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Revenue Product Review

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  1. Revenue Product Review

  2. Revenue Assurance • What is Revenue Assurance? • How did the program originate? • What crops are covered? • How does coverage work? • Is it expensive?

  3. Revenue Assurance • Revenue Assurance (RA) provides coverage to protect against loss of revenue caused by: • Low Prices • Low Yields, or • A Combination of both.

  4. Policy Updates/Provision Changes • Revenue Assurance Program by Crop • Barley (feed), Canola/Rapeseed • Idaho & North Dakota • Corn, Soybeans • Arkansas, Colorado, Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, North Dakota, Ohio, Oklahoma, South Dakota & Tennessee • Sunflowers • North Dakota • Wheat • Arkansas, Colorado, Idaho, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, North Dakota, Ohio, Oklahoma, South Dakota & Tennessee

  5. Revenue Assurance • Revenue Assurance (RA) was first proposed by the Iowa Farm Bill Study Team in 1995 as an alternative to the Federal programs that were then in place. • RA is now owned and administered by American Farm Bureau Insurance Services, Inc.

  6. Revenue Assurance • The objective of RA is to provide a flexible and efficient risk management tool to crop producers. • RA recognizes that revenue risk is less than the sum of price and yield risk considered separately. • RA premiums will be less than the combined cost of yield and price insurance.

  7. Revenue Assurance • Revenue Assurance Options • Producers who operate in different locations in a county face lower total yield risk than a producer who farms in only one location. • RA premiums are adjusted as the number of legally defined sections under a single policy increases. • Producers who plant multiple crops face lower revenue risk than a producer who grows a single crop. • RA premiums are adjusted if producers insure two or more crops as one unit.

  8. Revenue Assurance • Revenue Assurance Options • RA has an option that increases revenue protection if fall harvest prices are higher than projected harvest prices.

  9. Revenue Assurance • Revenue Assurance Options allow each individual producer to design a Revenue Assurance Policy that meets their particular needs and risk management objectives. • How do we begin?

  10. Revenue Assurance • Let’s first remember that the coverage and exclusions of Revenue Assurance are similar to those for the standard Multiple Peril Crop Insurance (MPCI) APH policy. • Can I have both policies in force for the same crop, same acreage? • NO! • Revenue Assurance is an alternative choice for MPCI APH policies.

  11. Revenue Assurance • How do the policies differ? • MPCI APH provides coverage for loss of production. • Revenue Assurance provides coverage to protect against loss of revenue caused by low prices or low yields or a combination of both. • Revenue assurance has available the fall harvest price option, which uses the greater of the fall harvest price or the projected harvest price to determine the per-acre revenue guarantee.

  12. Revenue Assurance • Let’s first establish the farmer’s guarantee. • Revenue Assurance guarantees are based on a farmer’s expected per acre revenue. This process is based upon: • Approved Yields • Established using standard APH rules, and • Projected Harvest Prices • The procedures used to calculate available revenue guarantees vary by the selected unit structure.

  13. Revenue Assurance • Now we must establish the Projected Harvest Price. • How? • The projected harvest price is the price used to determine the expected per-acre revenue and the per-acre revenue guarantee at the time of sale.

  14. Revenue Assurance • Projected Harvest Price. • For Corn • The simple average of the final daily settlement prices in February for the Chicago Board of Trade (CBOT) December corn futures contract. • For Soybeans • The simple average of the final daily settlement prices in February for the Chicago Board of Trade (CBOT) November soybean futures contract.

  15. Revenue Assurance • Projected Harvest Price. • For Spring Wheat • The simple average of the final daily settlement prices in February for the MGE September hard red spring wheat futures contract. • NOTE: DURUM WHEAT CAN BE INSURED AS HARD RED SPRING WHEAT!

  16. Revenue Assurance • Projected Harvest Price. • For Winter Wheat • Arkansas, Colorado, Iowa, Kansas, Missouri, Oklahoma, South Dakota • The simple average of the final daily settlement prices from August 15th to September 14th for the following year Kansas City Board of Trade (KCBOT) July hard red winter wheat futures contract.

