Crop Insurance Basics
Scroll through some of our basic topics or click on one of the links below to find out more about insuring your crops!
Multi-Peril Crop Insurance
Multi-Peril Crop Insurance (MPCI) is a form of Federal Crop Insurance provided and subsidized by the United States Government. The beauty of MPCI is that because of these subsidies, the premium you pay is only about one third of the actual base premium, with the government picking up the rest of the tab. This suite of products provides protection against yield and revenue losses for a variety of different crops. They provide a floor to how much money a farmer can lose in a bad year and give growers an affordable safety net along with the freedom and flexibility to experiment and expend.
MPCI is run by the USDA with the help of private companies called Authorized Insurance Providers (AIP’s). Crop insurance agents, like us, then sell coverage to growers much like any other type of insurance.
When starting a new policy, one of the first things we do is collect any production history you have for your crop. In most cases your coverage and guarantee will be based on some combination of your historic yield averages and the price of the commodity you are insuring as set by RMA. Your Actual Production History, or APH, is a database of your production and planted acres. By averaging your production over these years, we come up with your approved yield which is used to calculate your guarantee.
Once we have your approved yield, we can calculate your guarantee based on your chosen coverage level. Coverage typically ranges from 50% up to the 85% level in 5% increments. Your guarantee is simply your approved yield multiplied by your coverage level.
So let’s say farmer Doug has an Approved Yield for corn of 100 bushels per acre. If he chooses the 75% level, then his guarantee is 75% of his average, or 75 bushels per acre. If he makes less than 75 bushels, he will be paid a loss.
Establishing Your Production History and Coverage
CAT-Catastrophic Insurance is the stripped down “disaster” version of crop insurance which bases your guarantee on 50% of your historic production average. Losses are paid at 55% of the commodity prices as established by RMA. Every acre of a crop that you have in the county is insured under one guarantee and the cost is $655 per crop regardless of acreage. It often is more financially advantageous to go with a low level buy-up plan than with a CAT plan.
Catastrophic Insurance (CAT)
Polices that provide higher levels of protection above the CAT policy are called Buy-Up Policies. Buy-up policies protect against yield and/or revenue losses. Coverage levels range from 50%-85% in 5% increments. Your coverage level represents the percentage of your historic average for which your guarantee is based on (i.e. The 65% level guarantees you for 65% of your historic average). Unlike CAT coverage, losses on Buy-Up Policies are paid at the 100% of the commodity price as established by RMA.
Buy-Up Policy Highlights
Offers 50%, 55%, 60%, 65%, 70%, 75%, 80%, and 85% Coverage Levels
Choose to guarantee solely against yield losses (Yield Protection- YP)
Or, guarantee against yield and revenue losses (Revenue Protection- RP)
Provides Prevented Planting coverage on all crops as well as replant payments on Corn and Soybeans.
Administrative fee on buy-up policies is a flat $30 per crop.
Buy-Up policies allow you to structure your insurance so that the entire county is protected under one guarantee (Basic or Enterprise Unit) or so that each farm serial number (FSN) is insured separately (Optional Unit).
Buy-Up Policies
Yield Production insurance is the standard insurance program where coverage is based on a percentage of your history resulting in a bushel guarantee. When your production drops below the guaranteed coverage, you are paid the difference at the “Base Price”.
example: 100 bushel/acre corn APH average, insured at 70% level = 70.0 bushels of coverage. You produce 50 bu (70 bu coverage minus 50 bu of production = 20 bu loss times the Base Price of $4.59 /bu = $91.8 /acre.
Yield Protection (YP)
It does not matter what you sell your crop for. The Harvest Price strictly depends on the average commodity price on the CBOT. Should the Harvest Price end up higher than the Base Price, you must have a bushel loss to collect a claim. However, the loss will be paid per bushel at the higher harvest price.
The Harvest Price can be less than the Base Price without limitation but will not be greater than 200 percent of the Base Price.
example: If you have a 35-bushel Soybean APH and take the 70% level times the Base Price of $10.49/bushel:
35 Bushel APH X 70% level = 24.5 bushels of coverage X $13.00 Base Price = $318.50 of revenue coverage per acre.
If the Price Goes Down:
example: A 35 bushel/acre APH soybean average, insured at 70%, provides coverage of 24.5 bushels and $257 per acre ($10.49/bu base price). If you harvest 30 bushels (over your bushel guarantee) but the CBOT Harvest price drops to $8/bu ($8/bu x 30 bu = $240), insurance pays the difference: $257 - $240 = $17.00/acre.
If the Price Goes up:
Example: With a 35 bu/acre average at the 70% level, you have 24.5 bu/acre of coverage. If you harvest 21.5 bu/acre and soybean prices rise to $11.00/bushel, your 3 bu/acre loss will be compensated at the higher price:
3 bu/acre loss x $11.00/bushel = $33.00/acre loss payment.
Revenue Protection protects against a loss of yield (just like CAT or YP) and a loss in revenue caused by low “Harvest Prices”. The dollar coverage is calculated by multiplying your APH by your elected coverage level and the “Base Price”.
The “Harvest Price” is set based on fall commodity prices. A final value for your crop is calculated by multiplying the Harvest Price by the actual number of bushels you harvest. If that final value is lower than your dollar coverage, a loss will be paid for the difference.
Revenue Protection (RP)
Enterprise Units vs. Optional/Basic Units
There are two main ways to structure your insurance policy for most grain crops:
Optional Units (OU) insure each farm under its own guarantee. This means that if most of your crop performs above average but you have a handful of farms with low yields, you would be able to collect a loss on the farms with low production.
An Enterprise Unit (EU) insures all of the crop that you have in the county under one guarantee. With EU, your production average across the county must be below your guarantee before you start collecting a loss. A few farms with low production is not likely to lead to a loss if the majority of your crop in the county is high yielding.
You are more likely to have a loss with OU, but this means that the premium is 2-3 times more expensive than EU. Since it gives you more dollars of coverage for each dollar you spend on premium, we usually recommend EU unless the average production you see each year varies widely from field to field. Of course, no knows your operation better than you, so choose the unit structure that you think is best.