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.
What are the basic mechanics to PCI?
PCI is simply a margin insurance that uses a historical margin and adds input costs (seed, chemical, and fertilizer) for the current year to establish a guarantee. A loss is triggered when the actual revenue is less than the guarantee.
How much am I insuring?
The first step is determining your adjusted revenue. The adjusted revenue is the five-year average crop revenue adjusted for hedging gains/losses. Input costs are expenses of chemicals, seed, and fertilizer. The fiver-year average input costs are subtracted from the adjusted revenue to arrive at the fixed cost margin coverage (FCMC). The insured then picks how much of the FCMC to insure - from 40 to 80 percent. The actual expenditures for seed, chemical, and fertilizer for that year are then added to the insured level FCMC to calculate the guarantee. This is where PCI gets its name - it covers those actual productions costs for the year.
How is premium calculated?
Premium is calculated using a five-year average of the FCMC plus a three-year average of seed, fertilizer, and chemical costs. This premium is fixed even though you may spend more on seed, chemical, and fertilizer inputs than your three-year average. The guarantee will increase in this case but your premium will not.
How is a loss calculated?
A PCI loss is triggered if a named peril results in the producer's crop revenue, adjusted for hedging gains/losses, at the end of the year falling below the guarantee. Thus, the indemnity is equal to the difference between revenue and the guarantee.
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 takes into account hedging gains/losses, producers are free to sell when the market is giving them a profitable opportunity. Also, since PCI is based on your actual revenue, basis is also taken into account versus a futures-only price used for MPCI revenue products.
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 using artificial intelligence techniques at the unit level. Unit-by-unit indemnity calculations are then aggregated to the whole farm across all crops. This 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.
Contacts us for more information on PCI and what it can mean for your operation.