Should I Consider Crop Revenue Coverage Insurance this Year?

Todd D. Davis
Extension Economist

South Carolina producers enjoyed near record yields and higher commodity prices in 2003.  However, the 2002 drought is still a recent memory and revenue risk management is still an important part of managing a farm business.  Commodity futures and options are effective in limiting price risk, but they do not protect 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) guarantees a 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 have the option to insure at 80% and 85% of their APH yield. 

An advantage of CRC is that you know your 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.  The base prices for corn, soybeans, and cotton are listed in Table 1.

Table 1.  2004 Base Prices for Crop Revenue Coverage (CRC).

Commodity	CRC Price
Corn	$2.53 per bushel
Soybeans	$6.95 per bushel
Cotton	$0.68 per pound

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, which 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 cotton producer.

Example 1.  A cotton producer has an APH yield of 680 lbs./acre and chooses to insure the crop at 70% of the APH yield with a base price of $0.68/lb.  The harvest price is $0.61/lb. and the harvested yield is 450 lbs./acre.

Minimum Guaranteed Revenue = APH Yield x Yield Coverage Level x Base Price                                                     = 680 x70 % x $0.68 = $323.68/acre

Harvest Guaranteed Revenue = APH Yield x Yield Coverage Level x Harvest Price                                                  = 680 x 70% x $0.61 = $290.36/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 $323.68/acre.

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

Calculated Revenue = Harvested Yield x Harvest Price = 450 x $0.61 = $274.50/acre

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

Indemnity Payment = $323.68 – $274.50 = $49.18/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 cotton producer has an APH yield of 680 lbs./acre and chooses to insure the crop at 70% of the APH yield with a base price of $0.68/lb.  The harvest price is $0.45/lb. and the harvested yield is 600 lbs./acre.

Minimum Guaranteed Revenue = APH Yield x Yield Coverage Level x Base Price                                         = 680 x 70% x $0.68 = $323.68/acre

Harvest Guaranteed Revenue = APH Yield x Yield Coverage Level x Harvest Price                                                  = 680 x 70% x $0.45 = $214.20/acre

Final Guaranteed Revenue = Larger of $323.68 or $214.20 = $323.68

Calculated Revenue = Harvested Yield x Harvest Price = 600 x $0.45 = $270/acre

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

Indemnity Payment = $323.68 – $270 = $53.68/acre

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. 

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