What is the Harvest Price Option, and why do farmers need to have that choice?

The Harvest Price Option is revenue or price coverage within the crop insurance policy that provides protection on lost production at the higher of the price projected just before planting time or the price at harvest. Projected price is just an estimate of the final price, per se and farmers pay an additional premium for this type of price protection.  It is similar to the concept of paying an indemnity at “replacement value,” similar to what is available for homeowners insurance. It enables the producer to acquire the lost production at its replacement cost.

If there is a natural disaster that results in a large drop in production of a commodity, the price of that commodity is likely to increase sharply. Without the harvest price option, the producer’s loss would be indemnified at the lower price projected at the start of the season. Unfortunately, such an indemnity would place many farmers in financial jeopardy. Many farmers enter a forward contract to sell a portion of their production before harvest. Usually these contracts pay the farmer for the production they deliver after harvest based on harvest prices. If the farmer loses the crop, he is still obligated to deliver under the forward contract. But since the crop is lost, the farmer would have to buy the commodity at the harvest price and deliver that or financially settle the buyer’s contract at the harvest price. The purpose of the harvest price option is to provide the farmer with sufficient funds to settle the forward contract.

Another example of the application of the Harvest Price Option is for farmers who raise dairy cows, cattle, hogs, poultry or other animals and grow their own feed. If a disaster wipes out the feed production, the farmer has to enter the market and purchase feed at the going price, which would reflect the effects of the disaster. The Harvest Price Option provides them with the funds to afford the higher feed costs should feed prices rise.