With harvest around the corner and corn prices hovering just shy of $3.00 in many areas, producers may be thinking that with a $3.86 crop insurance price, “Why manage risk, make sales, or create a plan while the corn price is below your guaranteed price?”
$3.86 corn is certainly appealing when you consider today’s prices, but before you ignore the next Sell Signal, make sure you understand just how revenue protection (RP) insurance works.
"...as your yield increases above your Actual Production History (APH), your price protection actually decreases."
The key word in revenue protection is the word revenue. Revenue = price x yield, which means as your yield increases above your Actual Production History (APH), your price protection actually decreases. A producer with a final yield above their APH may need the harvest price to drop below $3.00, even if they carry the best coverage available.
Most producers today carry some form of revenue protection insurance usually with coverage levels ranging from 70% to 85%. That % represents a deductible, meaning you’re only covered for a % of your actual projected revenue. Even at or below their APH, producers carrying higher deductible 70% and 75% coverage will need prices below $3.00 to trigger a claim.
RP functions based on a guaranteed revenue per acre, which is calculated by taking the HIGHER of the spring price (February avg. of Dec corn/Nov beans) or harvest price (October average of Dec corn/Nov beans) and multiplying that by your coverage level and APH yield. For purposes of this article we are assuming the harvest price will be below the spring price.
If you have an APH of 185 bu/acre and 80% RP, your guarantee is 185 x 80% x $3.86 or $571.28 per acre. A claim is triggered when the calculated harvest revenue drops below your guarantee. Harvest revenue is calculated by taking your actual yield and multiplying it by the harvest price (October average of Dec corn/Nov beans).
If we apply this logic across multiple scenarios we get a table like the one below. Red numbers indicate scenarios where our hypothetical farm would need Dec corn to average below $3.00 in October to trigger a claim. We refer to the price at which a revenue claim would be started as the “Trigger Price”.
Study the table below and you’ll quickly notice there is a lot of red! Revenue protection insurance is a great tool to help farmers with their marketing decisions, but it does not replace the need for a proper marketing and risk management plan.
Give us a call at 800-622-7628 and speak with your Ag Consultant about putting together a plan to navigate the markets into spring 2017.
Click here to download an excel file including the table below. Plug in your APH and see just where your trigger prices are.
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