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Glossary of Crop Insurance Terms
Glossary of Terms
Acreage Report – The acreage report shows the crops you have planted, acreage prevented from planting, what share you have in the crop, where the crop is located, how many acres you planted, the dates you planted and what insurance unit they are located on, the practice. The acreage report is the basis for determining the amount of insurance provided and the premium charged.
Actuarial Soundness - This is an insurance term that describes a situation where indemnities, are paid on average, are equal to total premiums collected.
Adjusted Gross Revenue (AGR) Lite – AGR-Lite is whole farm revenue insurance that covers almost all of the commodities produced on a farm. It is an individual producer yields, quality, and marketing history that equals gross income.
Basic Unit – A basic unit is an insurance unit as determined first by crop, then by insured’s share in the crop. All of the crops’ acreage in the county in which the insured has a 100% share is in the same basic unit. Crop acreage shared with each different landlord/tenant is in a separate basic unit.
Buy-up Coverage – This refers to crop insurance coverage that exceeds the CAT level. Coverage is available up to 75% (for some crops) and 85% (for some crops) of your average yield.
CAT Coverage – CAT is short for “catastrophic” and refers to crop insurance coverage at the lowest, or catastrophic level. CAT coverage is set at the 50/55 level, which means that your yield must fall below 50% of your average yield before a loss is paid, These losses are paid at a rate of 55% of the highest price election. You must pay an administrative fee to become eligible to receive CAT coverage, but the government pays the entire premium.
Crop Revenue Insurance – Crop revenue insurance pays you indemnities based on gross revenue shortfalls instead of just yield or price shortfalls. Types of crop revenue insurance includes Revenue Protection (RP), Revenue Protection with Harvest Price Exclusion, Revenue Assurance (RA) and Income Protection (IP). These programs are subsidized and reinsured by the USDA’s Risk Management Agency (RMA).
Commodity Exchange price Provision (CEPP) – A part of the Common Crop Insurance Policy used for all crops for which revenue protection is available. It is a document which contains the information necessary to derive protected price and the harvest price for the insured crop.
Crop Yield Insurance – Also known as Yield Protection (YP), crop yield insurance pays indemnities to producers when yields fall below the producer’s insured average yield due to most natural causes. Crop yield insurance is subsidized by the USDA’s Risk Management Agency (RMA).
Disaster Payments – These are direct payments to farmers on an emergency basis when crop yields are abnormally low due to adverse growing conditions. During the 1970’s, there was a “standing” disaster payments program, with payments made without declaration of a disaster area. Regular payments ceased after 1981, but since then an ad hoc disaster payments have been specifically approved by the U.S. Congress on a number of occasions.
Enterprise Unit - An enterprise unit is a single unit consisting of all of the insured’s insurable acreage for the insured crop in the county – regardless of share, location, FSA Farm Serial Number assignment or practice. An enterprise unit structure will combine all of a producer’s basic or optional units.
Forward Contract – This is an agreement between two parties that calls for delivery of, and payment for, a specified quality and quantity of a commodity (such as a particular crop) at a specified future date. The price may be agreed upon in advance, or determined by formula at the time of delivery or other point in time.
Forward Pricing – This is when you agree on a price or a pricing formula for a commodity that will be delivered at a later date. “Forward pricing” is used broadly her to refer to both hedging with futures options, and forward contracting.
Futures Contract – This is an agreement to buy or sell a commodity of a standardized amount and quality during a specific month in the future, under terms established by the futures exchange, at a price established in the trading pit at the commodity futures exchange.
Futures Option Contract – This is a contract that gives the holder the right, though not the obligation to buy or sell a futures contract at a specific price within a specified period of time, regardless of the market price of the futures contract when the option is exercised. Options provide protection against adverse price movements.
Guarantee – Also called “yield guarantee” or “insurance guarantee” this is a promise of payment. In this context the amount of money you will be paid in the event of a loss, according to the terms of your crop insurance contract.
Harvest Price – A price determined in accordance with the Commodity Exchange Price Provisions and is used to value production to count under revenue protection.
Hedging – Hedging uses futures or options contracts to reduce the risk of adverse price changes prior to an anticipated cash sale or purchase of a commodity.
Indemnity – This is the money you receive for qualifying losses paid under an insurance policy. The indemnity compensates for losses that exceed the deductible, up to the level of the insurance guarantee.
Insurance Unit – In general terms, an “insurance unit” is the insured acreage of the crop in the county for which an individual protection amount is provided and from which any harvested and/or appraised “production to count” stands alone to be compared to the protection amount in order to determine any indemnity that may be due.
Leverage – Financial leverage refers to the use of borrowed funds to help finance a farm business. Higher levels of debt, relative to net worth, are generally considered riskier. The optimal amount of leverage depends on several factors, including farm profitability, the cost of credit, tolerance for risk, and the degree of uncertainty in income.
Marketing Contract - This is a contract between you and a processor or handler that establishes a marketing outlet and a price (or a formula for determining the price) for a commodity before harvest or before the commodity is ready to be marketed.
Multiple Peril Crop Insurance (MPCI) – MPCI was established in the 1930’s to cover yield losses from most natural causes. MPCI operated on a somewhat limited basis up through the early 1980’s when a private/public partnership was established. At that point, insurance availability was greatly expanded and premium subsidies increased in hopes of replacing the disaster payment program. Major reforms legislated in 1944 – introduction of a low-cost CAT coverage level, increased premium subsidies, and a requirement that participants in other farm program obtain crop insurance – increased participation to over 200 million acres, covering the majority of acres of major field crops planted in the United States.
New Producer – A new producer is categorized as an insured who has not produced the insured crop in the county, has produced the insured crop in the county for only one or two crop years or has produced the insured crop in the county for only one or two crop years but the entity type has changed.
Non-Insured Crop Disaster Assistance Program (NAP) - Crop insurance is not available for all commodities. NAP provides financial assistance to producers of many of these commodities if they experience a qualifying yield loss.
Optional Units – Optional units are a further division of basic units. Just as the name implies, further dividing basic units into optional units is optional for the insured. Crop acreage that would be otherwise be one basic unit may be divided into optional units if the acreage of the insured crop is located in separate legally identifiable FSA Farm Serial Numbers or the acreage is comprised of practices (i.e. irrigated, non-irrigated or organic).
Premium – The amount of money you pay for risk protection. Option buyers pay a premium to option sellers for options contracts. Similarly, the person who buys an insurance policy pays a premium in order to obtain coverage.
Prevented Planting (PP) – Prevented planting is the failure to plant the insured crop with proper equipment by the final planting date designated in the Common Crop Insurance Policy for the insured crop in the county or by the end of the late planting period. The insured must have been prevented from planting the insured crop due to an insured cause of loss that is general in the surrounding area and that prevents other producers from planting acreage with similar characteristics.
Risk – Uncertainty about outcomes that are not equally desirable. Risk is an important aspect of the farming business. The uncertainties of weather, yields, prices, government policies, global markets, and other factors can cause wide swings in farm income. Risk management involves choosing among alternatives that reduce the financial effects of such uncertainties.
Subsidy – Money given by the government to help producers function.
Tax Identification Number – As a condition for participation in the Federal Crop Insurance Program, the federal government requires that we collect Tax Identification Numbers (TINs) on the insured entity and ALL persons comprising the insured entity. The primary use of the TIN is to correctly identify the named insured and any others with an interest of 10% or more in the named farming operation.
Yield – the amount of something, especially a crop , produced by cultivation or labor.
Yield Floor - The yield floor is a percentage of the applicable “T Yield” based on the number of years of records the insured has provided for the crop and county.