Al Beback took out an insurance policy (RP) on his corn crop. Under the terms of the policy the approved corn yield was set at 170 bu./acre, and the base price for corn was set at \$6.50/bu. At harvest, the price of corn was \$5.75/bu. Al’s insurance coverage level was set at 75%, and his yield was 100 bu./acre. Al’s final revenue guarantee under the policy is 170 bu. x \$6.50 x .75 = \$828.75/acre. Al’s calculated revenue is his actual yield (100 bu./acre) multiplied by the harvest price (\$5.75/bu.) which equals \$575/acre. Al’s insurance proceeds is the guaranteed amount (\$828.75/acre) less the calculated revenue (\$575/acre), or \$253.75/acre. His yield loss is the 170 bu./acre approved yield less his actual yield of 100 bushels/acre, or 70 bu./acre. Multiplied by the harvest price of \$5.75/bu., the result is a physical loss of \$402.50/acre. Al’s price loss is computed by taking the base price of \$6.50/bu. less the harvest price of \$5.75/bu., or 75¢/bu. When multiplied by the actual yield of 100 bu./acre, the result is \$75/acre.

So, to summarize, Al has the following:

• Total loss (per acre): \$402.50 (physical loss) + \$75 (price loss) = \$477.50
• Physical loss as percentage of total loss: 402.50/477.50 = .8429
• Insurance payment: \$253.75/acre
• Insurance payment attributable to physical loss (which is deferrable): \$253.75 x .8429 = \$213.89/acre
• Portion of insurance payment that is not deferrable: \$253.75 - 213.89 = \$39.86