Actual production history (APH) yield. The basis for determining a producer's guarantee under either crop yield or crop revenue insurance policies. The APH yield is calculated as a 4- to 10-year simple average of the producer's actual yield on the insured parcel of land. If a producer does not have records of actual yields, the series is filled in with a "transitional yield" based on county average yields.
Actuarial soundness. An insurance term describing a situation where indemnities paid, on average, are equal to total premiums collected.
Agricultural Risk Protection Act of 2000 (ARPA). This law provided $8.2 billion for insurance premium subsidies and $5.2 billion for market loss assistance payments. Among its other effects, ARPA modified the crop insurance premium subsidy structure, authorized pilot programs for new forms of insurance, expanded insurance fraud detection and enforcement, and dropped the area yield loss trigger in the NAP program.
Buy-up coverage. Crop insurance coverage above the CAT (catastrophic) level. Coverage is available up to 75 percent of expected yield or expected revenue (yield times price). Coverage up to 85 percent is available for some crops in some areas. Producers pay a share of the premium, but government-premium-subsidy rates are now over 50 percent for most levels of coverage.
CAT coverage. Crop insurance coverage at the lowest, or "catastrophic" level. CAT coverage is set at the 50/55 level, meaning that yield must fall below 50 percent of average yield before a loss is paid, and such losses are paid at a rate of 55 percent of the highest price election. Producers must pay a service fee to become eligible, but the government pays the entire premium.
Crop revenue insurance. Insurance plans offered to farmers that pay indemnities based on revenue shortfalls. These plans are subsidized and reinsured by USDA's Risk Management Agency.
Crop yield insurance. Another name for the form of crop insurance that pays indemnities based on yield losses due to most natural causes (i.e., "multiple peril"). Crop yield insurance is subsidized and reinsured by USDA's Risk Management Agency.
Forward contract. An agreement between two parties calling for delivery of, and payment for, a specified quality and quantity of a commodity at a specified future date. The price may be agreed upon in advance, or determined by formula at the time of delivery or other point in time.
Forward pricing. Agreeing on a price or a pricing formula for later delivery. "Forward pricing" is used broadly here to refer to both hedging with futures or options, and forward contracting.
Futures contract. An agreement to later buy or sell a commodity of a standardized amount and quality during a specific month, under terms established by the futures exchange, at a price established in the trading pit at the commodity futures exchange.
Futures option contract. A contract that gives the holder the right, though not the obligation, to buy or sell a futures contract at a specific price within a specified period of time, regardless of the market price of the futures contract when the option is exercised. Options provide protection against adverse price movements.
Hedging. The initiation of a buying or selling position in a futures or options market, intended as a temporary substitute for the later actual sale or purchase of a commodity. Hedging aims to protect against adverse price movements prior to the actual transaction.
Indemnity. The compensation received by an individual for qualifying losses paid under an insurance policy. The indemnity compensates for losses that exceed the deductible up to the level of the insurance guarantee.
Leverage. The use of borrowed funds to help finance a farm business. Higher levels of debt, relative to net worth, are generally considered riskier.
Liquidity. The extent to which assets can be quickly converted to cash without accepting a discount in their value. An asset is perfectly liquid if its sale generates cash equal to, or greater than, the reduction in the value of a farm due to the sale (i.e., the farm's equity is not affected by the sale). Illiquid assets, in contrast, cannot be quickly sold without a producer accepting a discount, reducing the value of the farm by more than the expected sale price.
Marketing contract. A contract between a processor or handler and a grower, establishing a marketing outlet and a price (or a formula for determining the price) for a commodity before harvest or before the commodity is ready to be marketed.
Premium. An amount of money paid to secure risk protection. Option buyers pay a premium to option sellers for an options contract. Similarly, the purchaser of an insurance policy pays a premium in order to obtain coverage.
Production contract. An agreement between a processor and a grower that usually specifies in detail the production inputs supplied by the processor and the grower, the quality and quantity of a particular commodity that is to be delivered, and compensation that is to be paid to the grower. In return for relinquishing control over decision making, the producer is often compensated with a price premium or lower market risk.
Reinsurance. A method of transferring some of an insurer's risk to other parties. In the case of Federal crop insurance, USDA's Risk Management Agency shares the risk of loss with each private insurance company delivering policies to producers. Private reinsurance also exists, in which case, a private reinsurer assumes responsibility for a share of the risk in return for a share of the premiums.
Revenue insurance. An insurance program offered to farmers that pays indemnities based on revenue shortfalls. These programs are subsidized and reinsured by the USDA's Risk Management Agency.
Risk. Uncertainty about outcomes that are not equally desirable. Risk may involve the probability of making (or losing) money, harm to human health, negative effects on resources (such as credit), or other types of events that affect welfare.
Uncertainty. Lack of sure knowledge or predictability because of randomness.
A more extensive glossary is contained in Managing Risk in Farming: Concepts, Research, and Analysis, Agricultural Economics Report 774, ERS, March 1999.