Smith, Vincent H.

English

Research Papers in Economics

Contact:
Vince Smith
(406) 994-5615
uaevs@montana.edu
   B R I E F I N G
    Briefing No. 11 (Revised)         October 2003
                                                       Federal Crop and Crop Revenue Insurance Programs:
                                                             Income Protection
                                                            
                                                               Vincent H. Smith
Agricultural Marketing Policy Center
Linfield Hall
P.O. Box 172920
Montana State University
Bozeman, MT 59717-2920
Tel: (406) 994-3511
Fax: (406) 994-4838
email: ampc@montana.edu
website: www.ampc.montana.edu
Objective
Analysis
for Informed
Decision Making
Federal crop insurance against individual farm
yield losses in the form of  multiple peril
policies has been available for some crops
since 1938.  Following the 1980 Federal Crop
Insurance Act, the number of crops and the
geographic coverage of the federal crop yield
loss insurance program was greatly expanded. 
Beginning in the late 1980s, in addition to
traditional multiple peril policies, new policies
were developed based on yield losses at the
county level and offered for a limited number
of crops in a limited number of counties. 
Following the 1994 Crop Insurance Reform
Act, a wider range of federally subsidized
insurance policies were introduced that
provided protection against revenue losses and 
catastrophic losses.   
Today, producers face a wide array of crop
insurance alternatives including yield based
Actual Production History (APH) insurance
policies and Revenue Insurance policies.  Not
all insurance policies are available for every 
crop in any given county.  In some counties,
Risk Management Agency (RMA) approved
insurance policies are not available for some
crops.  In these circumstances, producers can
either utilize the Noninsured Disaster
Assistance Program (NAP) or make a request
for actuarial change. 
Yield based insurance policies include
Multiple Peril Crop Insurance (MPCI) and 
Group Risk Plan (GRP) policies.  Under MPCI
policies, indemnity payments are triggered by
low yields on an individual producer’s insured
acres.  Under GRP policies, indemnity
payments are triggered by low county-wide
yields.  
Revenue insurance policies that provide
indemnities for revenue losses caused by either
low yields, low prices, or both include Group
Revenue Insurance Policy (GRIP) policies,
Crop Revenue Coverage Policies (CRC),
Revenue Assurance (RA) policies, and Income
Protection (IP) policies.  Under CRC, RA,
and IP revenue insurance policies,
indemnities are triggered by low revenues for
an individual producer (caused either by low
yields, low prices, or both).  Under GRIP
policies, indemnity payments are triggered by
low average revenue for the crop in a county.
This Briefing describes and discusses Income
Protection (IP) policies.
Income Protection
Income Protection (IP) policies were
developed collaboratively under a mandate
provided by section 508(h)(6) of the 1994
Federal Crop Insurance Act to the FCIC to
offer a cost of production insurance plan. A
pilot IP program was introduced for the 1996
crop year.  
The IP policy provides protection against
reductions in expected revenues by paying for
losses below an individual producer’s
revenue guarantee for the crop.  The APH
yield is based on a producer’s expected yield
and the projected price at time of planting. 
Currently IP insurance policies are available
only for a limited number of crops in a
limited number of counties.  For the 2004
crop year, these crops include barley, corn,
cotton, grain sorghum, soybeans, spring
wheat, and winter wheat.  
Insurable Units:
A producer must insure all acres of a crop in
a county in which they have an interest under
the same IP unit.  A producer cannot insure
separate optional or basic units using separate
yield histories.  In this respect, IP policies are
different than other crop yield and revenue
insurance policies that base indemnities on
individual producer yields and revenues (that
is, MPCI, CRC, and RA policies). APH Approved Average Yield
A producer must establish an APH
approved yield for all acres planted to the
crop in the county (See Briefing No. 6,
revised November 2002, for a detailed
description of APH approved yields).
Coverage Levels
A producer elects the percentage of their
APH yield against which insurance is to
be purchased.  Producers can generally
select between 50 percent and 75 percent
of their APH approved yield as the basis
for their IP revenue insurance and
coverage levels can be specified in 5
percentage point increments.  In some
counties, producers can select up to 85
percent of their APH yield.
Income Protection Guarantee and 
Projected Harvest Price
A producer selects a coverage level.  The
coverage level is multiplied by the
producer’s APH yield.  This quantity is
then multiplied by the projected harvest
price for the crop as established by the
FCIC.
The projected price for the crop is a
specified average futures settlement price
for harvest time delivery of  the crop
during a specified period prior to the
sales closing date called the projected
price discovery period.   Typically, the
projected price for the crop is determined
between seven months and thirteen
months prior to the futures settlement
date, depending on the sign up date for
IP policies.
For example, in 2004, for corn with a
March 15 sales closing date, the IP
projected price was the Chicago Board of
Trade February average settlement price
for November corn futures policies (that
is, corn futures policies expiring ten
months later in November, 2004).     
The IP income protection guarantee is
equal to the producer’s APH yield
multiplied by the coverage level and the
projected harvest price for the crop.
Example:
A producer has an APH yield of 100
bushels per acre.  The producer selects an
IP coverage level of 70 percent.  The
projected harvest price for the crop is
$2.50 per bushel.   The producer’s IP
revenue guarantee is:
IP Revenue Guarantee   =   APH approved
yield  x coverage level x Projected harvest
price =  (100 bushels per acre) x (70 percent)
x ($2.50) = $175 per acre .
The FCIC Harvest Price
Under an IP policy, the price at which a
producer’s crop is valued to assess losses is the
FCIC harvest price. The harvest price for the
crop is the average futures settlement price for
the futures contract initially used to establish
the projected price in the month prior to the
expiration of that futures contract.  
For example, in 2041, for corn the FCIC
harvest price was the average November
settlement price for the Chicago Board of
Trade December corn futures policies (that is,
corn futures policies expiring one month later
in November, 2004).     
Calculating IP Indemnity Payments
 
