Production Cost Insurance (PCI) is a private, multiple peril crop insurance product developed by Canadian insurer Global Ag Risk Solutions (GARS). The guarantee is based on a producer's actual margin.
How does PCI work?
The PCI guarantee is calculated using the producer's five-year average revenue less averages of his seed, fertilizer, chemical and hedging costs. As the producer begins spending on seed, fertilizer, chemical and hedging, this guarantee slides up. A PCI loss is triggered by a named peril resulting in the producer's revenue at the end of the year falling below the guarantee.
How much am I insuring?
The difference between the producer's five-year average revenue less averages of his seed, fertilizer, chemical and hedging costs is multiplied by an amount up to 80 percent. This amount is defined as fixed cost margin coverage (FCMC) and is intended to cover fixed costs. Before the producer spends anything on seed, fertilizer, chemical or hedging, his guarantee is equal to this fixed cost margin.
Fixed Cost Margin Coverage = (Revenue - Seed Costs - Fertilizer Costs - Chemical Costs - Hedging Costs) x 80 Percent
As the producer spends on seed, fertilizer, chemical or hedging, this guarantee slides up by an amount equal to these costs. Premium is calculated using a three-year average of this guarantee (FCMC plus three-year average seed, fertilizer, chemical and hedging costs), but the premium does not increase if actual expenses for seed, fertilizer, chemical or hedging are more than the three-year average.
Guarantee = Fixed Cost Margin Coverage + Seed Costs + Fertilizer Costs + Chemical Costs + Hedging Costs
How is a loss calculated?
A PCI loss is triggered if a named peril results in the producer's revenue at the end of the year falling below the guarantee. Thus, the indemnity is equal to the difference between revenue and the guarantee.
Indemnity = Max(0, Guarantee - Revenue)
What is the advantage of PCI?
PCI enables producers to farm the way they know they should. When the forecast is dry and the market is down, producers often forgo essential inputs such as fertilizer. With PCI providing a backstop, producers can give the crop what it needs when it needs it. Similarly, when the crop looks bad but the market is up, producers are often hesitant to sell. Because PCI covers hedging costs, producers are free to sell when the market says to sell.
Does all my ground have to be insured?
PCI protects producers on a whole-farm basis as the guarantee is calculated using five-year averages for the entire operation.
Can I have PCI and regular (MPCI) crop insurance?
Yes; however, the best product in this case is PCI Select. PCI Select provides a coverage band over and above the MPCI guarantee. In many cases, PCI Select will allow producers to lower their underlying MPCI coverage and obtain better overall protection for the same and sometimes less premium.
Why choose SCIS for your PCI coverage?
We have developed software to analyze crop insurance coverage stochastically at the unit level. Unit-by-unit indemnity probability analysis is essential to choosing the ideal coverage level and unit structure. Without this analysis, purchasing PCI in lieu of MPCI or selecting a sub-optimum combination of MPCI and PCI Select could mean overlapping coverage or coverage gaps.