Glossary
Actual production history (APH) yield. The
basis for determining a producer's guarantee under either crop
yield or crop 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 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 plans offered
to farmers that pay indemnities based on revenue shortfalls. These
plans 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 and reinsured 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.