| Multi-Peril Products: Income
Protection (IP) Insurance |
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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.
| Figure
1. Base Prices for Revenue Insurance |
| Corn |
The average of December's futures
contract prices during February. |
| Soybeans |
The average of November's futures
contract prices during 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).
| Figure
2. Revenue Guarantee Under IP Insurance |
| Situation: |
| Crop |
Corn |
| APH yield |
150 bu. |
| Base price |
$2.40 |
| Farmer Election:
|
| Coverage level |
75% |
| Base revenue guarantee: |
$270 = 150 bu. APH yield x $2.40
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.
| Figure
3. Harvest Prices for Revenue Insurance |
| Corn |
The average of December's futures
contract prices during November. |
| Soybeans |
The average of November's futures
contract prices during 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.
| Figure
4. Per-Acre IP Indemnity Payments for a $270 Revenue Guarantee1
|
| |
Low Yield
Low Price |
Low Yield
Same Price |
Low Yield
High Price |
Avg. Yield
Low Price |
Avg. Yield
Same Price |
| Actual Yield |
100 bu. |
100 bu. |
100 bu. |
150 bu. |
150 bu. |
| Harvest Price |
$1.70 |
$2.40 |
$3.00 |
$1.70 |
$2.40 |
| |
| Gross Revenue2 |
$170 |
$240 |
$300 |
$255 |
$360 |
| |
| Indemnity Payment3 |
$100 |
$30 |
$8 |
$15 |
$0 |
| 1 |
See Figure 2 for the calculation of the revenue guarantee.
|
| 2 |
Gross revenue equals actual yield x harvest price.
|
| 3 |
Indemnity payments equal the revenue guarantee minus
gross revenue when gross revenue is greater than revenue guarantee; zero otherwise.
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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:
- IP only allows enterprise units. RA-BP allows basic, optional, enterprise,
and whole-farm units.
-
RA-BP has 80 and 85 percent coverage levels. IP only goes up to a 75 percent
coverage level.
- 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
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