Managing risks associated with crop production is crucial for sustaining farm operations. Crop insurance serves as a vital tool in this regard, offering financial safeguards against unforeseen events that can adversely affect crop yields and revenues. There are two primary types of crop insurance: Yield Protection (YP) and Revenue Protection (RP), providing an in-depth analysis to assist farmers in making informed decisions.
Yield Protection (YP) Insurance
Yield Protection insurance, also known as Actual Production History (APH) insurance, is designed to protect farmers against losses in crop yield due to natural perils such as drought, excessive moisture, hail, wind, frost, insects, and disease. It ensures that producers receive compensation when their actual harvested yield falls below a predetermined guarantee.
What is covered under Yield Protection Insurance?
Indemnity Calculation
If the actual harvested yield plus any appraised production is less than the insured yield, the indemnity is calculated as follows:
Indemnity=(Insured Yield−Actual Yield)×Selected Price Percentage×Insured Share\text{Indemnity} = (\text{Insured Yield} – \text{Actual Yield}) \times \text{Selected Price Percentage} \times \text{Insured Share}Indemnity=(Insured Yield−Actual Yield)×Selected Price Percentage×Insured Share
Example
Consider a farmer with an APH yield of 160 bushels per acre who selects a 75% coverage level and a 100% price election. The yield guarantee would be:
160 bushels/acre×75%=120 bushels/acre160 \, \text{bushels/acre} \times 75\% = 120 \, \text{bushels/acre}160bushels/acre×75%=120bushels/acre
If the actual yield is 115 bushels per acre, the indemnity would be:
(120−115) bushels/acre×100%×Insured Share=5 bushels/acre×Insured Share(120 – 115) \, \text{bushels/acre} \times 100\% \times \text{Insured Share} = 5 \, \text{bushels/acre} \times \text{Insured Share}(120−115)bushels/acre×100%×Insured Share=5bushels/acre×Insured Share
Revenue Protection (RP) Insurance
Revenue Protection insurance offers a broader safety net by protecting against revenue losses caused by a decline in either yield or market prices, or a combination of both. This type of insurance is particularly beneficial in volatile markets where price fluctuations can significantly impact farm income.
What is covered under Revenue Protection Insurance?
Indemnity Calculation
An indemnity is paid if the actual revenue falls below the revenue guarantee. The actual revenue is calculated by multiplying the actual harvested yield by the harvest price.
Indemnity=Revenue Guarantee−(Actual Yield×Harvest Price)\text{Indemnity} = \text{Revenue Guarantee} – (\text{Actual Yield} \times \text{Harvest Price})Indemnity=Revenue Guarantee−(Actual Yield×Harvest Price)
Example
Assume a farmer with an APH yield of 175 bushels per acre selects an 80% coverage level. The projected price is $4.00 per bushel, and the harvest price is $4.50 per bushel. The revenue guarantee would be:
175 bushels/acre×80%×$4.50=$630 per acre175 \, \text{bushels/acre} \times 80\% \times \$4.50 = \$630 \, \text{per acre}175bushels/acre×80%×$4.50=$630per acre
If the actual yield is 130 bushels per acre, the actual revenue is:
130 bushels/acre×$4.50=$585 per acre130 \, \text{bushels/acre} \times \$4.50 = \$585 \, \text{per acre}130bushels/acre×$4.50=$585per acre
The indemnity would be:
$630−$585=$45 per acre\$630 – \$585 = \$45 \, \text{per acre}$630−$585=$45per acre
What is the difference between Yield Protection and Revenue Protection Insurance?
Factors to Consider When Choosing Between YP and RP Insurance
