Updated February 8, 2024
Crop insurance is a tool that helps farmers manage the risks linked to lower yields or revenue in agriculture. The prices used in determining crop insurance indemnities are established in the projected and/or harvest price discovery periods each year. The projected price is determined for each crop by taking an average of the daily closing futures prices across a 30-day window in early spring, when crop planting would normally occur, for a given crop’s harvest month contract. Similarly, the harvest price is determined for each crop by taking an average of the daily closing futures prices across a 30-day window in the fall, when harvest would normally occur for a given crop’s harvest month contract.
These price discovery periods vary across states and locations due to the timing of planting for each location. Projected and harvest prices for upland cotton hinge on the average daily settlement price of the Inter Continental Exchange (ICE) December futures contract for cotton during the price discovery periods. Commodity Exchange Price Provisions (CEPP) list the variance in price discovery periods across states and locations, aligned with distinct sales closing dates for each specific area, as Table 1 illustrates. Our recent article on Southern Ag Today delved into the regional variations surrounding the Sales Closing Date. Texas, being a sizable state, notably features three distinct Sales Closing Dates. The projected and harvest prices are published by the U.S. Department of Agriculture Risk Management Agency no later than three business days following the end of the price discovery period.
Projected prices are used when determining the indemnity for yield policies for upland cotton, while both projected and harvest prices are used in determining indemnity for revenue policies. For a comprehensive breakdown of yield protection versus revenue protection policies for upland cotton, refer to Table 1 in Chong, Liu, and Biram (2023). Producers opting for revenue protection policies can choose between the default plan or the harvest price exclusion (HPE) option (Chong and Liu, 2023). Both the default plan and HPE use the projected price to calculate the value of the production guarantee at the beginning of the season. Similarly, both the default plan and HPE use the harvest price to determine the value of the crop actually produced at the end of the season. The difference between the two plans is that the default plan recalculates the value of the production guarantee at the end of the season if the harvest price is higher than the projected price (but no additional premium is owed), while HPE does not recalculate the guarantee.
In insurance plans featuring HPE, since indemnity calculations rely solely on the projected price, these policies typically come with lower premium costs for producers. One frequent query from producers revolves around choosing between the options—with or without HPE. Figure 1 illustrates the ratio between the harvest price and projected price for upland cotton, from 2011 to 2023, across various projected price and harvest price discovery periods. When the ratio is higher than one, it signifies that the harvest price exceeds the projected price. For example, according to Figure 1.A, cotton harvest prices exceeded projected prices in 6 years out of 13 years. These graphs serve as a tool for producers to make informed decisions regarding their insurance, helping them weigh between the default option and the HPE option.
Table 1. Projected Price and Harvest Price Discovery Periods for Upland Cotton among Different Regions Based on the Sales Closing Date
Figure 1. The ratio of harvest price (HP) to projected price (PP) for cotton insurance policies across various price discovery periods from 2011 to 2023.
Data Source: U.S. Department of Agriculture. Price Discovery Reporting Tool. https://prodwebnlb.rma.usda.gov/apps/PriceDiscovery
Chong, Fayu, and Yangxuan Liu. “Cotton Crop Insurance to Protect Against Revenue Losses: Select Harvest Price Exclusion or Not?” Southern Ag Today 3(3.3). January 18, 2023.
Chong, Fayu, Yangxuan Liu, and Hunter Biram. “Exploring Diverse Crop Insurance Options for Cotton Producers.” Southern Ag Today 3(51.3). December 20, 2023. Permalink
Liu, Yangxuan, Hunter Biram, and Fayu Chong. “Cotton Crop Insurance: Regional Differences in Sales Closing Dates and Cancellation Dates.” Southern Ag Today 4(3.3). January 17, 2024. Permalink
USDA Federal Crop Insurance Corporation, Commodity Exchange Price Provisions, Section II – Cotton. 24-CEPP-0021, Released June 2023.
U.S. Department of Agriculture. Price Discovery Reporting Tool. https://prodwebnlb.rma.usda.gov/apps/PriceDiscovery
Liu, Yangxuan, Fayu Chong, and Hunter Biram. “Cotton Crop Insurance: Unveiling Regional Differences in Projected and Harvest Prices.” Southern Ag Today 4(4.3). January 24, 2024. Permalink