United States Department of Agriculture 

Risk Management Agency 

Risk Management

Glossary

Someriskmanagemm enn t

terr ms,explainedd .

As you read about risk management, 

you may sometimes wonder, “What do 

these terms mean?” 

This glossary should help you 

understand a few of the more common 

terms or acronyms used. It is not 

meant to be a complete list of terms. 

If you have additional questions, you 

should contact a crop insurance agent. 

If you are unable to find an agent, 

you can go the the Risk Management 

Agency's agent locator at 

www.rma.usda.gov/Information-Tools/AgentLocator-Page. 

Farm-Risk-Plans.USDA.gov 

H lping farm rs & ranch rs fnd succ ss
 

 

 

 

 

 

 

 

 

 

 

 

 

 

A...............................................................

Actual Production History (APH). Actual 

Production History is the most common plan of 

insurance under the Multiple Peril Crop Insurance, 

or MPCI, umbrella. It is the basis for determining 

your guarantee under either multi-peril crop 

insurance or revenue insurance policies. The APH 

is calculated as a 4- to 10-year simple average of 

your actual yield on the insured land. If you do not 

have records of actual yields, a “transitional yield” 

based on average yields in your county is used. 

Actuarial soundness. This is an insurance term 

that describes 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 for producers. Among 

its other effects, ARPA also 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. 

Adjusted Gross Revenue-Lite (AGR-Lite). 

AGR-Lite is whole farm revenue insurance that 

covers almost all of the commodities produced on 

a farm. It is an individualized revenue insurance 

based on individual producer yields, quality, and 

marketing history that equals gross income. 

B...............................................................

Buy-up coverage. This refers to crop insurance 

coverage that exceeds the CAT (catastrophic) 

level. Coverage is available up to 75 percent of 

your expected yield or expected revenue (which 

is yield times price). In some areas, coverage 

up to 85 percent is available for some crops. 

You pay part of the premium, but government 

premium subsidy rates are now over 50 percent 

for most levels of coverage. 

C...............................................................

CAT coverage. CAT is short for “catastrophic,” 

and refers to crop insurance coverage at the lowest, 

or catastrophic level. CAT coverage is set at the 

50/55 level, which means that your yield must fall 

below 50 percent of your average yield before a loss 

is paid. These losses are paid at a rate of 55 percent 

of the highest price election. You must pay an 

administrative fee to become eligible to receive CAT 

coverage, but the government pays the entire premium. 

Crop Revenue Coverage (CRC). CRC is the 

most widely available revenue protection policy. 

This policy guarantees an amount of revenue 

(based on your actual production history (APH) 

x commodity price), called the final guarantee. 

Crop revenue insurance. Crop revenue insurance 

pays you indemnities based on gross revenue 

shortfalls instead of just yield or price shortfalls. 

Types of crop revenue insurance includes Crop 

Revenue Coverage (CRC), Revenue Assurance 

(RA) and Income Protection (IP). These programs 

are subsidized and reinsured by the USDA’s Risk 

Management Agency. 

Crop yield insurance. Also known as Actual 

Production History (APH) yield, crop yield 

insurance pays indemnities to producers when 

yields fall below the producer’s insured yield level 

due to most natural causes. Crop yield insurance is 

subsidized by the USDA’s Risk Management Agency. 

D...............................................................

Disaster payments. These are direct payments to 

farmers on an emergency basis when crop yields 

are abnormally low due to adverse growing 

conditions. During the 1970s, there was a 

“standing” disaster payments program, with 

payments made without declaration of a disaster 

area. Regular payments ceased after 1981, but 

since then ad hoc disaster payments have been 

specially approved by the U.S. Congress on a 

number of occasions. 

Dollar Plan of Insurance. The Dollar Plan of 

Insurance lets you select one of several dollar 

amounts of insurance per acre prior to planting. 

For vegetable crops, fresh market corn, fresh 

market tomatoes (Florida only), and peppers are 

insurable under the Dollar Plan of Insurance. 
 

 

 

 

 

 

 

E...............................................................

Enterprise diversification. Diversification is a 

way to generate income from different crops and/or 

livestock activities that are not closely related in 

price, so that low income from some activities 

would likely be offset by higher income from others. 

F...............................................................

Fixed Dollar Plan of Insurance. The Fixed Dollar 

Plan of Insurance provides protection against 

declining revenues due to damage that causes a 

loss of yield and there is no price increase in the 

market. The pilot Chile Pepper program is based 

on the Fixed Dollar Plan of Insurance and is 

available in Cochise County, Arizona, and in 

Hidalgo and Luna Counties, New Mexico. 

Forward contract. This is an agreement between 

two parties (such as you and someone who buys 

your products) that calls for delivery of, and 

payment for, a specified quality and quantity of 

a commodity (such as a particular crop) 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. This is when you agree on a price 

or a pricing formula for a commodity that will be 

delivered at a later date. “Forward pricing” is used 

broadly here to refer to both hedging with futures 

or options, and forward contracting. 

Futures contract. This is an agreement to buy or 

sell a commodity of a standardized amount and 

quality during a specific month in the future, under 

terms established by the futures exchange, at a 

price established in the trading pit at the 

commodity futures exchange. 

Futures option contract. This is 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. 