  17. RA Feed Barley • Projected harvest price: • Used to determine expected per-acre revenue. • Simple average of FDSP in Feb. for WCE Oct. feed barley futures contract x 0.02177 (converting WCE price from Canadian dollars per metric ton to Canadian dollars per bushel). • To convert into U.S. dollars multiply by the simple average of FDSP in Feb. on Sept. Canadian dollar futures contract on MERC, using current U.S./Canadian exchange rate. • Released on or before Mar. 5 of current crop year.

  18. RA Canola • Projected harvest price: • Used to determine expected per-acre revenue. • Simple average of FDSP in Feb. for WCE Nov. canola futures contract divided by 2,205 (converting WCE price from Canadian dollars per metric ton to Canadian dollars per pound). • To convert into U.S. dollars multiply by the simple average of FDSP in Feb. on Sept. Canadian dollar futures contract on MERC, using current U.S./Canadian exchange rate. • Released on or before Mar. 5 of current crop year.

  19. RA Sunflower • Projected harvest price: • Used to determine expected per-acre revenue. • Simple average of FDSP in Feb. for CBOT Oct. soybean oil futures contract divided by 2, then subtract 1. • Released on or before Mar. 5 of current crop year

  20. Revenue Assurance • We can now determine the farmer’s expected per acre revenue. • Wait! • What about unit structure? • What’s available for Revenue Assurance? • Can we mix Revenue Assurance coverage with other MPCI programs?

  21. Revenue Assurance • Revenue Assurance Unit Structure • Unit structures available under RA are: • Basic • Optional • Enterprise • Whole Farm • All crop acreage in the county must be insured under all applicable unit structures. • Winter Wheat exception.

  22. Revenue Assurance • Revenue Assurance Unit Structure • Winter Wheat Exception • Winter Wheat cannot be included under a whole farm unit. • Winter Wheat can be included under an optional, basic or enterprise unit.

  23. Revenue Assurance • Let’s now determine the farmer’s per-acre revenue guarantee. Unit of CropAPH YieldProjected HarvestExpected PricePer-Acre Revenue Corn unit 1 150 $2.50 $375 Corn unit 2 100 $2.50 $250 Soybean unit 40 $6.50 $260 Wheat unit 30 $3.70 $111

  24. Revenue Assurance • What about revenue guarantees for special unit structures such as “enterprise” and “whole farm?” • The expected per acre revenue for an enterprise unit is the weighted average of the expected per-acre revenues for each of the optional or basic units in a county. • The weighted average depends on the number of acres in each basic or optional unit, adjusted for share.

  25. Revenue Assurance • What about revenue guarantees for special unit structures such as “enterprise” and “whole farm?” • The expected per acre revenue for a whole farmunit is the weighted average of the expected per-acre revenue for each of the optional or basic units for all insured crops in the county. • The weighted average depends on the number of acres in each basic or optional unit, adjusted for share.

  26. Revenue Assurance • Let’s look at an example of how weighted averages are calculated within unit structures and the Expected Per-Acre Revenue determination.

  27. Revenue Assurance Expected Per Acre Revenue Unit of CropAcresAPH YieldShareBasic Enterprise Whole Farm UnitUnitUnit Corn unit 1 100 150 .50 $375 $291.67 $226.17 Corn unit 2 100 100 1.00 $250 $291.67 $226.17 Soybean unit 100 40 .50 $260 $260.00 $226.17 Wheat unit 100 30 1.00 $111 $111.00 $226.17 Corn Enterprise ($375*100*.5) + ($250*100*1.0) = $43,750 $43,750/((100*.5)+(100*1.0)) = $291.67 Whole Farm($375*100*.5)+($250*100*1.0)+($260*100*.5)+($111*100*1.0)=$67,850 $67,850/((100*.5)+(100*1.0)+(100*.5)+(100*1.0)) = $226.17

