By: Cody Darius Shay Alix Carmen

Revenue Protection

OverviewHistoryBasic Mechanics

◦Role of Futures Market◦Computation of trigger and

indemnity paymentsStereotypical producer to use RP

◦Risk adverse

The Problem SolverRisk management tool for when

income from crop production is low when the yields are not

Covers what multi peril contracts can and price risk

Gives you the best price◦Projected Price◦Harvest Price

BasicsCrop Insurance began in 1938

◦The Great Depression ◦AAA (Agricultural Adjustment Act)

80’s and 90’s came a new era of insurance coverage

Yield coverage is much like traditional Yield Protection◦Based on Actual Production History

Price CoverageUses CBOT Futures and APH

yieldsCorn Example

◦Projected Price Computed by average of Dec. CBOT

futures contract during Feb.

◦Harvest Price Computed by average of Dec. CBOT

futures contract during October

Corn Example Ctd.- The TriggerRevenue Guarantee

◦Higher of projected price or harvest price X APH yield X coverage level chosen

Actual Revenue◦Actual harvest yield X Harvest price

Indemnity Payment◦Amt by which the revenue guarantee

exceeds the actual revenue, if any

Numerical ExampleGiven

Three Examples of RP

Feb. Futures Price $4.00APH Yield 160Chosen Coverage Yield 0.75Revenue Guarantee $480.00

 Low Price/Low

YieldLow Price/ Normal

YieldHigher Price/Low

YieldHarvest Futures Price $3.20 $2.50 $5.00Revenue Guarantee $480.00 $480.00 $600.00Acutal Yield 130 160 110Actual Revenue $416.00 $400.00 $550.00Indemnity Payment $64.00 $80.00 $50.00

RP with Harvest Price ExclusionRP-HPEWritten so that the level of the revenue

guarantee solely based by the February futures Price

Does not increase even if the futures price rises by harvest

Why?◦ Carries lower premium than only RP Policy

Coverage Units and DiscountsEnterprise Unit Coverage

◦All acres of a crop in a county are insured as a single unit

◦Average must fail to claim indemnityWhole Farm Coverage

◦At least 2 crops with each over 10% of acres planted

◦Weighted by number of acres planted of each

Farm Coverage Example

Indemnity Pmt made when the combined per acre corn and soybean revenue falls below the whole farm guarantee

RP and RP-HPEAdjusted in the

same manner as APH losses

Based on Projected Price in Feb. even if the harvest price is higher

Replanting

Corn SoybeansRevenue Guarantee $450.00 $400.0050/50 rotation rev. Guarantee2/3 Corn 1/3 Soybean Rev. G.

$425.00$433.33

The Insured Risk AverseAvailable:

◦Soybeans◦Corn◦Wheat◦Grain Sorghum

Want to reduce Price Risk

◦Barley◦Canola/Rapeseed◦Rice◦Sunflowers◦Cotton

SummaryProtects from combined effects

◦Yield Coverage◦Price Risk

Reduces year-to-year income variability

Variety of options and coverage levels are available

Design the protection you want for your operation

Questions?