Question

Katherine produces dryland wheat in North-Central Kansas. Her actual production history (APH) yield is 55 bushels per acre. The average futures price before planting (indemnity price) for wheat is $7.17. The average futures price at harvest is $9.59. She purchases crop insurance at the 80% coverage level. How much would her indemnity payment from the insurance company be for each policy if her actual yield is 40 bushels per acre?

Answer 1

Katherine's indemnity payment would be $30.56 per acre.

Step-by-step explanation:

In this scenario, Katherine's actual yield is 40 bushels per acre, which is lower than her actual production history (APH) yield of 55 bushels per acre. To calculate her indemnity payment, we need to determine the shortfall in yield and multiply it by the difference between the harvest futures price and the indemnity price.

The yield shortfall is calculated as: APH yield - Actual yield = 55 - 40 = 15 bushels per acre.

The indemnity payment can be calculated as: Yield shortfall × (Futures price at harvest - Indemnity price) × Coverage level.

Given that the futures price at harvest is $9.59, the indemnity price is $7.17, and the coverage level is 80%, we can substitute these values into the formula:

Indemnity payment = 15 × ($9.59 - $7.17) × 0.8 = $30.56 per acre.