Mr. Davis has been growing tomatoes on his 1,000-acre farm in Delano for about 20 years. His average production yield history (APH) is 40 tons per acre. The average price of tomatoes has been approximately $100 per ton, but it is variable from year to year and hence risky. Explain to Mr. Davis, how crop insurance can help him manage risk.
Assume the indemnity price for tomatoes is $96 per ton. Also assume that you convinced Mr. Davis to purchase crop insurance, which cost him $6.50 per ton for 75% coverage level. Delano experienced a few cool nights during the growing season. Cool temperatures result in slow tomato seed germination, which leads to lower yields. Mr. Davis' yield fell to 25 tons per acre. Given these circumstances, does Mr. Davis get an indemnity payment? If so, how much is his total payment, i.e. what does he get from the insurance company? Show your work.