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