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The Contract Price Addendum: A Good Risk Management Tool for Certified Organic and Transitioning Producers?

March 3, 2016

photo credit: USDA

photo credit: USDA

The Risk Management Agency (RMA) has recently announced an important update to the Contract Price Addendum (CPA) — transitioning to organic acres will now be eligible. With this change have come a flurry of questions about CPA and how it works, including “What are CPAs?”, “Is my crop eligible for this?”, and “Should I use this?”.

The ability to use a CPA on organic crops is relatively new (first offered for the 2014 crop year), so many farmers in or adjacent to the organic movement have only just recently begun to investigate them as an option for their acres.

We hope that the following information will serve as a helpful FAQ, providing more detail on CPAs and who they may be right for. However, if and when you are interested in purchasing a policy using a CPA, you should get in touch with your local crop insurance agent, who can provide you information on your specific situation (crop, location, etc.). RMA provides an agent locator tool on its website.

What is a Contract Price Addendum and Why Might a Farmer Want One?

At its most basic level, a CPA works with an existing crop insurance plan to allow farmers the option to use their contract price instead of the RMA price election or projected price. A CPA cannot exist on its own. It can only be used where there is a policy available for the crop being grown.

A farmer may contract a crop as a hedge against price fluctuations, or because they are growing a differentiated product like food grade soybeans, or because they are growing something with a premium price, such as a seed crop.

Why does the contract price matter? Without the CPA, a producer must use the price established by RMA (price election or projected price, depending on the crop and insurance plan). This price is derived by RMA from public and private data, but does not always reflect the price individual farmers may actually receive under a contract.

The RMA price is used to determine the premium (before subsidies), liability, whether there will be an indemnity, and the amount of a farmer’s indemnity for yield policies. It is also used as part of the formula to determine if the farmer is entitled to an indemnity in the case of a revenue policy. So, if a farmer’s higher contract price can be used in place of the RMA-established price it is to their advantage because the policy will more fully reflect their actual risk.

What is the Particular Significance of CPA to Organics?

A CPA may be a good choice for those who farm certified organic crops or crops in transition to organic certification. Currently, there are more crop types eligible for a CPA than there are premium organic price elections – there are 57 crops with premium organic price elections but 70+ CPA eligible crop types. For CPA crops that do not have an organic price election, the CPA option provides a way for the farmer to still insure at the organic price. For those crops where, in a given county, there is an organic price election as well as the CPA option, the farmer and the insurance agent will need to sit down and work through which might be the better option for the particular circumstances.

Is CPA Relevant to Both Yield and Revenue Policies?

The most common crop insurance policies are either yield policies or revenue policies. Yield policies provide coverage for a farmer when there is a decline in yield for a particular crop.

Photo credit: RMA

Photo credit: RMA

Revenue polices cover a crop for yield and price declines. Though revenue policies are the most generous policies, they are also the scarcest ­– currently, revenue policies are only available for 13 of the most widely grown commodities.

The price election (or projected price) is important to both policies because it is used to calculate the farmers indemnity if there is a loss. The following table illustrates an example:

Although, it would seem that under a Revenue Policy the contract price would not matter because it is fixed, it does. RMA has constructed the policy so that the price can still fluctuate between the CPA projected price and the CPA harvest price. The “How a contract price is determined?” section explains this in more detail.







What Crops are Eligible?

Since the CPA is used in conjunction with an existing crop insurance policy, there has to be an existing yield or revenue crop insurance policy for the particular crop. Thus far RMA has created CPAs for more than 70 crop types, a majority of insurable crops:

All Other Grapefruit
Canola / Rapeseed
Cultivated Wild Rice
Dry Beans
Dry Peas
Early & Midseason Oranges
ELS Cotton
Fresh Apricots
Fresh Freestone Peaches
Fresh Market Tomatoes
Fresh Nectarines
Grain Sorghum
Late Oranges
Macadamia Nuts
Oranges (Navel, Sweet, and Valencia)
Processing Apricots
Processing Beans
Processing Cling Peaches
Processing Freestone Peaches
Rio Red & Star Ruby Grapefruit
Ruby Red Grapefruit
Sugar Beets
Table Grapes
Tangelos (Minneola & Orlando)

There are also several other crops that are eligible to be insured at a contract price, but not with a CPA.

Alfalfa Seed
Grass Seed
Green Peas
Silage Sorghum
Sweet Corn

It is important to keep in mind that many of these policies are only offered in a select number of states and counties. For example, the onion policy is only available in 14 states and even within those states it is only offered in a select few counties. The pear policy is only available in four states, and a limited number of counties.

