There are two basic types of coverage - Yield Protection (YP) with a fixed price - or Revenue Protection (RP) which also protects bushel prices. Both plans have the same base or minimum bushel price which is derived directly from averaging the close of harvest contracts on the CBOT during specific time periods for each crop. For corn and beans, that occurs during February – there are private company plans which allow for supplemental pricing using different months to “hopefully” set a higher base price – we haven’t found many of those that we’d recommend.
YP - This is strictly a yield guarantee. Either plan is based on your own average production - your Actual Production History (APH) - and it guarantees you a selected percentage of that yield. For example, if you averaged 130 bu/a APH, and you selected 70% YP coverage, you’d be guaranteed 91 bushels per acre and be paid a loss on any production yielding below that guarantee. For 2018, we’re guessing at a $3.90 bushel price for corn – maybe $10.00 for beans. With YP you’d be guaranteed 70% of the 130 or 91 bu. and be paid the $3.90 for anything short of the 91 bushels – no matter where the markets prices might go during the year.
RP (with Harvest Option)- This is actually a dollar policy rather than just a yield guarantee. It does not guarantee you a market price for your crops! But it does have a lot of value in the mechanics of how it works. You still have to market the grain, but RP will guarantee that you have bushels to fill a contract – you’ll either grow them or be paid 100% of CBOT prices at harvest! You have the same base or minimum price as set for YP. But, they then take your APH times that base price, and give you a minimum value per acre. Same example, with 91 bu/A. guaranteed, and using a $3.90 base price (a guess at this point), you’d be guaranteed a minimum income of $ 354.90 per acre. At harvest time next fall (Oct.), they will repeat the futures averaging process, and that will reflect what type of crop year we’ve had. If the harvest price is down at harvest, as it has it has been in recent years, you are still guaranteed that minimum income figure, and what actually happens is that it will take more of the cheaper bushels at harvest to get to your guaranteed income. For example, if the harvest average for our example came in at $3.50, it would now take 101.40 bushels to get your $354.90 income. If the harvest price came in higher than the base, any loss is paid at that higher harvest price, with no additional premium. For example, with a harvest price of $6.00 and an actual yield of only 81 bushel per acre, you’d have a 10 bushel per acre loss, and be paid $60.00 per acre (the YP would have only paid $39.00). The revenue plan automatically takes care of a lot of problems, especially if you are into forward contracting. You’re sure you’ll have your guaranteed bushels at harvest - if you do come up short, 100% of the futures price at loss time will certainly let you purchase anything you are short. Bankers are especially fond of the concept – RP has a higher premium than YP, but usually is a far better plan.
Enterprise Units (EU) - A wrinkle that “muddies the waters” is the selection of unit structure for your coverage. EU is not a new concept, but starting in 2009, there has been a significant extra premium subsidy applied to EU. Maybe a little over-simplified, but this extra subsidy reduces the premium to around 1/3 the cost of the same coverage with optional or separate units. After years of recommending that we separate coverage as much as possible, the savings have been too much to ignore - you have to consider the EU. EU lumps all of your share of the crop within the county together for loss purposes, and isolated loss farms may not pay a loss with EU, but, ………. Strictly from a risk management standpoint, for the same premium dollars, you can buy far more coverage with EU than any other individual policy. The total bushels you need either to pay your operating costs, or even to back up a marketing plan – for the same premium dollars – will be far cheaper with EU. In practice that means you can buy 75 or 80% EU for what 65% OU would cost you.