To calculate its revenue guarantee, crop insurance uses the average December corn futures price and average November soybean futures price during the month of February, which will subsequently be referred to as planting. For 2012, these prices are \$5.68/bu. for corn and \$12.55/bu. for soybeans (see Table 1). On Aug. 28, 2012, December corn futures closed at \$7.95 and November soybeans futures closed at \$17.22.

The primary, but not only, reason for the 40% increase in corn price and 37% increase in soybean price is the drought in the U.S. Based on a linear trend line from 1974 through 2011, U.S. average trend yield per planted acre of corn for 2012 is 157.1 bu. In contrast, the August production report from the USDA suggests a U.S. average yield per planted acre of 119.7 bu., or a yield that is 24% below trend. For soybeans, the U.S. average trend yield for 2012 is 43.9 bu./planted acre vs.35.0 bu./planted acre in the August report, or a yield that is 20% below trend.

Using these prices and yields, revenue per planted acre expected at planting was \$892.37 for corn (\$5.68 x 157.1) and \$551 for soybeans (\$12.55 x 43.9). In comparison, the revenue in August is \$951 for corn (\$7.95 x 119.7) and \$603 for soybeans (\$17.22 x 35.0). Thus, for both the average U.S. corn acre and the average U.S. soybean acre, revenue is 7% and 9%, respectively, higher in August than at planting. In other words, for the average U.S. acre of corn and soybeans, the higher price resulting from the drought has more than offset the decline in yield resulting from the drought. However, there are many farms (acres) that have lower revenue due a yield loss that is greater than the average U.S. yield loss. Note that this analysis assumes a zero basis between the cash and futures price and no forward pricing of corn and soybeans.