 ...............................................................

Group Risk Income Protection (GRIP). 

GRIP is based on the experience of the county 

rather than on individual farms, so APH is not 

required for this program. A GRIP policy includes 

coverage against potential loss of revenue resulting 

from a significant reduction in your county’s 

yield or the commodity price of a specific crop. 

Group Risk Plan (GRP). Like GRIP, GRP 

coverage is based on the experience of the county 

rather than on individual farms, so APH is not 

required for this program. GRP protects you in the 

event that your county’s average per-acre yield or 

payment falls below your trigger yield. 

Guarantee. Also called “yield guarantee” or 

“insurance guarantee”, this is a promise of payment. 

In this context, it means the amount of money you 

will be paid in the event of a loss, according to the 

terms of your crop insurance contract. 

H...............................................................

Hedging. Hedging uses futures or options contracts to 

reduce the risk of adverse price changes prior to an 

anticipated cash sale or purchase of a commodity. 

I...............................................................

Income Protection (IP). IP is a revenue product 

that, based on your APH, protects you against a 

loss of income when prices and/or yields fall. 

While IP is similar to CRC, it does not have the 

increasing price function of CRC. 

Indemnity. This is the compensation, or money 

you receive 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. 

L...............................................................

Leverage. Financial leverage refers to the use of 

borrowed funds to help finance a farm business. 

Higher levels of debt, relative to net worth, are 

generally considered riskier. The optimal amount 

of leverage depends on several factors, including 

farm profitability, the cost of credit, tolerance for 

risk, and the degree of uncertainty in income. 

Liquidity. Liquidity refers to your ability to generate 

cash quickly and efficiently in order to meet 

financial obligations. Liquidity can be enhanced 

by holding cash, stored commodities, or other 

assets that can be converted to cash on short notice 

without incurring a major loss. 

Loan Deficiency Payments (LDPs). 

These payments protect producers of several 

major commodities against revenue losses due 

to low prices. 
 

 

 

 

 

 

 

M...............................................................

Marketing contract. This is a contract between 

you and a processor or handler that establishes 

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. 

Multiple Peril Crop Insurance (MPCI). 

MPCI was established in the 1930s to cover yield 

losses from most natural causes. MPCI operated 

on a somewhat limited basis up through the early 

1980s, when a private/public partnership was 

established. At that point, insurance availability 

was greatly expanded and premium subsidies 

increased in hopes of replacing the disaster 

payment program. Major reforms legislated in 

1994—introduction of a low-cost CAT (catastrophic) 

coverage level, increased premium subsidies, and 

a requirement that participants in other farm 

programs obtain crop insurance—increased 

participation to over 200 million acres, covering 

the majority of acres of major field crops planted 

in the United States. 

N...............................................................

Non-Insured Crop Disaster Assistance

Program (NAP). Crop insurance is not available 

for all commodities. NAP provides financial 

assistance to producers of many of these commodities 

if they experience a qualifying yield loss. 

P...............................................................

Premium. The amount of money you pay for risk 

protection. Option buyers pay a premium to option 

sellers for an options contract. Similarly, the person 

who buys an insurance policy pays a premium in 

order to obtain coverage. 

Production contract. An agreement between you 

and a processor that usually details the production 

inputs supplied by both you and the processor, the 

quality and quantity of a particular commodity that 

is to be delivered, and compensation that you will 

be paid. In return for giving up control over 

decision making, you are often compensated with 

a price premium or lower market risk. 

R...............................................................

Revenue Assurance (RA). Revenue Assurance 

provides coverage to protect you against loss of 

revenue caused by low prices, low yields, or a 

combination of both. 

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 private insurance 

companies that deliver policies to producers. 

Private reinsurance also exists. In this case, a 

private reinsurer assumes responsibility for a share 

of the risk, in return for a share of the premiums. 

Revenue insurance. Revenue insurance, a cousin 

to MPCI, was introduced after the 1994 reforms 

and has become the most popular form of 

insurance in some areas. Whereas crop insurance 

covers only yield losses, revenue insurance pays 

when gross revenue (yield times price) falls below 

a specified level. These programs are subsidized 

and reinsured by the Risk Management Agency. 

Risk. Uncertainty about outcomes that are not 

equally desirable. Risk is an important aspect of 

the farming business. The uncertainties of weather, 

yields, prices, government policies, global 

markets, and other factors can cause wide swings 

in farm income. Risk management involves 

choosing among alternatives that reduce the 

financial effects of such uncertainties. 

S...............................................................

Subsidy. Money given by the government to help 

producers function. 

T...............................................................

Trigger yield. Under GRP, farmers receive payments 

any time the actual county yield drops below the 

trigger yield that the farmer chooses. The trigger 

yield can be 90, 85, 80, 75, or 70 percent of the 

expected county yield, which is based on the county's 

yield history since 1962. Expected county yields 

are adjusted for upward trends. 

U...............................................................

Uncertainty. Lack of sure knowledge or predictability. 

Y...............................................................

Yield. The amount of something, especially a crop, 

produced by cultivation or labor. 
 

 

 

 

 

 

Farm-Risk-Plans.USDA.gov 

H lping farm rs & ranch rs fnd succ ss

United States Department of Agriculture 

Risk Management Agency 

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