The Surprising Relationship Between Yield, Crop Insurance, and Revenue Per Acre

June 16, 2016 09:42 AM

Here’s a quick quiz: Do lower yields translate into lower revenues per acre? The answer might surprise you.

According to an article in farmdoc daily, lower yields results in lower revenue per acre only for sorghum and cotton. “For the other four crops—corn, rice, soybeans, and wheat—a decline in U.S. yield can result in higher revenue for U.S. producers of the crop as a group,” writes agricultural economist Carl Zulauf.  “Such an outcome occurred in the 2012 drought for corn and soybeans. In other words, for these four crops at the U.S. market level, a physical loss does not necessarily translate into a financial loss relative to the decision to plant the crop.”

Part of the reason is crop insurance, which offers farmers revenue protection. For example, “for the four years with the largest decline in corn yield, the average decline in revenue per planted acre is only 4% despite an average 22% decline in yield,” Zulauf writes. “For rice, soybeans, and wheat; the average percent change in revenue per planted acre is positive, implying the percent increase in crop insurance price more than offset the percent decline in U.S. yield.”

Of course, overall numbers don’t necessarily match up with every farmer’s experience. “Even if a decline in U.S. yield increases average U.S. revenue per acre relative to the value expected at planting, a reduction in yield for an individual producer can reduce the producer's revenue per acre if the producer's individual yield reduction is large enough,” Zulauf acknowledges.

Lastly, crop insurance payments are of course influenced by factors beyond one’s own farm; farmers will receive a larger payment when the market risk is higher, because insurance is intended to help growers manage the very real financial risk of price and yield drops for their operation. 

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Spell Check

Western, NE
6/17/2016 08:57 AM

  2012 was a flash drought year in the US. The RA guarantee was actually quite high for crops when the prices set compared in 2012 compared to 2016. The spread between contract set prices and harvest prices were quite substantial leading to a decent crop insurance payout. I don't see that big of a difference between the contract price and the potential harvest price this year unless there is another flash drought. The dude must have needed to produce an article for farmdoc.daily. To have happen what Zulauf is writing about, would take a huge price difference between the contract RA price and the set harvest price at the end of the crop cycle.


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