Guidelines Crop Insurance Alternatives Divisions of Insurance Products A Comparison of Yield and Revenue Insurance Choosing Between the Products

A Comparison of Yield and Revenue Insurance

APH, IP, and CRC insure individual farm results. These products are compared to illustrate the difference between yield insurance (APH), revenue insurance with no guarantee increase (IP), and revenue insurance allowing guarantee to increase (CRC).RA is not included in the example.For this example, RA with the base price option functions similar to IP.RA with the harvest price option functions similar to CRC.

The comparison is based on the same coverage levels (75 percent yield election under APH and 75 percent coverage level under IP and CRC).APH and IP will have roughly the same per acre premiums.CRC's premiums will be roughly 50% higher than premiums than APH and IP. In the example, corn having 120 bu. APH yield is insured.Prices used in the example reflect 1999 conditions.The base price for corn is $2.40 per bu., equaling the average of the settlement prices of the December CBOT futures corn contract during the month of February.

Under APH, the yield guarantee is 90 bu. per acre (120 bushels x 75 percent yield election).An indemnity payment occurs when actual yield is below 90 bu.In this example, indemnity payments will be based on an indemnity price of $2.10, the highest price a farmer could choose to insure yields during 1999.An indemnity payment of $21 per acre occurs when actual yield is 80 bu. ((90 bu yield guarantee - 80 bu actual yield) x $2.10 price).

Under IP, the revenue guarantee is $216 per acre, found by multiplying the 120 bu. APH yield by the $2.40 base price by the 75% coverage level.IP will make a payment any time revenue is below $216.Revenue is calculated by multiplying actual yield times a harvest price.The harvest price for corn is based on settlement prices of the CBOT December futures contract during the month of November.A $2.10 harvest price and a 100 bu. actual yield gives $210 of revenue (100 bu. yield x $2.10 harvest price).Given this revenue, IP makes an indemnity payment of $6 ($216 revenue guarantee - $210 actual revenue).

When the harvest price is less than the base price, CRC and IP will have the same revenue guarantee.For the above example, the guarantee is $210. When the harvest price is greater than the base price, CRC will have a higher revenue guarantee compared to IP.CRC's revenue guarantee is $234 for a $2.60 harvest price ($234 = 120 bu. APH yield x $2.60 price x 75% coverage level while IP's revenue guarantee remains at $216.

Table 1 shows indemnity payments for IP and CRC for different actual yields given that the harvest price is $2.10.Because the harvest price is below the base price, IP and CRC will have the same payments.At an 80 bu. yield level both IP and CRC will pay indemnities of $48 per acre.At a 90 bu. actual yield, IP and CRC will both pay $27 per acre.

Table 2 shows indemnity payments for different actual yields given that the harvest price is $2.60.Because the harvest price is greater than the base price, IP and CRC will have different indemnity payments.At an 80 bu. actual yield, IP will have a $8 per acre indemnity payment while CRC will have a $26 per acre indemnity payment.