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Crop Insurance

Crop insurance is purchased by agricultural producers, including farmers, ranchers and others to protect themselves against either the loss of their crops due to natural disasters, such as hail, drought and floods, or the loss of revenue due to declines in the prices of agricultural commodities. The two general categories of crop insurance are called crop-yield insurance and crop-revenue insurance.

There are two main classes of crop-yield insurance.

  • Crop-hail insurance is generally available from private insurers because hail is a narrow peril that occurs in a limited place and its accumulated losses tend not to overwhelm the capital reserves of private insurers. In the early 1820s, crop-hail insurance was available to farmers in France and Germany. That is among the earliest forms of hail insurance from an actuarial perspective. It is possible to implement the hail risk into financial instruments since the risk is isolated.
  • Multi-peril crop insurance. Coverage in this type of insurance is not limited to just one risk. Usually multi-peril crop insurance offers hail, excessive rain and drought in a combined package. Sometimes, additional risks such as insect or bacteria-related diseases are also offered. The problem with the multi-peril crop insurance is the possibility of a large scale event. Such an event can cause significant losses beyond the insurer’s financial capacity. To make this class of insurance, the perils are often bundled together in a single policy, called a multi-peril crop insurance policy. This coverage is usually offered by a government insurer and premiums are usually partially subsidised by the Government. U. S. Department of Agriculture is known to implement the earliest Multi-Peril Crop Insurance Program in 1938. Federal Crop Insurance Corporation managed this multi-peril insurance program since then. The Risk Management Agency (RMA) is active in calculating the premiums based on individual risk factors since 1996
  • Crop-Revenue insurance. Crop-yield times the crop price gives the crop revenues. Based on farmer’s revenues, crop revenue insurance is based on deviation from the mean revenue. The Risk Management Agency (RMA) uses the future prices on harvest times listed in the commodity exchange markets, to determine the prices. Combining the future price with farmer’s average production gives the estimated revenue of the farmer. Accessing the futures market offers enables revenue protection even before the crop is planted. There is a single guarantee for a certain number of dollars. The policy pays an indemnity if the combination of the actual yield and the cash settlement price in the futures market is less than the guarantee.

In the United States, the program is called Crop Revenue Coverage. Crop Revenue insurance covers the decline in price that occurs during the crop’s growing season. It does not cover declines that may occur from one growing season to another.

  • John Deere offers yield protection. With yield protection you can purchase coverage to guarantee yields based on your actual production history (APH). Yield Protection provides protection against losses for most crops from nearly all natural disasters. Less expensive than revenue-based policies, Yield Protection protects against yield and/or quality losses from many different perils, including drought, excess moisture, cold and frost, wildlife, disease and insects.
  • Various coverage levels are available. Comprehensive protection against weather-related causes of loss and certain other unavoidable perils. Protects against low yields, poor quality, late planting, replanting costs or when planting is prevented. Guarantee is based on producer’s own yield records. Projected price is determine by the Commodity Exchange Price Provision (CEPP) and is generally available 10 days prior to applicable sales closing date.
  • Benefits: Provides a source of income when low crop yields are caused by covered perils. Adds security to farm loans and low-level security for marketing plans. Minimum catastrophic coverage is available and provisions are available for limited resource farmers.
  • Available crops: Wheat, Barley, Malting Barley, Corn, Grain Sorghum, Soybeans, Cotton, Rice, Sunflowers and Canola/Rapeseed. King Crop Insurance Inc. offers yield protection where farmer selects the amount of average yield he or she wishes to insure from 50 to 85 per cent. The farmer also selects the per cent of the predicted price he or she wants to insure between 55 and 100 per cent. The projected price is determined in accordance with the Commodity Exchange Price Provisions (CEPP) and is based on daily settlement prices for certain futures contracts. If the harvested plus any appraised production is less than the yield insured, the farmer is paid an indemnity based on the difference. Indemnities are calculated by multiplying this difference by the insured percentage of the projected price selected when crop insurance was purchased and by the insured share.
  • Revenue Protection: Revenue Protection insures producers against yield losses due to natural causes such as drought, excessive moisture, hail, wind, frost, insects and disease and revenue losses caused by a change in the harvest price from the projected price. The farmer selects the amount of average yield he or she wishes to insure from 50 to 85 per cent. The projected price and the harvest price are 100 per cent of the amounts determined in accordance with the Commodity Exchange Price Provisions (CEPP) and are based on daily settlement prices for certain futures contracts. The amount of insurance protection is based on the greater of the projected price or the harvest price. If the harvested plus any appraised production multiplied by the harvest price is less than the amount of insurance protection, the farmer is paid an indemnity based on the difference.
  • Adjusted Gross Revenue: Adjusted Gross Revenue insures revenue of the entire farm rather than an individual crop by guaranteeing a percentage of average gross farm revenue, including a small amount of livestock revenue. The plan uses information from a producer’s Schedule F tax forms, and current year expected farm revenue and calculate policy revenue guarantee. Under this plan, you can also cover revenue from commodities that are currently uninsurable (such as forage, fruit and vegetable crops).