By Cory Walters
Crop insurance harvest prices were recently determined by USDA's Risk Management Agency. These values naturally affect the probability of crop insurance payments. The corn harvest price came in at $3.49/bushel. This represents a 24% decline from the spring time projected price of $4.62/bushel. For some producers who signed up for Revenue Protection (RP), a crop insurance payment (indemnity) could be paid due to low price. Actual yields and insurance coverage level will determine whether this will happen. Above-average yields make an indemnity payment less likely because actual yield multiplied by $3.49 will exceed guaranteed revenue. Higher coverage levels increase the probability that a payment will be paid.
For a corn payment, farm revenue must be lower than the guarantee. With a 24% price decline and yields holding at APH levels, payments will be made for 80% and 85% coverage levels because the price decline is more than the deductible (which is 20% for an 80% coverage level). Realizing yields higher than APH imply that a higher coverage level is needed induce payments. Realizing yields lower than APH imply that lower coverage levels may receive payments.
The story for soybeans is similar. Harvest prices were found to be $9.65/bushel, 15% less than the projected price of $11.36/bushel. Realizing yields equal to APH will not provide an indemnity, even at the 85% coverage level. Consequently, only realized yields below APH will have a chance at a payment. Once more, a high coverage level makes payment more likely.
Realizing a payment as a result of having a lower APH yield does two things. First, a payment is received. Second, the following year's APH will be lowered because the current year's lower realized yield will be included in next year's APH calculation. As a result, no payment (or a small payment with a realized yield similar or higher than APH) preserves or increases next year's APH. This would be similar to holding your cards for another year. Keeping APH as high as possible increases the chances of sizeable future payments. The size of next year's potential payments (or guarantee) will be a function of the projected price level. Lower projected prices imply smaller payments because each bushel is worth less. Another result of lower projected prices is lower premiums.
Source:unl.edu