Supplemental Coverage Available for 2015 Mississippi Winter Wheat

The Supplemental Coverage Option (SCO) crop insurance endorsement will be available to winter wheat producers in Bolivar, Coahoma, Sunflower, Tallahatchie and Washington counties for 2015. SCO was authorized in the Agricultural Act of 2014 and will provide an indemnity payment when yield or market revenue (depending on whether the producer has a yield protection or revenue protection policy) measured at the county level falls below 86 percent of the expected county revenue as determined from county yield histories and futures prices.

The SCO indemnity payment size is determined by the proportion of the range of the loss below 86 percent down to the nominal coverage level of the producer’s farm-level crop insurance. A producer will pay 35% of the actuarially-fair premium (65% subsidy) for SCO coverage. While the indemnity is triggered by county level production or revenue, the producer’s actual production history yield is used calculate both the SCO indemnity and SCO premium.

Winter wheat producers in the five eligible counties will need to make SCO participation decisions by the September 30, 2014 sales closing date. Risk Management Agency will have the projected price for winter wheat available after September 14, 2014, at which time premiums will also be calculated.

A producer is not required to purchase SCO coverage. SCO is not available for acreage enrolled in the Farm Service Agency’s (FSA) Agricultural Risk Coverage (ARC) program. For fall planted wheat for the 2015 crop year only, an insured who applies for SCO and later elects to participate in ARC for winter wheat has until the earlier of the acreage reporting date or December 15, 2014 for any fall-planted wheat with an acreage reporting date after December 15, 2014 to withdraw SCO coverage on winter wheat on the farm for which ARC was elected for winter wheat and owe no premium. This is a one-time exemption that will only be allowed for 2015 crop year for fall planted wheat, to recognize that the ARC program rules may not yet be available to the public (FCIC-18180).

Producers who intend to plant winter wheat this fall in the five eligible counties are encouraged to contact their crop insurance agents regarding this important decision.

A Look at U.S. Crop Insurance “Buy-Up” Participation

Crop insurance continues to gain importance which is reflected in the 2014 Farm Bill. Given the extreme weather events in the past few years, coupled with price uncertainty, U.S. producers are aware of the pitfalls of not having insurance. However, many options exist with respect to the level of coverage a producer can obtain. At the minimum a producer can purchase “CAT”, or catastrophic coverage, that will protect up to 50% of his crop if a loss occurs. In all areas of the U.S. producers can “buy-up” to higher levels of coverage with some locations having the option to insure up to 85% of their crop [1]. Coverage levels for crop insurance increase from the 50% level to the 85% level, in 5% increments. The maps below show the average level of coverage for each county in the U.S. where crop insurance purchase data are available.

A few patterns stick out. First, it is noticeable that with corn and soybean insurance producers in the Cornbelt (primarily Iowa, Illinois, and Indiana) buy-up to higher levels of coverage. This is not surprising since the uncertainty around yield is small relative to other regions, which implies the insurance product is typically less expensive (in other words, the premium is cheaper [2]). Also, with respect to revenue insurance products, given that the bulk of these two crops are produced in this region there is a ‘natural hedge’ relationship between yield and price. So, when yield is low prices are high and vice versa, which provides a smoother revenue outcome compared to other locations. As a result these premiums are typically less than in other regions.

Also, we notice that coverage levels are low (averaging from 50% to 70%) in the Mid-South, southern Georgia and South Carolina, and the southwestern U.S. This is most likely the result of the inverse that was noted above. In these instances yields are less certain and typically carry a higher premium which decreases the incentive to buy-up to higher premium levels. More specifically, across all crops, the counties in eastern Arkansas and Louisiana (with some spillover in to the boothill of Missouri) as well as the counties from southeast Alabama through southern South Carolina, the coverage level is consistently very low (50% to 65%).

… Click each map for a larger view …

2013 Soybean coverage levels  2013 Corn coverage levels2013 Cotton coverage levels2013 Wheat coverage levels2013 Rice coverage levels 2013 Sorghum coverage levels

[1] In relation to an automobile insurance policy, this would imply the producer’s crop insurance carries a 15% deductible whereby a $20,000 vehicle with a $1,000 deductible would equate to a 5% deductible.

[2] Again, using the automobile insurance example, the premium for a 40 year old female driver will be less than a 18 year old male driver since the younger male is typically more reckless behind the wheel and therefore poses a higher risk for the insurance company. Here the older female is the Cornbelt and the 18 year old is the southwestern U.S.

Analyzing Mississippi Soybean Producers’ Farm Bill Alternatives

With the recent passage of the 2014 Agricultural Act a number of new choices are available for producers, while many of the previous options are no longer available. The analysis here examines these choices for soybean production in Mississippi. The report can be viewed at this LINK (Adobe Reader required to view the report).

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

Farm Bill Presentations, Support Tools, and Calculators

This page will provide links to presentations and various tools that we create. Please check back frequently as new tools will be added and updates to existing tools will be provided. If you have any questions or find any errors with any of these tools please feel free to contact us or leave a comment below.