  28. Revenue Assurance • Per-Acre Revenue Guarantee • The per-acre revenue guarantee on a basic or optional unit is determined by multiplying the selected coverage level percent by approved APH yield by the projected harvest price. Selected Coverage Level Percent Approved APH Yield Projected Harvest Price X X

  29. Revenue Assurance • Per-Acre Revenue Guarantee • If the fall harvest price option is selected, the per-acre revenue guarantee equals the coverage level percent multiplied by the approved yield multiplied by the greater of the projected harvest price or the fall harvest price. Greater of: Projected Harvest Price or Fall Harvest Price Selected Coverage Level Percent Approved APH Yield X X

  30. Revenue Assurance • Unit Revenue Guarantee • The unit revenue guarantee for a basic or optionalunit equals the per-acre revenue guarantee, multiplied by acres on the unit, multiplied by the share. Per Acre Guarantee Unit Acres Share X X

  31. Revenue Assurance • Unit Revenue Guarantee • The unit revenue guarantee for an enterprise or whole farmunit equals the per-acre revenue guarantee, multiplied by acres on the unit, multiplied by the share. Per Acre Guarantee Total Acres Share Adjustment X X

  32. Revenue Assurance • Unit Revenue Guarantee Basic Unit Expected Per AcreUnit Revenue GuaranteeCoverageRevenue Unit of CropAcresShareBasic Unit LevelGuarantees Corn unit 1 100 .50 $375 .75 $14,063 Corn unit 2 100 1.00 $250 .75 $18,750 Soybean unit 100 .50 $260 .75 $ 9,750 Wheat unit 100 1.00 $111 .75 $ 8,325

  33. Revenue Assurance • Unit Revenue Guarantee Enterprise Unit • Corn Enterprise Unit • $14,063 + $18,750 = $32,813 • Soybean Enterprise Unit • $9,750 • Wheat Enterprise Unit • $8,325

  34. Revenue Assurance • Unit Revenue Guarantee Whole Farm Unit • Sum all basic unit revenue guarantees. • $14,063 + $18,750 + $9,750 + $8,325 = $50,888 • OR • ($266.17) X (.75) X ((100*.5)+(100*1)+(100*.5)+(100*1)) = $50,888

  35. Revenue Assurance • Unit Revenue Guarantee • The expected per-acre revenue for enterprise and whole farm units depends on the insured acres rather than estimated acres. The final unit revenue guarantee can only be computed after the insured’s acreage report is complete. • The preliminary unit revenue guarantee and premium based upon estimated acreage at sales closing date, can vary from the final unit revenue guarantee and premium based on the completed acreage report data.

  36. Revenue Assurance • Coverage Level Selection • The insured may select coverage from the following unit structure scenarios. • Basic and Optional Units • Minimum Coverage Level is 65%. • Maximum Coverage Level is 75%. • Enterprise and Whole-Farm Units • Minimum Coverage Level is 65%. • Maximum Coverage Level is 85%.

  37. Revenue Assurance • Unit Indemnity Calculation • Let’s now calculate a unit indemnity. • What must we first know to begin this process? • Calculate the Unit Revenue Guarantee. • Secure the Production to Count on each Unit. • Secure the Fall Harvest Price for each crop. • Let’s do the Math!

  38. Revenue Assurance • Unit Indemnity Calculation Unit of CropProductionFall HarvestPer-Acre to CountPriceRevenue Corn unit 1 100 $2.10 $210 Corn unit 2 110 $2.10 $231 Soybean unit 40 $6.70 $268 Wheat unit 30 $3.20 $ 96 Have we elected the Fall Harvest Price election?

