Alberta RIC part of crop insurance

[poorboy]

How does the revenue insurance part of the Alberta crop insurance work? If the crop insurance price is $6 and the RIC price is $6.50, what happens if the calculated fall price is $6.05? Does the RIC kick in and pay at $6.05, or does it only pay if the price falls 10% below the $6 and then both the SPE and RIC pay?

It looks to me that the fall price stands a big chance of falling below the RIC price, but not 10% below the crop insurance price. In talking to the ladies at the local crop insurance office, I am left with the impression that they are not totally sure how the
RIC works.

[charliep]

Using canola as an example, revenue insurance if prices fall below $295/tonne ($6.69/bu). The payment is base on 70 % of the difference between the revenue insurance price and the calculated fall price (average WCE November canola futures during the month of October minus $15/tonne basis). This program pays out up to and including $243/tonne (about $5.50/bu) a which time spring price endorsement kicks in. If the calculated price this fall is $273/tonne ($22/tonne difference), you collect $15.40/tonne. If it were $250/tonne($45/tonne difference), you would collect $31.50/tonne.

You need to pay the spring price endorsement premium to get revenue insurance. This mean that you can collect on this program if prices fall 10 % below the crop insurance price set this spring. The current crop insurance price for canola is $270/tonne so the trigger is $243/tonne for this program. The spring price endorsement is a trigger program if that the program pays the full difference if 10 % decline occurs. 9 % decline would not trigger.

If prices get real ugly this fall, you would collect on spring price endorsement and revenue insurance. Lets say the price of canola dropped to $230/tonne according to the October calculation (average futures $245/tonne minus $15). Your spring price endorsement would payout $40/tonne and a revenue insurance payment for the difference between the current crop insurance price ($270/tonne) and the revenue insurance price ($295/tonne). That is, 70 % of the $25 difference or $17.50/tonne. Total payment in this case $57.50/tonne.

As a note today, November canola futures is about $290/tonne.

The 2 CWRS low protein alternative revenue insurance is $145 tonne. Crop insurance coverage is based on $120/tonne. The current price using the crop insurance methodology is $110/tonne.

Hopefully this helps.

[charliep]

More comments (trying to get the message out).

1) Revenue insurance is the product that will have the value. To participate, you have to pay the revenue issurance premium.

2) If I seem wimpy on recommendations there is a reason. You have to do cost of premium versus potential payout analysis on each crop. Wheat will likely have the best potential payouts but run the numbers.

3) I would treat this as part of your risk strategy versus something that will payout. You can use this program to guarantee a certain amount of revenue per acre. Not colleting on the program would be a good thing - it means prices are above the trigger. Look at the risk reward decision from this standpoint.

4) You still need to do your normal amount of new crop pricing/pay attention to the market. This is not a replacement for your marketing plan.

5) If you have forward priced a comfortable amount of your new crop, there is less incentive to use this program. If you haven't done any new crop pricing (and maybe are not planning on doing so), you should be looking at using it as a base risk strategy.

6) If your business is in good financial shape, there is less incentive to use this program. If your farm is suffering financial stain, there is more incentive to use.

[charliep]

Falling asleep/mistake (line 1 should read you have to pay the spring price endorsement premium). Sorry about that.

[Digger]

My understanding of the RIC (right from AFSC) is that the max RIC payment is the difference between the floor price and the spring insured price.

[TOM4CWB]

Digger;

If prices were to fall say 8% below the spring crop insurance price, then the RI payout should be higher because the SPE does not kick in until a 10% loss.

The new rules mean a 70% payout of the difference, so a 70% payment of the 8% drop in prices... if I have this right.

Comments Charlie?

On the other hand, with SPE/RI the expence and revenue are not counted for CAIS... if RI does pay out it will not be added to income for CAIS purposes... from what I have been told.

[charliep]

My understanding is the same as Tom4cwb on both payout and CAIS but will have to check Monday (actually with AFSC today).

You can find information on the AFSC web site.

General description at (the examples are for a situations where there is payout on both programs):

http://www.afsc.ca/NR/rdonlyres/etkaksjmyjzumpyauazojkyau7rviokfsmgk66ve3zozmxpyc6 no4qyto5j5fofi7sccfw3cld3afmq3yl6gzovt2kb/SectionIII.pdf

The official contract is at:

http://www.afsc.ca/NR/rdonlyres/elkljnpuia7zfagxk7byek2rqzvmukej5y4gcsztyxd7kylg5x 7nk7xtcf3sz6ok24v4cuxrvicjgain2fjl42hfxhh/SectionVIII.pdf

Go to the last page. Too late on a Friday to comprehend so will ask Monday. Also, replace the 50 % you see here with 70 % payout.

[charliep]

Re-read the web site and would seem to confirm what Tom4cwb/I have indicated. Under section D1a in the contract, the revenue insurance payment is 50 % (now changed to 70) of the difference between the revenue insurance price (they call it floor price) and the fall determined price (assuming the RI/floor price is higher) minus any money that is paid out under the Spring Price Endorsement (this is a separate payment calculation that will be included in your crop insurance cheque). Another plus that is in the calculation is you can also be paid a revenue insurance payment on a crop insurance claim - that is, your revenue insurance payment is on your entire crop yield insurance coverage you have selected regardless of whether actual production or a yield claim (up to your coverage yield).

[charliep]

As a note, you can calculate the minimum price you will get (up to your crop insurance). The minimum price for 2CWRS low protein is $134/tonne (minus premium cost). I did this by taking the RI price ($145/tonne) and subtracting it from the current crop insurance price minus the 10 % SPE trigger ($108/tonne). 70 % of this difference is $26/tonne or the total or a total of $134/tonne. I note there is no SPE in this calculation. Multiply this by your coverage yield and you have a guaranteed revenue/acre.

The CWB fixed price contract today for 2CWRS 11.5 protein (assuming spreads stay the same as the current PRO) is $120/tonne.

CPS wheat minimum price is $122/tonne (minus premium cost). Current CWB fixed priced price contract is $105/tonne. Have not heard many new crop feed wheat prices other that some of the new ethanol plants are in the $110 to 115/tonne range.

Canola minimum price would be $280/tonne (minus premium cost). November futures have been floating in the $285 to $300/tonne range. New crop basis Alberta $10 to $27/tonne (AGC numbers - you put in your own region).

Hopefully this is helping.

[Digger]

I agree with all that you are saying and this my understanding originally but when I asked local AFSC office I was told only the difference between floor price and SIP

[charliep]

Today is decision day. Many will be inside because of the cool temperatures. Work the numbers on your crop insurance/individual farm and make a conscious decision to take or pass.