"Actual production history" (APH)
yield. The basis for determining a producer's guarantee under either
multiple peril crop insurance or revenue insurance policies. The APH yield
is calculated as a 4- to 10-year simple average of the producer's actual
yield on the insured parcel of land. If a producer does not have records
of actual yields, the series is filled in with a "transitional yield" based
on county average yields.
Actuarial soundness. An insurance term describing a situation
where indemnities paid, on average, are equal to total premiums collected.
Agricultural Risk Protection Act of 2000 (ARPA). This law provided
$8.2 billion for insurance premium subsidies and $5.2 billion for market
loss assistance payments. Among its other effects, ARPA also modified
the crop insurance premium subsidy structure, authorized pilot programs
for new forms of insurance, expanded insurance fraud detection and enforcement,
and dropped the area yield loss trigger in the NAP program.
Buy-up coverage. Crop insurance coverage above the CAT (catastrophic)
level. Coverage is available up to 75 percent of expected yield
or expected revenue (yield times price). Coverage up to 85 percent
is available for some crops in some areas. Producers pay a share
of the premium, but government-premium-subsidy rates are now over
50 percent for most levels of coverage.
CAT coverage. Crop insurance coverage at the lowest, or "catastrophic"
level. CAT coverage is set at the 50/55 level, meaning that yield must
fall below 50 percent of average yield before a loss is paid, and such
losses are paid at a rate of 55 percent of the highest price election.
Producers must pay a service fee to become eligible, but the government
pays the entire premium.
Crop revenue insurance. Insurance programs offered to farmers
that pay indemnities based on revenue shortfalls. These programs
are subsidized and reinsured by USDA's Risk Management Agency.
Crop yield insurance. Another name for the form of crop
insurance that pays indemnities based on yield losses due to most
natural causes (i.e., "multiple peril"). Crop yield insurance
is subsidized by USDA's Risk Management Agency.
Forward contract. An agreement between two parties calling for
delivery of, and payment for, a specified quality and quantity of a commodity
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. Agreeing on a price or a pricing formula for
later delivery. "Forward pricing" is used broadly here to refer
to both hedging with futures or options, and forward contracting.
Futures contract. An agreement to later buy or sell a commodity
of a standardized amount and quality during a specific month, under terms
established by the futures exchange, at a price established in the trading
pit at the commodity futures exchange.
Futures option contract. 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.
Hedging. The initiation of a buying or selling position in a futures
or options market, intended as a temporary substitute for the later actual
sale or purchase of a commodity. Hedging aims to protect against adverse
price movements prior to the actual transaction.
Indemnity. The compensation received by an individual 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.
Leverage. The use of borrowed funds to help finance a farm business.
Higher levels of debt, relative to net worth, are generally considered
riskier.
Liquidity. The extent to which assets can be quickly converted
to cash without accepting a discount in their value. An asset is perfectly
liquid if its sale generates cash equal to, or greater than, the reduction
in the value of a farm due to the sale (i.e., the farm's equity is not
affected by the sale). Illiquid assets, in contrast, cannot be quickly
sold without a producer accepting a discount, reducing the value of the
farm by more than the expected sale price.
Marketing contract. A contract between a processor or handler
and a grower, establishing 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.
Noninsured Crop Disaster Assistance Program (NAP). NAP provides
financial assistance to producers of many commodities for which crop insurance
is not available in the event of qualifying yield loss.
Premium. An amount of money paid to secure risk protection. Option
buyers pay a premium to option sellers for an options contract. Similarly,
the purchaser of an insurance policy pays a premium in order to obtain
coverage.
Production contract. An agreement between a processor and a grower
that usually specifies in detail the production inputs supplied by the
processor and the grower, the quality and quantity of a particular commodity
that is to be delivered, and compensation that is to be paid to the grower.
In return for relinquishing control over decision making, the producer
is often compensated with a price premium or lower market risk.
Reinsurance. A method of transferring some of an insurer's risk
to other parties. In the case of Federal crop insurance, USDA's Risk Management
Agency shares the risk of loss with each private insurance company delivering
policies to producers. Private reinsurance also exists, in which case,
a private reinsurer assumes responsibility for a share of the risk in
return for a share of the premiums.
Revenue insurance. An insurance program offered to farmers that
pays indemnities based on revenue shortfalls. These programs are
subsidized and reinsured by the USDA's Risk Management Agency.
Risk. Uncertainty about outcomes that are not equally desirable.
Risk may involve the probability of making (or losing) money, harm to
human health, negative effects on resources (such as credit), or other
types of events that affect welfare.
Uncertainty. Lack of sure knowledge or predictability because
of randomness.
A more extensive glossary
is contained in Managing Risk in Farming:
Concepts, Research, and Analysis, Agricultural Economics Report 774,
ERS, March 1999.
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