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Fall harvest prices & indemnity payments

STEVE JOHNSON 11/08/2010 @ 11:59am 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 RMA released the final fall harvest prices for revenue crop insurance prices at $5.46 per bushel for corn and $11.63 per bushel for soybeans. These numbers were the final piece of information to finalize potential indemnity payments for many revenue insurance products including Crop Revenue Coverage (CRC) on corn and soybeans and Revenue Assurance with the Harvest Price Option (RA-HPO) for soybeans. Many Iowa farms that suffered significant production losses in 2010 will receive indemnity payments reflecting these harvest prices over the next few weeks, especially if they insured using CRC coverage.

In 2010 Iowa farmers insured 89% of all the corn and soybean acres. Of these insured acres, 74% were covered by CRC and 12% with RA. The CRC policies use the higher of the spring base price or harvest price to determine the revenue guarantee, which is very similar to the RA-HPO coverage. Farmers have to designate on an RA policy whether to elect the Harvest Price Option (HPO) or simply use only the spring base price (RA-BP). An insured that chose to use RA or CRC coverage in 2010 would have made the designation on or before the March 15th enrollment deadline.

CRC and RA-HPO policies are very similar products except for small differences in the premium charged and the fact that CRC uses the month of October average for December corn futures prices while RA-HPO uses the November average. Thus indemnity payments for RA-HPO coverage on corn will be determined in December. It’s quite possible that that November average futures prices might be higher than the October average, so those with RA-HPO may have a slight advantage insuring corn in 2010 because it uses the November price. The insured using RA-HPO would have less risk of the "buy-back" bushel price being lower than the insurance harvest price, compared to those CRC policy holders.

CRC and RA-HPO both provide protection against a decline in market prices as well as a shortfall in production. The guarantee is in dollars and a loss situation occurs when the dollar value reflecting actual production falls below the dollar guarantee. CRC or RA-HPO offers protection whether prices increase or decline:

  • In most years when the price usually declines as harvest approaches, you are guaranteed a pre¬determined amount of income per acre using the Spring Base Price.
  • In a year of rising futures prices at harvest, a production shortfall would be compensated at the higher market-based harvest price. This is critical if any lost production must be replaced at higher market prices for on-farm feeding or to fulfill delivery on a forward contract.
  • Should a significant shortfall of production occur, the insured may need to “buy back” bushels through their grain merchandiser at the prevailing cash price.

Buying Back Bushels

The key to the issue surrounding “buying back” bushels is fairly straight forward but is often confusing until the insured receives their indemnity check. However, the crop revenue insurance products that feature the fall harvest price will create a higher harvest guarantee and a larger indemnity payment when harvest futures price rise, like occurred in 2010. In the example below, crop insurance bushels total 105 bushel per acre (140 bu/A APH X 75%). For someone that commits a large portion of these “insurance bushels” to delivery on an annual basis they should consider the use of either a CRC or RA-HPO policy. In 2011, these policies will be combined into one policy called Revenue Protection (RP).

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