.  The harvested yield is 328 lbs./acre, the harvest cash price and harvest LDP is $0.410 and $0.147 per pound, respectively.
^3/ The analysis assumed a 100-acre cotton farm, so the premium for CAT coverage would be $1 per acre.
^4/ APH 50/100 denotes MPCI at the 50% of APH Yield coverage level and a 100% price election.