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| I had a nice discussion recently with a friend who had recently attended a crop insurance CE training. I mentioned that I am in the small minority who use RP-HPE, to which he replied, “oh so you’re a gambler? You are betting on price outcome.” I countered that I think regular RP is more akin to gambling. So for your consideration, I present my case for harvest price exclusion.
With RP-HPE, you are setting a floor at APH x Spring Price X Coverage %. The premium is about half of RP. You are of course giving up using the greater of Spring or Harvest price. But regardless, on March 1, your floor is set. And by March 1, you likely know nearly all direct input costs. So since you know the floor and direct costs, you have reasonable certainty what your financial risk is.
I argued that it is actually the RP policy buyer that is the gambler. The RP policy holder is paying about double to essentially buy an option embedded in the policy that only has potential to trigger if price increases at harvest. An RP-HPE policy holder could purchase out of the money calls and capture any amount of this upside if desired. The very nature of either is speculative to me.
The RP product has always felt more speculative to me than a pure insurance play. But it can be argued that to be a farmer is speculative. Growing a crop is inherently taking a long position that then must be managed. I acknowledge the subsidy component comes into play and it would be great if a data miner type could give us some insight there. But it goes to show there are many different ways to view things and you have to use what works for your situation.
I also had to remind my friend that a crop insurance agent makes approximately double the commission selling RP over RP-HPE, so there is probably some inherent bias. To which he replied, the change to ECO will be good to both him and the producers. ECO subsidy is going up from 44% to 65%. That means the producer share of the premium will be reduced by 37.5%.
Curious on thoughts / critiques. Its how we all learn. And yes I remember 2012. I’ve saved premium each year, but that is the scenario you miss with RP-HPE. And I can live with that.
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The case for harvest price exclusion (RP-HPE)
