Sample Farm Examples
Example 1:
Sample Farm has a unit consisting of 150 acres in which you have a 60 percent share and a second unit consisting of 75 acres in which you have a 100 percent share. You have selected a 70 percent coverage level. Your approved (indexed) yield is 20.0 tons (see links to calculate indexed APH) per acre on the first unit and 22.0 tons per acre on the second unit.
You have a silage sorghum purchase contract with Smith Diary that contains a price equal to 6.0 times the CBOT price of corn minus $0.15. The first futures contract you may use for this purpose is December. The silage sorghum purchase contract includes 2,500 tons.
You are able to harvest only 450 tons of silage sorghum from unit 1 due to an insured cause of loss that reduced production. You harvested 1,350 tons from unit 2. All acres are harvested.
On the final planting date, the settlement price for the December corn contract is $2.35 per bushel of corn. The maximum price election is $12.00 per ton. Thus, your price election is 6 x ($2.35 - $0.15) = 6 x $2.20 = $13.20 per ton because the contract price is less than $2.00 greater than the maximum price election.
The first step is to determine the unit guarantee and determine the appropriate price election:
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Production guarantee per acre unit 1 |
20.0 tons x 0.70 = 14.0 tons |
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Production guarantee per acre unit 2 |
22.0 tons x 0.70 = 15.4 tons |
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Unit guarantee unit 1 |
150 acres x 14.0 tons = 2,100 tons |
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Unit guarantee unit 2 |
75 acres x 15.4 tons = 1,155 tons |
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Your share of the unit guarantee unit 1
Your share of the unit guarantee unit 2 |
2,100 tons x 0.60 = 1,260 tons
1,155 tons x 1.00 = 1,155 tons
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Your share of the unit guarantee for all units combined = 2,415 tons
You qualify to use the contract price option because the contracted quantity (2,500 tons) is greater than your share of the production guarantee for all units combined.
The next step is to apply the loss calculation from section 11:
1) Unit 1; 150 acres x 14.0 tons per acre = 2,100 tons unit guarantee
2) 2,100 tons unit guarantee 450 tons production to count = 1,650 tons of production loss
3) 1,650 tons of production loss x $13.20 price election = $21,780 value of lost production
4) $21,780 value of lost production x 0.60 your share= $13,068 indemnity
5) Unit 2; since the harvested production exceeded the guarantee, no indemnity is due.
Lets Do an Example for You:
Your Farm has two units growing sorghum silage. The first unit consists of 100 acres in which you have a 75% share and the second is 50 acres in which you have a 100 percent share. You have selected 70 percent coverage level.
Step 1:
Calculate your approved indexed yield (see links to determine).
You have a silage sorghum purchase contract with John Doe Dairy that contains a price equal to 6.0 times the CBOT price of corn minus $0.15. The first future contract you may use for this purpose is December. The silage sorghum purchase contract includes 1,500 tons.
You harvest only 300 tons of silage sorghum from unit 1 due to insured cause of loss that reduced production. You harvest 750 tons on unit 2. All acres are harvested. On the final planting date, the settlement price for the December corn contract is $2.35 per bushel of corn. The maximum price election is $12.00 per ton.
Step 2:
Calculate your Price Election.
Step 3:
Determine the unit guarantee and determine the appropriate price election.
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Production guarantee per acre unit 1 |
= |
Approved yield unit 1 x coverage level |
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Production guarantee per acre unit 2 |
= |
Approved yield unit 2x coverage level |
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Unit 1 guarantee |
= |
Acres unit 1 x Production guarantee Unit 1 |
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Unit 2 guarantee |
= |
Acres unit 2 x Production guarantee Unit 2 |
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Your share of the unit 1 guarantee |
= |
Unit 1 guarantee x share |
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Your share of the unit 2 guarantee |
= |
Unit 2 guarantee x share |
Total share of the unit guarantee for all units combined = ??
Do you qualify to use the contract price option??
Step 4:
Calculate your Indemnity:
Unit 1: Unit guarantee tons production to count = tons of production loss
Tons of production loss x price election = $ Value of lost production
$ Value of lost production x your share = indemnity
Example 2:
For whatever reason, Sample Farm silage is not harvested and we are not able to appraise the production until after the calendar date for the end of the insurance period. We appraise 320 tons of silage and determine that it contains 55 percent moisture (45 percent dry matter).
The first step is to convert the production to a 32 percent dry matter basis
1) Appraised unharvested production = 320 tons x 0.45 = 144 tons of dry matter
2) Production to count = 144 tons divided by 0.32 = 450 tons green weight equivalent
The next step is to apply the loss calculation from section 11:
1) 150 acres x 14.0 tons per acre = 2,100 tons unit guarantee
2) 2,100 tons unit guarantee 450 tons green weight equivalent = 1,650 tons of production loss
3) 1,650 tons of production loss x $13.20 price election = $21,780 value of lost production
4) $21,780 value of lost production x 0.60 share = $13,068 indemnity |