What is in this article?:
- 2012 Drought: Yield Loss, Revenue Loss, Harvest Price Option
- 2012 Perspective as of August
- Historical Perspective
- Impact of Insurance Harvest Price Option
- Summary Observations
Impact of Insurance Harvest Price Option
Given the increase in corn and soybeans futures prices since planting as well as a zero futures-cash basis and no forward contracting, August revenue is less than the revenue expected at planting if the August yield is lower than 75% of trend yield (see Figures 1 and 2). In other words, August revenue is lower if yield has declined by more than 25% relative to trend yield. On the other hand, if the August yield is 75% or more of trend yield, August revenue is higher than the revenue expected at planting. Figures 1 and 2 underscore the importance of the individual farm’s yield in assessing a farm’s revenue situation as of August 2012.
These two figures also provide another insight. Assuming that trend yield is the farm’s insurance yield, the harvest price option was purchased, and the Aug. 28 price is the harvest price option; the x-axis become the insurance coverage level and the numbers in the figures become the minimum revenue a farm has relative to the expected revenue at planting for a given insurance coverage level.
For example, as of Aug. 28, if a farm has at least 75% insurance coverage and no forward contracting, crop insurance will guarantee a per acre revenue that exceeds the per acre revenue expected at planting. The minimum will hold regardless of how low the yield is on the farm, including a zero yield. The reason is that all production, whatever its size, and all insurance payments, whatever its size, is made at the Aug. 28 price because of assuming the harvest price option and no forward contracting. Stated somewhat differently, a farm that has insurance with the harvest price option must have a coverage level that is less than 75% for its revenue on Aug. 28 to be less than the revenue it expected at planting.
Again, these statements assume no forward contracting, a zero cash-futures basis, and insurance yield equal to trend yield. It is worth noting that the last assumption is more likely to be valid in 2012 than in previous years because of the availability of the trend-adjusted yield option.
To put this discussion in perspective, data from the Risk Management Agency for 2011 reveals that 85% of planted corn and soybeans acres were covered by crop insurance. Moreover, 50% of corn planted acres and 48% of soybean planted acres were insured at coverage levels of 75% or more.