Crop shortfall coverage
October 01, 2009
by World Grain Staff
Crop shortfall insurance is based upon production statistics (area planted and yield) as measured and reported by government entities or industry associations.
Alternatively, production can be quantified by independent inspectors at delivery points, or through third-party audits. The insured production is defined by the market share of a corporation for different crops and regions.
The crop shortfall coverage pays out if the actual production is below a pre-defined trigger, which is typically set as a percentage of the insured production. Usually, each unit of production shortfall is indemnified by a pre-agreed amount, but in selective cases, volume-contingent price hedging structures can be developed reflecting the actual market price.
The payout pattern of a crop shortfall insurance contract essentially mirrors a put option on grain volume.To lower long-term planning uncertainty, covers can be structured in multi-year contracts.