Choosing Between Yield Protection or Revenue Protection with Your Crop Insurance
When it comes to options for insuring crops, such as corn, soybeans and wheat, there are two selections that often come up: yield protection (YP) and revenue protection (RP). We’re breaking them down so you can make the best decision for your farm’s crop insurance.
What is Yield Protection?
YP insures the amount of grain produced. Based on your actual production history (APH), you would select a coverage level, and that would be used to set the number of bushels you’re guaranteed. This would then be multiplied by the projected price, which is set before the sales closing date, based on commodity price averages from the Chicago Board of Trade (CBOT).
This is the simplest way to insure a crop, but it only insures against lost production. Here’s a scenario:
If your APH on a particular farm is 180 bu/ac, and you have 80% coverage, you would have an insurance guaranteed yield of 144 bu/ac. If your farm only had a yield of 120 bu/ ac, then you would take the difference of the guarantee and the actual yield (144-120 = 24), multiply that by the projected price (if your projected price is $4.15, then 4.15 x 24 = 99.60). You’d receive $99.60 per acre for that farm.
What is Revenue Protection?
RP protects against lost production, but it has the additional advantage of protection against lost revenue due to price changes. RP sets a dollar amount using two numbers – the projected price covered above, or a second price established at harvest, using similar criteria from the CBOT.
RP uses the higher of these two prices to establish your guaranteed revenue. Here’s that scenario again:
So, using the same numbers from before: 180 bu/ac APH × 80% coverage level gets you to 144 bu/ac. If the projected price is $4.15, then you’d be guaranteed to make $597.60 ($4.15 × 144). If the harvest price was only $3.50, you’d receive a loss payment of $177.60 to make up that difference ($597.60 − $420.00 = $177.60). AND, if prices increased and harvest price was set at $4.50, you’d use that number in your calculations (144 × $4.50 = $648.00. Then, $648.00 − $540.00 = $108.00), meaning you’d instead get $108.00 to make up the revenue difference.
And here’s what happens in this scenario if…
Projected price = Harvest price? Your guaranteed revenue stays the same.
Projected price < Harvest price? Your guarantee would be figured on harvest price. You wouldn’t be charged any additional premium from the increase.
Projected price > Harvest price? Your guarantee would be figured on the projected price, with harvest revenue figured on harvest price.
How to think about YP and RP for your crop insurance
Here’s how I explain it most often...
We pay bills with dollars. We can’t pay bills with bushels.
So, if RP insures a fixed monetary amount, and YP insures a unit of measure (which is what a bushel is at the end of the day), for many farmers, RP is the way to go.
This won’t come as a surprise to anyone who’s ever marketed their grain, the price of a bushel of grain can change from day-to-day, sometimes hour-to-hour.
With YP, if your yields don’t quite measure up to your expectation when you contracted it, and the price goes up at harvest, you could take a hit coming and going – not being able to deliver on your contract and having to buy yourself out of it.
Since RP pays the higher revenue potential, in scenarios like the one above, it would help even out the cost difficulties you find yourself in. At the end of the day, RP is designed to help you contract your grain with confidence.
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