  39. Revenue Assurance Per Acre Revenue Unit of CropAcres ProductionShareBasic Enterprise Whole Farm to CountUnitUnitUnit Corn unit 1 100 100 .50 $210 $224.00 $188.66 Corn unit 2 100 110 1.00 $231 $224.00 $188.66 Soybean unit 100 40 .50 $268 $231.00 $188.66 Wheat unit 100 30 1.00 $ 96 $ 96.00 $188.66 Corn Enterprise ($210*100*.5) + ($231*100*1.0) = $33,600 $33,600/((100*.5)+(100*1.0)) = $224 Whole Farm($210*100*.5)+($231*100*1.0)+($268*100*.5)+($96*100*1.0)=$56,500 $56,500/((100*.5)+(100*1.0)+(100*.5)+(100*1.0)) = $188.66

  40. Revenue Assurance • Collect and Process Data • Let’s review the information we have calculated. • What are the Unit Revenue Guarantees assuming a 75% coverage level?

  41. Revenue Assurance • Unit Revenue Guarantee Basic Unit Expected Per AcreUnit Revenue GuaranteeCoverageRevenue Unit of CropAcresShareBasic Unit LevelGuarantees Corn unit 1 100 .50 $375 .75 $14,063 Corn unit 2 100 1.00 $250 .75 $18,750 Soybean unit 100 .50 $260 .75 $ 9,750 Wheat unit 100 1.00 $111 .75 $ 8,325

  42. Revenue Assurance • Collect and Process Data • Let’s now examine an actual revenue scenario. • Actual Revenue for each of the units is as follows: • Corn unit 1 $10,500 • Corn unit 2 $23,100 • Soybean unit $13,400 • Wheat unit $ 9,600 • How do these numbers compare with the unit revenue guarantee?

  43. Revenue Assurance • Collect and Process Data Basic Units ActualUnitPaid CropUnit RevenueRevenue GuaranteeIndemnity Corn unit 1 $10,500 $14,063 $3,563 Corn unit 2 $23,100 $18,750 $0 Soybean unit $13,400 $ 9,750 $0 Wheat unit $ 9,600 $ 8,325 $0

  44. Revenue Assurance • Collect and Process Data Enterprise Units ActualUnitPaid CropUnit RevenueRevenue GuaranteeIndemnity Corn unit 1 $10,500 $14,063 Corn unit 2 $23,100$18,750 $33,600 $32,813 $0

  45. Revenue Assurance • Collect and Process Data Whole Farm Unit ActualUnitPaid CropUnit RevenueRevenue GuaranteeIndemnity Corn unit 1 $10,500 $14,063 Corn unit 2 $23,100 $18,750 Soybean unit $13,400 $ 9,750 Wheat unit $ 9,600$ 8,325 $0 $56,600 $50,888

  46. Revenue Assurance • How are RA indemnities triggered? • Without Fall Harvest Option • RA indemnities will be paid if all of the production to count times the projected harvest price is less than the per-acre revenue guarantee times the number of acres (unit guarantee). • With Fall Harvest Option • RA indemnities will be paid if all of the production to count times the, greater of the projected harvest price or harvest price, is less than the per-acre revenue guarantee times the number of acres (unit guarantee).

  47. Revenue Assurance • Harvest Price Option • Remember! • If the insured purchases the RA fall harvest price option, the revenue assurance guarantee will be based on the fall harvest price if the fall harvest price is higher than the projected harvest price. • Insured must choose the fall harvest price option by sales closing date. • The option is continuous unless canceled by the crop sales closing date.

  48. Revenue Assurance • Harvest Price Option • The fall harvest price option is designed to provide additional assurance to those producers who market their crop before harvest. • These producers take on the additional risk that harvested bushels will not be sufficient to meet their contractual obligation. • Shortfalls of this type can have severe consequences if the fall harvest prices are greater than projected harvest prices because the producer will be forced to purchase bushels to meet his/her obligations at the higher price.

  49. Revenue Assurance • Harvest Price Option • The Revenue Assurance price option provides additional coverage when the fall harvest price is greater than the projected harvest price. • Coverage will allow the producer to fulfill possible contractual obligations from Revenue Assurance indemnities.

  50. Revenue Assurance • How do we determine the Harvest Price?