Home 5 Ag Stories Crop Insurance: Revenue Protection vs Area Risk Protection

Crop Insurance: Revenue Protection vs Area Risk Protection

by Ken Root

Listen Here: Agribusiness Matters 2-9-17

Crop Insurance is getting a lot of attention this week. An Illinois ag economist, suggests considering a different flavor when you make your selection this spring.

Federal crop insurance comes in two basic revenue protection forms, RP and ARP. RP, stands for Revenue Protection. ARP, stands for Area Risk Protection. The difference between the two says University of Illinois Agricultural Economist Gary Schnitkey is simple enough to understand.

“RP, is what most people buy. It is a farm level product. It makes payments based on what happens to farm yields. ARP, is a county level product. It makes payments based on county yields.”

It is the available coverage level under the ARP federal crop insurance option that put Schnitkey’s mind to work when he was considering how farmers should use the risk management program this season. “The reason why farmers should consider it is because they have a 90% coverage level with ARP, versus only going up to 85% with R-P.” Schnitkey’s continued, “This year we are probably looking at more down side price risk on soybeans, and that 90% guarantee would cover more of that price risk.”

Moving up to a 90 percent coverage level increases the price below which crop insurance payments occur. Given a $10.20 projected February price and a 90 percent coverage level, harvest prices below $9.18 a bushel for soybeans in November ($10.20 x .90) would generate payments, given that the harvest yield equals the guarantee yield. The $9.18 price compares to an $8.67 break-even price at an 85 percent RP coverage level, and an $8.16 break-even at an 80 percent percent coverage level.

 

Again, ARP does not have prevented planting or replant payments while RP does. The coverage on ARP begins when the crop is planted. Because ARP uses county yields in its calculations, a farm may not receive a payment if the farm has a poor yield and the county does not. The relative premiums on RP and ARP vary across counties. Not all counties will have a 90% ARP premium that is lower than the 85 percent RP policies.

Finally, Gary Schnitkey explains that the CME Group soybean contract for November 2017 delivery, is currently trading around $10.20 per bushel. A $10.20 per bushel projected price would be $1.35 higher than last year’s projected price of $8.85 per bushel. In and of itself, a higher projected price will offer additional revenue protection on soybeans without the need to consider the merits of RP versus ARP.

SHARE