Grant Gardner, University of Kentucky
October 31st marks the end of the harvest price discovery period for revenue protection crop insurance policies. The harvest price is used to calculate crop insurance indemnity payments and is the average December (corn) and November (soybeans) futures settlement prices during October.
The projected price is released earlier in the year and uses the same methods during February. The 2023 harvest prices for corn and soybeans are $4.88 and $12.84, respectively. The corn harvest price fell 17% below the February projected price ($5.91), whereas the soybean harvest price fell 7% below the projected price ($13.76). Using the projected and harvest price, we can look at the impacts of 2023 farm yield loss on indemnity payments. We find that due to the larger price change between the projected and harvest price, indemnities are more likely to trigger for corn than soybeans.
Two of the largest crop insurance policies are revenue protection (RP) and revenue protection with a harvest price exclusion (RP-HPE). RP, the more expensive product, allows the producer to “roll the dice” twice on price, meaning that if the harvest price is higher than the projected price, the indemnity payments adjust by using the higher harvest price in the revenue guarantee.
RP-HPE only allows the producer to “roll the dice” once and calculates indemnities using the formula, Indemnity = Revenue Guarantee – (Harvest Price x Yield). The revenue guarantee is calculated using the formula Revenue Guarantee = Coverage Level x Projected Price x APH, where APH is the “Actual Production History” for the operation. For example, corn insured with an 85% coverage level and APH of 180 bu/acre would result in a revenue guarantee of 0.85 x $5.91 x 180 = $904/acre. If the farm yield is 160 bu/acre, the indemnity would be $904 – (4.88 x 160) or $123.20/acre (Figure 1). No indemnity is received if the farm yield multiplied by the harvest price exceeds the revenue guarantee. Since the harvest price is lower than the projected price in 2023, both RP and RP-HPE will trigger the same indemnity payments.
With corn prices falling 17%, a 2023 RP policy with an 85% coverage level will trigger indemnity payments with farm yields slightly higher than APH. Assuming an APH of 180 bu/acre, indemnities will trigger at 185.3 bu/acre. Figure 1 indicates corn indemnity payments/acre increase as coverage level increases and farm yields decrease. Due to the large drop in harvest price, indemnity payments of $12.66/acre are triggered with a coverage level of 70% and a farm yield of 150 bu/acre. As of October 12th, USDA-NASS (2023) had Kentucky average corn yields at 183 bu/acre.
Since the soybean price only fell 7%, only farm yields lower than APH will trigger indemnity payments, regardless of coverage level. Figure 2 displays soybean indemnity payments as coverage level and farm yield change. For example, at an 85% coverage level, APH of 55 bu/acre, and a farm yield of 45 bu/acre, indemnity payments would be $65.48. As of October 13th, USDA-NASS (2023) had average Kentucky soybean yields at 54 bu/acre.
USDA-NASS. Crop Production Report. (2023) https://downloads.usda.library.cornell.edu/usda-esmis/files/tm70mv177/6395xr873/p2678f18x/crop1023.pdf