The Basics of Sunflower RA
Saturday, December 1, 2007
filed under: Marketing/Risk Management
The backgrounder below on Revenue Assurance in sunflower is provided courtesy of Fran Herman, Rain & Hail LLC (www.rainhail.com). Growers are encouraged to consult with their crop insurance agent well before the March 15 signup deadline regarding the coverage options best suited for their farm.
• Unit Structure Available — Basic, Optional, Enterprise or Whole Farm.
• Coverage Levels — 65% through 85% in 5% increments; 80-85% levels available only in counties and on crops where MPCI allows 80-85% coverage.
• Projected Price (early price) — The projected price is the simple average of the final daily settlement prices in February for the CBoT soybean oil futures contract divided by two, then adding one. (Announced in early March.)
• Harvest Price (later price) — The harvest price is the simple average of the final daily settlement prices in October for the CBoT December soybean oil futures contract divided by two, then adding one. (Announced in early November.)
• Harvest Price Option — A coverage option that allows the insured to use the greater of the harvest price or the projected price to determine the revenue guarantee. Option must be selected by sales closing date of March 15.
• Indemnity Situations — If an indemnity payment is due under an RA policy, there are two different scenarios to be taken into consideration: (1) if the harvest price option was chosen; (2) if the harvest price option was not chosen.
(1) With the harvest price option: If the harvest price is not known at the time a loss is determined, RA may pay adjusted losses in two segments: a) RA pays an initial indemnity based upon the projected price. b) Once the harvest price is known and if it is greater than the projected price, RA recalculates the indemnity payment and pays the additional indemnity due. If the harvest price is known at the time of the loss is determined, RA will pay the loss based upon the greater of the projected price or the harvest price.
(2) Without the harvest price option: Indemnity payments will be paid after the production to count has been determined and the harvest price has been released. Preliminary indemnity payment may not be made for partial crop losses since the valuation of the production to count could lead to an overpayment situation.
What are the benefits of the harvest price option?
The RA harvest price option is designed to provide additional assurance to those producers who market their crop before harvest. These producers have taken on the additional risk that harvested seed will not be sufficient to meet their contractual obligation. Such a production shortfall can have severe consequences if fall harvest prices are greater than projected harvest prices, because the producer will be forced to purchase seed to meet his obligations at the higher price (not the case in an Act of God clause).
The RA harvest price option provides additional coverage when the harvest price is greater than the projected price, allowing this type of producer to fulfill contractual obligations from RA indemnities. The harvest price option allows the producer to use the greater of the harvest price or the projected price to determine the producer’s revenue guarantee.
Example of Revenue Assurance for Sunflower
— Dollar Guarantee —
1,500 lbs x 70% coverage level x 100 acres x $0.18 = $18,900 projected price
1,500 lbs x 70% x 100 acres x $0.22 = $23,100 harvest price
— Value of Production —
Harvested 1,000 lbs/acre x 100 acres x $0.22 = $22,000 production
— Loss Payment —
If insured had selected the harvest price option:
$23,100 - $22,000 = $1,100 payment
If the insured had not selected the harvest price option:
$18,900 - $22,000 = 0 payment