Farm Bill Learning Session Presentations (December 2014):

All About the 2014 Farm Bill

Farm Bill Decision Aids (part 1)

Farm Bill Decision Aids (part 2)

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Base Reallocation Calculator v 1.0  [updated April 8, 2014]

:: Previous versions: N/A

Generic Base Distribution Calculator v 1.1 [updated April 14, 2014]

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  • v 1.0, April 8, 2014

Summary of the Agricultural Act of 2014

The recent passage of the 2014 Farm Bill (formally known as the Agricultural Act of 2014) brings about some significant changes in agricultural policies, specifically within Titles One and Eleven in the legislation. The following summarizes the key changes that were made, the new programs that are being made available to landowners and producers, and the decisions that these individuals or firms will need to make.

First, from Title One, the new bill eliminates Direct Payments, the Counter-Cyclical program (CCP), the Average Crop Revenue Election program (ACRE), and the supplemental revenue assistance program. Marketing loans are retained and unchanged.

New offerings for 2014 through 2018 are Price Loss Coverage (PLC) and Agricultural Risk Coverage (ARC). PLC and ARC cannot be chosen for the same base acres and committing to either PLC or ARC is locked for the duration of the current Farm Bill (5 years). Also, for 2014 only, transition payments for current cotton base acres and yield will be available.

Two new Title Eleven products are Stacked Income Protection Plan (STAX) for planted cotton acres and Supplemental Coverage Option (SCO) for other covered program crops. Both STAX and SCO are an “insurance styled” revenue protection coverage.

For more detail on these new offerings click HERE and for a breakdown on each individual program click the acronym: ARC, PLC, STAX (including information on 2014 transition payments), and SCO.

With respect to base acres, landowners are provided the opportunity to reallocate the current base acre allotment. This attempts to bring current base allotment more in-line with recent plantings. The reallocation of covered commodities will be in proportion to the 4-year average of the planted acres (actual planted and prevented plantings) from 2009 to 2012 crop years. Also, yields can be updated to reflect 90% of the 5-year average from 2008 to 2012.

Given that cotton is no longer a covered (Title One) commodity, current cotton base can be converted to “generic” base. In any year that generic base is planted to a covered commodity, that base will fall in-line with the program choice for that commodity. For example, if soybeans are allocated to generic base in 2015 then the generic base will be follow the soybean program chosen (ARC or PLC). Then if corn were planted to the generic base in 2016, the generic base would follow the corn program chosen (ARC or PLC).

2014 Farm Bill: Nearing Completion

Late Monday evening (Jan 27) the conference committee of the U.S. House of Representative and the Senate finalized the Agricultural Act of 2014 putting the new farm bill on its path to approval. The House passed the bill today (Jan 29) by a vote of 251-166.  The Senate may vote tomorrow.  Much of the bill will go into effect in the near future.

As has been expected, the new legislation will abandon the long-standing direct payments. Also, the Average Crop Revenue Election and Counter-Cyclical programs that were introduced, respectively, in the 2008 and 2002 bills will transition to Agricultural Risk Coverage (ARC) and Price Loss Coverage (PLC). The marketing loan program will likely remain unchanged. Cotton will utilize its own program, Stacked Income Protection Plan (STAX).

Producers and/or landowners will face many decisions with the new legislation. First, base acres could have the option to be reallocated and yields can be updated. Second, producers must choose either ARC or PLC for all non-cotton base. With the ARC program, producers will then have the option to choose coverage at their individual farm level or at the county level. The PLC option can be combined with a supplemental layer of coverage, called Supplemental Coverage Option (SCO). However, SCO can be added without opting into PLC, but SCO cannot be combined with ARC.

ARC will be delivered by the Farm Service Agency (FSA) and, again, will trigger at either the farm or county level, depending on the producer’s decision. The county and farm level ARC will both kick in when the farm’s revenue declines 14% from a pre-calculated benchmark revenue. The benchmark revenue, for both options, is the five-year Olympic average[1] yield times the five-year average marketing year price. The county-triggered program will be commodity specific, use county yields and will be paid on 85% of base acres. The farm-level program will aggregate across all program crops, use farm yields, and will be paid on 65% of a producer’s base acres.

The PLC program will also be delivered by FSA and looks very similar to the previous Counter-Cyclical program. Each commodity (corn, peanuts, long and medium grain rice, grain sorghum, soybeans, and wheat — not cotton) has a set reference price and when the market year average price for each individual commodity falls below the reference price, the program will trigger. The program covers 85% of a producer’s base acres.

The STAX plan for cotton will provide an area based level of protection (i.e., county level) and will be delivered by the Risk Management Agency (RMA). Cotton producers electing STAX must pay a premium (similar to crop insurance). Like ARC, the STAX program is revenue based and will kick in when county level cotton revenues decline 10% below a county level benchmark (which is the five-year Olympic average[1] yield times the crop insurance spring time price). The program will continue to cover revenue losses from 10% to 30% below the benchmark and, even though yield and price are county level, the acres stem from the producer’s individual election.

SCO is available as a stand-alone program or can be coupled with PLC. It requires a premium, much like insurance, and provides coverage when revenue losses are 14% below the county level benchmark and will continue to cover losses until crop insurance kicks in.

So, none of these are easily digestible and, once elected, must be maintained for the life of the bill (currently slated to be in place for five years). As a result, a number of important decisions will need to be made. We are currently building an in-depth program that will cover these and other issues that are in the bill. As noted, the Senate will follow shortly thereafter. Once a final piece of legislation is known, look for this educational program to begin.

[1] An olympic average drops the highest and lowest values over the given time period. So, a five-year olympic average will discard the highest and lowest values over the five-year period thus giving an average over the three middle years.

Post written by John Michael Riley and Keith Coble