Two cents per bushel is all you save by shifting from Revenue Protection to Yield Protection crop insurance or excluding the harvest price option from RP, says KS St. risk management specialist Art Barnaby. He says a common price election is used and any increase in premiums or indemnity payment greater than YP’s premiums and indemnity are caused by just price risk. He says some agents recommend the reduced coverage, but he says you lose price protection.
Barnaby’s argument assumes your familiarity with advanced options trading, since crop insurance formulas are based on option puts and calls. He says, “Effectively RP is YP plus a Yield Adjusted Asian put (YAA put) (revenue endorsement) plus a Yield Adjusted Asian call (YAA call) (harvest price endorsement). The YAA put protects against falling prices and a YAA call protects against price increasing and eliminates any negative values in the YAA put.” It should be noted that Asian options are an average over time, CME options are a point in time.
How do you do that?
Barnaby says, “Farmers can write covered options against the RP contract. This is similar to a bear spread where the farmer buys an at-the-money put and sells an out-of-the-money put to lower the premium cost. One can do something similar by buying RP and then selling options out-of-the-money. If the market moves against the farmer then either he will collect from RP or he will produce a yield greater than his APH yield. In addition, this common price discovery will limit risk for farmers who want to take advantage of selling covered puts in addition to marketing their crops.”
Spring guarantees for crop insurance on Cornbelt row crops is being set in February based on closing prices for December corn and November beans. In addition to the closing price, guarantees are also calculated with the help of market volatility and volatility not only affects the spring guarantee, but also the premium paid by farmers. To reduce premium costs, some agents have recommended downgrading to yield protection from revenue protection. However, there is very little savings and the price protection is lost.
Source: FarmGate blog