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Harvest prices & indemnity payments

STEVE JOHNSON 10/17/2012 @ 7:58am Farm Management Specialist with ISU Extension housed in Polk County, Iowa. Areas of expertise include crop marketing, grain contracts, government farm programs, crop insurance, farmland leasing and other crop risk management strategies. Reach Steve by e-mail at sdjohns@iastate.edu.

The USDA Risk Management Agency (RMA) will release the final fall harvest prices for revenue protection crop insurance policies on November 1. As of October 15, those harvest prices are near $7.50 per bushel for corn and $15.38 per bushel for soybeans.

These final harvest price numbers are the final piece of information to finalize potential indemnity payments for revenue protection crop insurance coverage. Iowa farmers insured 92% of the corn acres and 91% of the soybean acres using revenue protection in 2012.

Many Iowa farms that suffered significant production losses in 2012 will receive indemnity payments over the next few months reflecting these harvest prices. December corn futures price average increased between the projected price (determined in February) and the harvest price (determined in October). Should a production shortfall occur, that loss would be compensated at the higher December corn futures average price.

Many farmers use revenue protection coverage along with preharvest marketing strategies and commit a portion of their guaranteed bushels to delivery. This harvest price is critical if any lost production must be replaced at higher market prices for on-farm feeding or to fulfill delivery on a forward cash or hedge-to-arrive grain contract.

Shortfall of Contracted Bushels

Once the farmer realizes that they cannot deliver all the bushels they’ve contracted, they should work with the grain merchandiser on a strategy to make up the shortfall in bushels or pay the replacement value of those bushels.

To illustrate how indemnity payments are determined, an example of Revenue Protection (RP) coverage for corn is featured.

2012 Revenue Protection (RP) Example:

A loss occurs when the bushels of corn produced for the unit fall below the production guarantee as a result of damage from a covered cause loss. This example assumes 175 bushels per acre APH yield, 75% coverage level, and basic unit coverage.

175 bushels per acre X .75 = 131.3-bushel guarantee *

100 bushels per acre actually produced

131.3 bushels – 100 bushels = 31.3 per-acre loss

31.3 per-acre loss X $7.50 per bushel (harvest price determined in October) = $234.75 net indemnity *

* Figures shown on a per-acre basis. Guarantees and losses are paid are on a unit basis. See individual policy provisions.

Summary

As long as the farmer did not commit to delivery more than the 131.3 bushels per acre, they should have adequate funds to make up the shortfall in bushels or pay the replacement value of those bushels.

Delaying settlement beyond early November leaves the farmer in a speculative position for those bushels that they were unable to deliver. Should the futures price move even higher beyond this time frame, the replacement cost would increase. Regardless, the need to work with the grain merchandiser is critical should you fall short on contracted bushels.


Adapted from USDA RMA’s 2012 COMMODITY INSURANCE FACT SHEET, Corn—Crop Revenue Coverage, January 2012.

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