What is Production Cost Insurance?
Farming is a high-risk business, and often volatile price movements in seed, chemical, fertilizer, and commodities make it difficult to predict farm revenue from year to year. Production Cost Insurance (PCI) alleviates these concerns by providing a predictable annual revenue stream above defined, direct input costs. PCI is a reliable, predictable risk management tool that not only underpins the cost of production in challenging growing seasons but one that promotes best farm management practices each and every day, across virtually all aspects of the operation. When adversity strikes at any phase of the crop production cycle, PCI supports producer confidence and empowers them to make optimal management and agronomy decisions.
How it Works
- Basic PCI coverage is calculated by averaging the cost of seed, chemical, and fertilizer based on the five-year financial history of your farm. An additional 40% may be added to cover unexpected increases in costs. PCI covers the ACTUAL costs of fertilizer, seed, and chemical.
- Based on the analysis of financial records, producers may have the option to choose an enhanced coverage level in $25 increments up to a maximum of $800 per acre to cover margins in excess of variable inputs.
- If input costs surge higher over the growing season, PCI coverage may increase by exactly the same amount, dollar per dollar, with no increase in premium; therefore, the margin of risk always remains the same.
- PCI is written on a whole-farm basis, so virtually any crop can be insured.
- A PCI policy can stand alone or be combined with other crop insurance plans.
- Three major inputs (fertilizer, seed, and chemical) are covered, plus a specific amount of revenue per acre.
- As input costs rise over the crop year, coverage may increase as well.
- Farmers often use this insurance as collateral with major banks and borrow against it.
Production Cost Insurance Example
A farmer’s financial history indicates his variable input costs averaged $300 per acre. This amount is automatically covered by his basic PCI policy.
He expects his fixed costs for the crop year to total $350 per acre, and he chooses an enhanced PCI coverage level of $300 per acre.
His total PCI coverage is $600 per acre, and his PCI policy ensured $6 million of insured revenue for his 10,000-acre farm.
During the course of the growing season, insects infest the farmer’s crop. He decides to spend an additional $25 per acre on insecticide, pushing his input costs to $325 per acre. As a result, his PCI coverage may increase to $625 per acre – $6.25 million total revenue – without an increase in premium.
Due to lower than expected yields, the farmer sells his crop for only $5.25 million. His Production Cost Insurance policy pays the $1,000,000 necessary to meet his insured revenue of $6.25 million.
How Does PCI Cover Hedging?
Linked Here is an article about a client from Ohio who has used this the policy as an effective management tool.