Revenue Assurance -- Harvest Price (RA--HP) Insurance

Revenue Assurance with the harvest price option (RA--HP) is revenue insurance protecting against low prices, low yields, or a combination of low prices and low yields. RA--HP insurance pays an indemnity when gross revenue falls below a revenue guarantee. The revenue guarantee will increase under RA--HP if prices rise between the spring and the fall. Revenue assurance with the base price option does not contain a guarantee increase provision.

Revenue guarantee under RA--HP

RA--HP's revenue guarantee equals the APH yield, times the higher of the base price or harvest price, times the coverage level. Each factor determining the revenue guarantee is described below:

1. APH yield. The APH yield is specific to a farm or a unit. It is usually based on the yield history from an insured unit.

2. Base and harvest prices.

   Figure 1. Base and Harvest Prices for Revenue Insurance
   Base Prices:
   Corn	The average of December's futures contract prices during February
   Soybeans	The average of November's futures contract prices during February
   Harvest Prices:
   Corn	The average of December futures contract prices during November
   Soybeans	The average of November's futures contract prices during October

   Base prices are determined by averaging settlement prices during the month of February. The December futures contract is used for corn and the October contract is used for soybeans. Base prices are released in early March prior to the deadline for purchasing crop insurance. 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.

   Harvest prices are determined by averaging settlement prices during the fall. For corn, the settlement prices for the December contract are averaged during November. For soybeans, the settlement prices for the November contract are averaged during October. These prices reflect market conditions during harvest.

   The higher of the base or harvest price is used to calculate the revenue guarantee.

3. Coverage level. The farmer selects the coverage level. In most Illinois counties, the coverage level can be between 50 and 85 percent of expected gross revenue.

   The process of calculating the revenue guarantee is a two step process: 1) Determining the base guarantee and 2) Updating the base guarantee.

Determining the base guarantee: Prior to the deadline for signing up for insurance, base prices are used to calculate a "base revenue guarantee." This base revenue provides a floor. The final revenue guarantee will never be below the base revenue guarantee.

Figure 2 shows an example base revenue guarantee. The crop is corn having a 150 bu. APH yield. The base price is $2.40. For the example, 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).

Updating the guarantee: The base revenue guarantee will increase if the harvest price is greater than the base price. In these cases, the harvest price is used in calculating the revenue guarantee.

In the example in Figure 2, the $270 base revenue guarantee reflects a $2.40 base price. If the harvest price, which is released in December, is below $2.40 the revenue guarantee will equal the $270 base revenue guarantee. If the harvest price is higher, the revenue guarantee will be updated. If the harvest price is $3.00, the revenue guarantee is $338 (150 bu. APH yield x $3.00 corn price x 75% coverage level).

Gross revenue under RA--HP

Gross revenue is used to calculate indemnity payments. Gross revenue equals actual yield times the harvest price (see Figure 1 for price definitions).

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

Indemnity payments under RA--HP

An indemnity payment occurs when gross revenue is below the revenue guarantee. For a $270 revenue guarantee, an indemnity payment equal to $50 occurs when actual gross revenue is $220 ($50 = $270 revenue guarantee - $220 gross revenue).

Indemnity payments occur because of low prices, low yields, or a combination of low yields and low prices. Figure 4 shows indemnity payments for different actual yields and harvest prices.

Choices under RA--HP

For a unit, the farmer chooses the coverage level. A higher coverage level results in a higher revenue guarantee. When indemnity payments occur, the indemnity payment will be greater with a higher coverage level than a lower coverage level.

RA--HP premiums

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

Insurable units under RA--HP

Insurance units available under RA--HP are basic, optional, enterprise, and whole farm units. For a complete discussion of units, see Iowa State University Extension, Actual Production History and Insured Units, March 2003, http://www.exnet.iastate.edu/Publications/FM1860.pdf.

Insurance Similar to RA--HP

CRC and Revenue Assurance with a Harvest Price option (RA-HP) are very similar insurance products. Differences between the products are:

1. CRC can be used to insure basic, optional, and enterprise units. RA-HP has these units along with a whole farm unit.

2. Under CRC, there are price increase limits when updating the revenue guarantee. Limits are $1.50 for corn and $3.00 for soybeans. RA-HP does not have these limits.

3. For corn, settlement prices during November of the December CBOT corn contract are used to determine the harvest price for RA-HP. Settlement prices during October are used for CRC.

4. Premiums may differ between CRC and RA-HP.

Other information

Iowa State University Extension, Crop Revenue Insurance, March 2003, http://www.exnet.iastate.edu/Publications/FM1853.pdf

Updated: January 2006