Multiple Peril Crop Insurance – Another Way to Manage Revenue Risk

Todd D. Davis
Extension Economist  

While producers enjoyed near record yields in 2003, the previous five consecutive years of drought, combined with below average commodity prices, illustrate the importance of managing revenue risk.  Loan deficiency payments and hedging with futures and options provide protection against low prices, but they do not protect against low yields.  This memo explains how multiple peril crop insurance (MPCI) can be used to protect against low yields at very little cost to your farm business.

Catastrophic Insurance (CAT)

The minimum coverage offered through MPCI is the catastrophic (CAT) coverage level.  CAT insures the crop at 50% of the farm's actual production history (APH) yield and 55% of the MPCI Price (Table 1).  The APH yield is based on a minimum of four and a maximum of ten consecutive years of yield data.  The yield guarantee for CAT is the APH yield multiplied by 50%.  The production loss, used in calculating an indemnity payment, is the yield guarantee less the harvested yield.  The indemnity payment for CAT is the production loss multiplied by 55% of the MPCI Price described in Table 1.

Table 1.  2004 Prices for Multiple Peril Crop Insurance (MPCI).

Commodity	MPCI Price
Corn	$2.45 per bushel
Soybeans	$5.60 per bushel
Cotton	$0.63 per pound

The premium for CAT is $100 per crop per county.  CAT is the minimum coverage level available and will only pay an indemnity for extremely low yields, like those experienced by some producers in 2002.  Example 1 illustrates how CAT insurance works.

Example 1.  A cotton producer with an APH yield of 680 lbs./acre decides to purchase MPCI at the CAT level.  The harvested yield is 200 lbs./acre.  What is the indemnity payment?

          Yield Guarantee = APH Yield x 50% = 680 x 50% = 340 lbs./acre

          Production Loss = Yield Guarantee – Harvested Yield

     = 340 – 200 = 140 lbs./acre

Indemnity Payment = Production Loss x MPCI Price x 55%

          = 140 x $0.63 x 55% = $48.51/acre

Under CAT coverage, the cotton producer in Example 1 would receive an indemnity payment whenever the harvested yield falls below the yield guarantee of 340 lbs./acre.

Multiple Peril Crop Insurance (MPCI)

The other MPCI policies insure yield at coverage levels of 50%, 55%, 60%, 65%, 70%, and 75% of the APH yield for corn and soybeans.  However, cotton yields can be insured at 80% or 85% of the APH yield.  Producers also insure the crop at a price level, called the price election, which ranges from 55% to 100% of the MPCI Price (Table 1).  The yield guarantee for MPCI is the APH yield multiplied by the yield coverage level.  An indemnity is paid whenever the harvested yield is less than the yield guarantee.  The indemnity payment is the production loss multiplied by the MPCI Price and the price election.  Example 2 illustrates the use of MPCI for a cotton producer.

Example 2.  A cotton producer has an APH yield of 680 lbs./acre and chooses to insure the crop at 70% of the APH yield and 100% of the MPCI Price.  The harvested yield is 400 lbs./acre.  What is the indemnity payment?

          Yield Guarantee = APH Yield x Coverage Level = 680 x 70% = 476 lbs./acre

          Production Loss = Yield Guarantee – Harvested Yield = 476 – 400 = 76 lbs./acre

          Indemnity Payment = Production Loss x MPCI Price x Price Election

                                      = 76 x $0.63 x 100% = $47.88/acre

Making the Decision to Purchase Insurance

Crop insurance is just one component of a comprehensive risk management program.  Only protecting against low prices will not guarantee that you will obtain a revenue level that will cover your variable and fixed costs. 

The deadline for purchasing MPCI and CAT insurance is February 28, 2004.  Contact your local insurance agent for more information on the insurance products available for your farm business.