Empowering Farmers Through Insurance

Revenue Protection—commonly called RP—is designed to protect a producer against an insured loss of crop revenue caused by lower yields, lower prices or a combination of both. For many row-crop farmers, protecting revenue is more useful than protecting yield alone. A producer can harvest an average crop and still experience a serious revenue loss if commodity prices fall. Another producer may experience a major yield loss during a year when prices rise sharply. Revenue Protection is designed to address both situations. Delta Crop Insurance helps producers in Eastern Arkansas and Western Mississippi understand how Revenue Protection works, compare coverage levels and build a policy around the financial needs of their operation. What Does Revenue Protection Cover? Revenue Protection may provide a payment when the insured crop’s calculated revenue falls below the policy’s revenue guarantee. A revenue loss may result from: - A covered yield loss caused by drought, excessive moisture, flooding, hail, wind, frost, certain plant diseases or other insured causes - A decline in the harvest price compared with the projected price - A combination of reduced production and a lower harvest price - A severe yield loss during a year when the harvest price increases A physical production loss must result from an insured cause and meet the requirements of the policy. Revenue Protection does not insure poor marketing decisions, lost contracts, differences in local basis or prices received under a particular marketing agreement. The Four Main Parts of Revenue Protection 1. Approved Yield Your approved yield is generally developed from the farm’s Actual Production History, commonly called APH. The APH database uses reported and verified production records to establish the yield used in determining coverage. The approved yield may also be affected by policy provisions and available elections such as trend adjustments, yield exclusions, substitutions, cups or other applicable yield-adjustment procedures. Maintaining complete and accurate acreage and production records is important. Missing or incorrect information can affect both the guarantee and the outcome of a claim. 2. Coverage Level The producer selects a percentage of the approved yield to insure. Available coverage levels commonly range from 50% through 85%, although the highest levels are not available for every crop, county or practice. For example, a farmer with an approved soybean yield of 60 bushels per acre and a 75% coverage level would have an insured yield of: **60-bushel approved yield × 75% coverage = 45 insured bushels per acre** Choosing a higher coverage level generally produces a larger revenue guarantee but also increases the producer-paid premium. 3. Projected Price The projected price is established for the crop under USDA Risk Management Agency procedures. It is generally based on settlement prices for a designated commodity futures contract during a specified price-discovery period. The projected price is an insurance price. It is not necessarily the cash price available at a producer’s local elevator or grain buyer. The projected price is initially used to establish the expected value of the crop and calculate the preliminary revenue guarantee. 4. Harvest Price The harvest price is established later in the crop year using the futures contract and price-discovery period specified by RMA. Under standard Revenue Protection, the price used to establish the final guarantee is the higher of: - The projected price, or - The harvest price The harvested and appraised production is valued using the harvest price when determining the crop’s revenue to count. How the Revenue Guarantee Is Calculated A simplified per-acre Revenue Protection guarantee is calculated as follows: Approved yield × Coverage level × Higher of projected or harvest price = Revenue guarantee per acre** The final unit guarantee also considers: - Insured acreage - The producer’s ownership share - Crop, type and practice - Unit structure - Applicable policy adjustments - Information reported on the acreage report Because the harvest price can increase the guarantee, the final guarantee may be higher than the preliminary guarantee shown before planting. How a Revenue Protection Loss Is Calculated A simplified calculation compares the revenue guarantee with the value of the production to count. **Production to count × Harvest price = Revenue to count** The potential loss is then calculated as: **Revenue guarantee − Revenue to count = Potential indemnity** The calculation is normally made at the insured-unit level, not field by field. Good production from one field can offset poor production from another field when both are included in the same insured unit. Production to count can include harvested production, appraised unharvested production and other production required to be included under the policy. Approved quality adjustments may reduce the amount of production counted when the crop fails to meet applicable quality standards. Revenue Protection Example Assume a soybean producer has the following coverage: - Approved APH yield: 60 bushels per acre - Coverage level: 75% - Projected price: $12.00 per bushel - Harvest price: $10.00 per bushel - Actual production: 40 bushels per acre - Insured acreage: 100 acres - Producer’s share: 100% Step 1: Calculate the insured yield **60 bushels × 75% = 45 insured bushels per acre** Step 2: Determine the price used for the guarantee Revenue