Coverage may be available by written agreement in additional counties, but you’ll want to discuss this with your crop insurance agent.

Are CPA Prices Unlimited?

Another important thing to keep in mind, and an important question to clarify with your crop insurance agent, is the maximum contract price under which you can insure your particular crop with a CPA. As an anti-fraud measure, all crops have a limit on the allowable contract price at which the crop can be insured under the CPA.

If your contract price is higher than the limit, the premium, liability, and potential indemnity will based on the maximum contract price, not on your actual contract price. This can result in a producer being underinsured.

In general, caps are 1.5 the organic price and 2 times the conventional price established by RMA. However, the limits can vary by state, county, or by crop type (such as “food grade”), as well, they are different for certified organic crops and crops in transition to organic.

For the 2016 crop year, the maximum contract prices for oats and Khorasan wheat were increased to allow for higher priced contracts, so the factors can be changed based on information RMA receives, which is a good thing.

However, contracts do exist that have prices that are greater than the maximum contract price, and it is important to determine if you have one of these contract before purchasing a CPA.

Prices and factors are set in advance of the sales closing date so farmers know what they are before the deadline to purchase a policy.

You can find more information about the maximum contract price on the RMA Information Browser. When in the browser add in your crop information for 2016, then go to the next page and select the “Prices” tab.

Must the Contract Be in Place When Purchasing the Policy?

The production contract does not have to be in place when the farmer purchases the policy or even by the policy’s sales closing date, which vary by region. The contract must be in place by the acreage reporting date, which can be significantly after the closing date.

How is the Contract Price Determined?

Given the range in the types of contracts (‘fixed price’ or ‘premium over base’) that farmers enter into, and the fact that price plays a different roll in different types of crop insurance policies, determining the contract price can be confusing. In all cases, the producer can choose to use RMA’s established price or their contract price.

This is especially true for revenue policies, which allow the farmer to select from the projected price or the harvest price when calculating an indemnity payment. In the absence of a CPA, the farmer’s indemnity is higher when the harvest price (end of season price) is higher than the projected price and there is a loss.

Following is a brief explanation of how the contract price is determined. For more detailed information see RMA’s CPA fact sheet.

Yield Protection: If the contract provides a fixed price, or if a fixed price can be determined (base plus premium) prior to the acreage reporting date, then that is the contract price under the CPA.

Even if the contract price is calculated as premium over base and the base is not available by the acreage reporting date, a CPA can still be used. In this case, the projected price will be the RMA price election (or projected price) plus the premium over the base. This could result in a smaller indemnity if the base price ends up being higher than the RMA price. Finally, all of this is subject to the CPA maximum contract price. If the contract price is above the limit, then the maximum contract price will be the price used.

Revenue Protection: If the contract provides for a fixed price, or if the fixed price can be determined (base plus premium) prior to the acreage reporting date, then that is the price under the CPA. Again, this is also subject to the CPA maximum contract price:

Contract price (fixed) = CPA Projected Price

If the contract price is determined as a premium over based and the base is not available by the acreage reporting date, the CPA projected price is the sum of the premium over the base and the RMA projected price:

RMA projected price + premium over base = CPA projected price

Determining the harvest price is more complicated. If the contract provides for a fixed price, or if a fixed price can be determined (base plus premium) prior to the acreage reporting date, then the harvest price is the difference between the contract price and the RMA projected price, added to the RMA harvest price:

Contract price (fixed) – RMA projected price + RMA harvest price = CPA harvest price

If the contract price is determined as a premium over a base and the base price is not available by the acreage reporting date, the harvest price under the CPA will be the sum of the premium over the base and the RMA harvest price:

RMA harvest price + premium over base = CPA harvest price

Why is RMA Extending CPA to Transitional Acres? Will this Work the Same Way?

On February 18 RMA extended CPA eligibility to acres that are transitioning to certified organic production. Transitioning farmers will need to have an organic plan and meet certain other conditions to prove they are transitioning to organic and thus eligible for a CPA on transitioning acres.

While not many farmers currently have an organic transition contract with premium prices, NSAC applauds USDA for stepping ahead of the market in its recognition of the value of transitioning to organic products. Interest is growing, and some organic certifiers are also helping to boost the visibility of transitional products by offering transitional certifications.

USDA has gotten the ball rolling by making it easier and more appealing for more farmers to consider organic production — an important step in helping the organic industry meet the growing demand for its products. The next great challenge for transitioning farmers will be in convincing consumers and buyers to recognize the value of their unique products, and to support them with their business.

Categories: Commodity, Crop Insurance & Credit Programs, Organic

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