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Explained: Crop Insurance
In our work as trusted advisors in crop insurance, we know that the risk management decisions you make for your farm have become increasingly complex. With less-than-ideal prices and increasing inputs, it can be hard to know when to increase your safety net or save your money and put it somewhere else in your operation.
Thankfully, the U.S. is interested in keeping family farms and ranches on the land for food security. Federally subsidized crop insurance is a core tenet of that effort. Crop insurance is unique. It is different from your typical insurance, which protects physical assets, such as a building or machinery. Instead, crop insurance protects your annual production and revenue. This allows us to help you utilize the coverage in a way that most effectively manages the overall risk of the farm and will enable you to be more assertive in the many other decisions you face daily. The bottom line: it gives you more flexibility in maximizing your cash flow.
In this week’s blog, we will be covering some of the most common types of crop insurances and how they differ. Additionally, we will be going over how to maximize crop insurance benefits by adequately utilizing your guaranteed revenue.
There are many types of crop insurance policies and policy options. These policies have improved over time, making the final coverage decision more complex. Having an AgRisk advisor on your team makes those decisions easier. We will be going over two of the most common types of policies.
The first is called Yield Protection or YP. As the name suggests, this protects you against yield loss. This is done by taking the average of your crop yields and insuring a percentage of that average. The crops and yields you have produced in the past are known as your Actual Production History database or APH database. You must always have between 4 and 10 years in your database. If you do not have any yield history in the county, you get four-county T- yields. The county T-yield is a yield based on your county’s growing conditions and will vary from county to county. As you create your yield history, it slowly replaces the county T-yields. Even though YP only protects you against yield loss, each bushel must assign a value.
The second type of policy is called Revenue Protection or RP. Revenue protection still protects you against yield loss and protects you against price loss. Think of RP as yield protection with added put option into the policy. Like YP, a price is discovered before the growing season, but a harvest price is also known as a regular harvest season. This is meant to protect you if the price goes down when you typically sell your crop.
When the price goes down, the bushels you produce are priced accordingly, meaning it will be harder to reach your guarantee, which would result in a higher chance of an indemnity payment. Although if the price goes up, it protects your operation from price fluctuations. When the price goes up, and you have a bushel loss, those bushels will be calculated at the higher harvest price, resulting in a higher indemnity payment.
Stop in next week to learn the other half of crop insurance policies!
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