Protection uses the higher of the projected price or harvest price. - Projected price: $12.00 - Harvest price: $10.00 The projected price of $12.00 is higher, so it is used to calculate the guarantee. Step 3: Calculate the revenue guarantee **60-bushel approved yield × 75% coverage × $12.00 = $540 per acre** The total guarantee for 100 acres is: **$540 × 100 acres = $54,000** Step 4: Calculate the revenue to count The harvested production is valued at the harvest price. **40 actual bushels × $10.00 harvest price = $400 per acre** The total revenue to count is: **$400 × 100 acres = $40,000** Step 5: Calculate the potential indemnity **$54,000 guarantee − $40,000 revenue to count = $14,000** In this simplified example, the potential indemnity would be: **$140 per acre, or $14,000 for the insured unit** This example assumes a 100% ownership share and does not include additional adjustments that may apply under the policy. Producer-paid premium is also not included in the simplified calculation. What Happens When the Harvest Price Increases? One of the most important features of standard Revenue Protection is its ability to increase the guarantee when the harvest price is higher than the projected price. This can be particularly valuable when widespread drought or another production problem causes commodity prices to rise. A farmer may have fewer bushels to sell or may need to purchase higher-priced grain to satisfy a forward contract. When the harvest price increases, standard RP generally recalculates the guarantee using that higher price. However, the producer’s actual production is also valued at the higher harvest price when determining revenue to count. The higher guarantee does not automatically mean a claim will be paid. Production must still be low enough for the calculated revenue to fall below the adjusted guarantee. Revenue Protection Is Calculated by Unit Revenue Protection losses are generally calculated across the insured unit. Unit structure can therefore have a major effect on whether a claim is triggered. With an enterprise unit, production from eligible acreage throughout the county is generally combined under the applicable policy rules. Higher yields on one part of the operation may offset lower yields elsewhere. Optional or basic units may separate certain acreage when all eligibility and recordkeeping requirements are satisfied. These structures can reduce the amount of production offset between units, but they may also have higher producer-paid premiums. The least expensive unit structure is not automatically the best choice. The decision should consider how the farm is spread out, differences in soil and drainage, irrigation, production history and the operation’s ability to withstand a localized loss. Revenue Protection Versus Yield Protection Yield Protection primarily protects against a covered loss in production. Its guarantee is calculated using the projected price and does not increase because the harvest price rises. Revenue Protection adds protection against price-related revenue declines and can increase the guarantee when the harvest price is higher than the projected price. Revenue Protection may be a better fit for producers who: - Want protection against both yield and price risk - Forward-contract part of their expected production - Need to protect operating capital or loan obligations - Have substantial per-acre production expenses - Want the potential benefit of harvest-price protection The appropriate choice depends on the farm’s premium budget, marketing strategy, debt structure, historical yields and overall ability to absorb risk. When Should a Potential Loss Be Reported? Contact Delta Crop Insurance as soon as you believe a crop may have an insured loss. Do not wait until harvest is complete to begin the conversation. A producer should obtain appropriate guidance before: - Destroying damaged acreage - Replanting a crop - Abandoning acreage - Harvesting the crop in a manner that prevents an accurate appraisal - Putting insured acreage to another use - Commingling production when separate records are required The approved insurance provider and assigned adjuster determine whether a loss is covered and calculate any indemnity under the policy. Delta Crop Insurance assists with reporting the potential loss, explaining the process and identifying the records that may be needed. Is Revenue Protection Right for Your Farm? Revenue Protection is not a one-size-fits-all policy. Two farms growing the same crop in the same county may need different coverage because of differences in yield history, irrigation, unit structure, land quality, cash flow, marketing and debt. Before selecting coverage, producers should compare several combinations of: - Coverage levels - Unit structures - Approved yields - Premium costs - Irrigated and non-irrigated practices - Revenue guarantees - Supplemental endorsements - Potential loss scenarios A good crop-insurance decision should show more than the premium. It should demonstrate what the farm’s guarantee would be and how the policy could respond under realistic price and production outcomes. **Contact Delta Crop Insurance to request a Revenue Protection review for your operation.** *This information is provided for general educational purposes and does not change or replace the terms of any crop-insurance policy, crop provisions, actuarial documents or Special Provisions. Coverage, availability and policy requirements vary by crop, county, practice and crop year.*