Contract Price Option Example

Total Production Contract

You grow 250 acres of yellow mustard and have all production from these acres contracted at $20.00/bushel. SCIC provides you with a guarantee of 3,000 bushels on these acres at the coverage option you choose. The base price for yellow mustard is $15.00/bushel.

Average yield guarantee/acre = total guaranteed production ÷ total acres
= 3,000 bushels ÷ 250 acres
= 12 bushels/acre

For total production contracts, SCIC considers the contracted quantity per acre to be equivalent to your average yield guarantee/acre. Therefore:

Contracted production = contracted acres x average yield guarantee per acre
= 250 acres x 12 bushels/acre
= 3,000 bushels

The blended price equals an average of the contract price, weighted by the proportion of production that is contracted, and Crop Insurance’s base price, weighted by the remainder of production.

In this case all of your production is contracted, so the blended price equals the contract price of $20.00/bushel.

Your average coverage at the base price was 3,000 bushels x $15.00/bushel
= $45,000 ÷ 250 acres = $180.00/acre

With the blended price, your average coverage is 3,000 bushels x $20.00/bushel
= $60,000 ÷ 250 acres = $240.00/acre

Your premium also increases proportionally with the price. Assuming your average premium at the base price was $12.00/acre at the coverage level selected, your premium would be:

Premium at blended price = blended price/base price x premium at base price
= ($20.00 ÷ $15.00) x $12.00
= $16.00/acre

Partial Production Contract

You have a partial production contract for the first four bushels per acre of yellow mustard from 150 acres at $20.00/bushel. You have another 100 acres of yellow mustard that is not contracted. SCIC provides you with a guarantee of 3,000 bushels over all acres at the coverage option you choose. The base price for yellow mustard is $15.00/bushel.

Contracted production = contracted acres x contracted quantity per acre
= 150 acres x 4 bushels/acre
= 600 bushels

The blended price equals an average of the contract price, weighted by the proportion of production that is contracted, and SCIC’s base price, weighted by the remainder of production.

Proportion of production contracted:
600 bushels contracted/3,000 bushels total guarantee = 0.20

Proportion of non-contracted production:
2,400 bushels not contracted/3,000 bushels total guarantee = 0.80

Blended price = (contract price x portion of production contracted) + (SCIC base price x non-contracted portion of production)
= ($20.00 x 0.20) + ($15.00 x 0.80)
= $4.00 + $12.00
= $16.00/bushel for all yellow mustard

In this scenario, your average coverage at the base price was 3,000 bushels x $15.00/bushel
= $45,000 ÷ 250 acres
= $180.00/acre

With the blended price, your average coverage is 3,000 bushels x $16.00/bushel
= $48,000 ÷ 250 acres
= $192.00/acre

Your premium also increases proportionally with the price. Assuming your average premium at the base price was $12.00/acre at the coverage level selected, your premium would be:

Premium at blended price = blended price/base price x premium at base price
= ($16.00 ÷ $15.00) x $12.00
= $12.80/acre

IP Canola Contract

You are growing 150 acres of identity preserved canola and have a positive basis contract for all acres of specialty oil canola at a positive $40.00 basis.

Commercial canola base price + positive basis contract
= $300.00/tonne + $40.00/tonne
= $340.00/tonne

Crop Insurance will insure your identity preserved canola at $340.00/tonne.

Commercial Canola

20 bushels/acre x $6.80/bushel
($300.00/tonne) = $136.00/acre guarantee

Identity-Preserved Canola

20 bushels/acre x $7.71/bushel
($340.00/tonne) = $154.20/acre guarantee

Your premium per acre will increase from commercial canola because of the higher identity preserved canola price and because identity-preserved canola has a slightly higher premium rate than commercial canola.