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What do crop insurance options mean to your farm?

Agriculture.com Staff 03/06/2008 @ 8:28am

Crop Revenue Coverage (CRC) and Revenue Assurance (RA) are similar products insuring farm revenues. These products differ in three manners.

  1. CRC and RA will have different premiums.
  2. CRC averages October settlement prices of the December corn futures contract traded on Chicago Board of Trade (CBOT) to determine its harvest price. RA averages November settlement prices to determine its harvest price.
  3. CRC limits how much the harvest price can differ from the base price while RA does not have limits. The corn limit is $1.50 per bushel and the soybean limit is $3.00 per bushel. Take a corn base price of $5.30. If settlement prices average above $6.80 ($5.25 base price + $1.50 limit), the CRC harvest price is $6.80. If settlement prices average less than $3.80 ($5.30 base price - $1.50 limit), the CRC harvest price is $3.30.

In past years, price limits associated with CRC have not been a major concern. In 2008, price limits are a concern as price volatility has increased greatly, increasingly the likelihood that settlement prices will fall outside CRC price limits. This could cause RA to have higher payments than CRC.

Expected payments under CRC and RA are reported in this paper. The difference between RA and CRC payments puts a value on not having CRC limits. Before reporting expected payments, the payment mechanisms for CRC and RA are detailed. Then, the price volatility for 2008 is quantified before reporting expected payments.

Crop Revenue Coverage (CRC) and Revenue Assurance (RA) are similar products insuring farm revenues. These products differ in three manners.

Both CRC and RA with the harvest revenue option (RA-HP) calculate a revenue guarantee as follows:

In the past, there were very small chances that the harvest price would be outside the limits set by CRC. Between 1972 and 2007, the harvest prices of corn were never $1.50 above or $1.50 below base prices. Similarly, soybean harvest prices were never $3.00 higher or $3.00 lower than base prices.

Expected 2008 payments associated with CRC and RA were estimated for a central Illinois situation with parameters used in the iFARM simulation model. This model is used to estimate payments in the crop insurance. The farm has a 172-bushel APH yield for corn and a $5.30 corn base price is used. The farm has a 50-bushel APH yield for soybeans and a $13.00 soybean base price is used. Yield variability is reflective of a Logan County, Illinois, situation and price variability reflects volatilities estimated from mid February CBOT futures and options contracts.

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