A producer’s crop value for IP insurance
purposes is defined as the producer’s actual
yield for the crop multiplied by the FCIC
harvest price (not the price that the producer
can sell the crop to a local county elevator at
harvest time).  If the measured crop value is
less than the producer’s IP revenue guarantee
then the producer receives an indemnity equal
to the difference between the revenue
guarantee and the crop value.  If the producer’s
measured crop revenue exceeds the revenue
guarantee then the producer receives no
indemnity.
Example (continued):
A producer purchases an IP insurance policy at
the 70 percent coverage level.  The producer’s
actual yield is 50 bushels (50 percent of the
producer’s APH yield of 100 bushels), the
projected harvest price is $2.50 per bushel, and
the harvest price is $3.00 per bushel.  
Crop Value =  Actual yield x Harvest price =
50 bushels per acre  x $3 per bushel = $150
per acre
The revenue guarantee ($175) is greater than
the measured crop value.  The producer
receives the following indemnity payment on
each insured acre:
Indemnity Payment  = IP Revenue Guarantee -
Crop Value = ($175  - $150) per acre =  $25
per acre
In this example, the producer receives a lower
indemnity from the IP policy than the
producer would have obtained from an MPCI
policy with the same coverage level and
projected harvest price. This is because the
FCIC harvest price exceeded the FCIC
projected price. If the FCIC harvest price had
been lower than the projected price, the
producer’s indemnity would have been
greater than under a similar MPCI policy. 
When comparing IP policies with MPCI
policies, a producer should consider not only
the likely site of indemnity payments, but also
the premium payments associated with each
policy.  Producers should always compare the
insurance protection against the risk of loss
provided by each policy with the cost of each
policy (the premium payment). 
Premium Rates and Premium Payments
Premium rates for IP policies are developed
for each county and quoted to individual
producers for each policy option.  Producers
may also select a Catastrophic Risk
Protection (CAT) policy.  In that case,
producers are simply charged a $100
administrative fee for each crop which may
be waived if they are limited resource
producers.
Premium Subsidies
Premium rates charged to producers for all
federal crop yield and revenue insurance
policies are lower than the premium rates that
would be charged if producer premium 
payments covered all expected indemnity
payments.  Premium subsidies generally do
not increase in proportion to coverage levels. 
Producers insuring against revenue losses
with lower coverage levels typically receive
subsidies that make up a larger share of their
total premium payments than producers
insuring against crop losses with higher
coverage levels.    
Crop Shares
A producer often shares a portion of a crop
with a landlord.  Each individual with a share
in a crop may insure their own share.  Indemnity
payments for losses and premium payments
are pro-rated by the individual’s share.Example (continued):
Assume a producer has a 67 percent
share in the crop.  The producer can now
only receive 67 percent of any indemnity
payment.  However, the producer only
has to pay 67 percent of the premium.
Prevented Planting and Replanting
Indemnity Payments
In some years, producers may need to
replant a crop or be prevented from
planting a crop.   In some circumstances,
producers may be indemnified for
replanting costs under an IP policy.  
Unless limited by the provisions of the
policy, indemnity payments will also be
made when producers are prevented from
planting during the planting dates
prescribed in the policy because of
causes covered by the insurance policy
(such as severe weather or flooding).
Sign Up Dates
FCIC  identifies unique dates by which
producers must sign up for their IP
policies that are specific to each county
for each crop.  
Reporting of Acreage and Crop
Damage
Each crop year, producers with IP
policies are required to submit an acreage
report by unit for each insured crop. The
acreage report must be signed and
submitted by the producer on or before
the acreage reporting date contained in
the Special Provisions for the county for
the insured crop. In the event of crop
damage, producers should immediately
notify their insurance provider of the
damage.The programs of the MSU Extension Service are available to all people regardless of race, color, national origin, gender, religion, age,
disability, political beliefs, sexual orientation, and marital or family status.  Issued in furtherance of cooperative extension work in
agriculture and home economics, acts of May 8 and June 30, 1914, in cooperation with the U.S. Department of Agriculture, LeRoy Luft,
Vice Provost and Director, Extension Service, Montana State University, Bozeman, MT 59717.

Federal Crop and Crop Revenue Insurance Programs: Income Protection

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