New Revenue Options in the 2014 Farm Bill

The Agricultural Act of 2014 introduces three county-triggered shallow loss programs – Supplemental Coverage Option (SCO), Stacked Income Protection Program (STAX) for cotton, and the county triggered version of Agricultural Risk Coverage (ARC).  All three programs have the potential to be used as a risk management substitute for individual coverage crop insurance.  However, it is important to note that aggregate county revenue is less variable than the average farm in that county.  This largely stems from less than perfect correlation of yields within the county.  The bottom line when one evaluates a county-triggered program versus and farm-triggered program, one needs to recognize (1) county-based programs will usually trigger less frequently and pay less indemnity than an identical layer of farm level coverage, and (2) county-based programs are not perfectly correlated with farm losses because farm and county yields do not rise and fall in perfect lockstep with each other.

The following chart focuses on the first issue – county revenue tends to be less variable than farm revenue for a commodity.  Computer simulations of farm and county revenue risk for hundreds of counties were conducted to determine the frequency that farm revenue and county revenue fall below 86% of expected revenue (the trigger point for ARC and SCO).  The results are averaged by each of five crops.  While there is variation within the data, county-triggered programs are about 10% less likely to trigger than a typical farm in the county, and all else equal, pay less than the same layer of crop insurance protection.  The exception to this will be when the farm is significantly less risky than the county average.  For example an irrigated farm in a mostly non-irrigated county.

Farm or County Revenue Less Than 86 Percent of Expected