Multi-Peril Products: Income Protection (IP) Insurance

Income Protection (IP) is revenue insurance protecting against low prices, low yields, or a combination of low prices and low yields. IP makes payments when gross revenue falls below a revenue guarantee.

Revenue guarantee under IP

The revenue guarantee equals the APH yield times a base price times a coverage level. The coverage level is selected by the farmer and ranges from 50 to 75 percent of expected gross revenue.

Base prices are calculated using Chicago Board of Trade (CBOT) futures contracts. For corn, the base price equals the average of settlement prices of the December corn contract during the month of February. For soybeans, the base price equals the average of settlement prices of November soybean contract during the month of February.

Base prices are released in early March prior to the deadline for purchasing crop insurance. These prices reflect estimates of futures prices at harvest-time. Base prices vary from year to year. The base price for corn was $2.32 in 2002, $2.42 in 2003, $2.83 in 2004, and $2.32 in 2005.

Figure 2 shows information used to calculate an example revenue guarantee. The crop is corn having a 150 bu. APH yield. The base price is $2.40. A 75% coverage level is selected. The revenue guarantee is $270 per acre (150 bu. APH yield x $2.40 base price x 75% coverage level).

Gross revenue under IP

Gross revenue is used to calculate indemnity payments. Gross revenue equals actual yield times the harvest price.

The harvest price is based on Chicago Board of Trade (CBOT) futures contracts. For corn, the harvest price equals the average of settlement prices of the CBOT December corn contract during the month of November. For soybeans, the harvest price equals the average of settlement prices of the CBOT November soybean contract during the month of October.

In most cases, gross revenue does not equal the revenue a farmer receives for the crop. Prices used to calculate revenue under IP are based on CBOT futures contracts. Usually, cash prices at harvest time are below futures prices. Moreover, IP does not require sales of crop at harvest time. A farmer also could hedge grain production using forward or futures contracts prior to harvest. A farmer also is free to store grain for later sale.

Indemnity payments under IP

IP makes payments when gross revenue is below the revenue guarantee. For a $270 revenue guarantee, a $50 payment occurs when actual gross revenue is $220 ($50 = $270 revenue guarantee - $220 gross revenue).

Indemnity payments result from a low price, low yield, or a combination of low yield and low price. Figure 4 shows indemnity payments for different actual yields and harvest prices.

Choices under IP

The farmer chooses the coverage level. A higher coverage level results in a higher revenue guarantee.

Premiums under IP

Per-acre premiums will depend on the county of the insured crop, the crop's APH yield, and the selected coverage level. Higher coverage levels result in higher premiums.

Insurable units under IP

Insurance units available under IP are enterprise units. Enterprise units include all farmland in one crop in a county. For a complete discussion of units, see the PDF from Iowa State University Extension, Actual Production History and Insured Units, March 2003, http://www.exnet.iastate.edu/Publications/FM1860.pdf.

Insurance Similar to IP

IP and Revenue Assurance with a base price option (RA-BP) are very similar insurance products. Differences between the products are:

1. IP only allows enterprise units. RA-BP allows basic, optional, enterprise, and whole-farm units.

2. RA-BP has 80 and 85 percent coverage levels. IP only goes up to a 75 percent coverage level.

3. Premiums may differ between the two products.

Other information (PDF)

Iowa State University Extension, Crop Revenue Insurance, March 1999, http://www.exnet.iastate.edu/Publications/FM1853.pdf

Updated: January 2006