Last week in Part 3 we examined STAX insurance. This week we will discuss SCO insurance. Both are new insurance products developed in the 2014 Farm Bill in Title 11. For cotton, both STAX and SCO are available, although STAX is a cotton only product and SCO is available on lots of other commodities. STAX does not require an underlying policy to be purchased, but SCO does require and underlying policy.
The major difference between STAX and SCO is the coverage amount. For STAX, as explained last week, the coverage is from 90-70% of expected revenue. With SCO your coverage starts at 86% and goes down to your underlying policy. With both STAX and SCO, your underlying policy will not overlap your STAX/SCO coverage. If your underlying policy is a buy-up at 75%, then your STAX coverage would be from 90-76% or your SCO coverage would be from 86-76%. You can not purchase both STAX and SCO on the same acre, but you may have some farms with SCO and some with STAX, it all depends on your individual needs. Also, SCO is fixed at the 86% level down to your underlying policy. STAX can not be higher than 90% and no lower than 70%, but can be purchased in 5% increments within the 90-70% range. This means you could buy STAX and only cover from 85-70%, 80-70%, or 75-70%. Again, neither STAX nor SCO can overlap with an underlying policy, so you could potentially, for example, have a STAX product that was from 80-75% if your underlying policy if your underlying policy is a buy-up at 75%.
Like STAX, SCO is a area policy and is paid on expected versus actual area (usually a county) revenue for that growing season. The calculation for actual and expected revenue are the same as for STAX, which was explained in Part 3 last week. Unlike STAX, SCO follows the same option as your underlying policy, whether yield or revenue coverage. STAX is only a shallow loss revenue product. SCO will either be yield coverage, revenue coverage, or revenue coverage with the harvest price exclusion (the three main options for an underlying policy). The harvest price exclusion option is also available on STAX. SCO does not have the protection factor option like STAX. STAX has a premium subsidy of 80%, SCO has a premium subsidy of 65%, therefore a producer pays less of the premium cost with STAX than SCO.
Other than those differences laid out above, SCO operates much like STAX as an area wide shallow loss coverage plan. The best way to play with your numbers and see which product works best for you is to use an online decision aid found on our homepage.
In this section, Part 3 of our 2014 Farm Bill series, we will look at one of two new insurance options, STAX, the other new option being SCO. STAX and SCO are available for irrigated and non-irrigated practices, and both are area wide insurance products, with the county being defined as the area. This differs from almost all other insurance products which are based on an individual yield per farm or a grouping of farms operated by an individual in a county. Area wide insurance products are set up and triggered based on the the average of all acres of that crop in the county. In some instances, the defined area will actually be more than one county or may include other practices, i.e. irrigated coverage is based on non-irrigated data. This is the case for a few north Georgia cotton growing counties. Look at these two maps for irrigated and non-irrgated STAX/SCO coverage and you will see that 6 north Georgia counties’ irrigated coverage is based on non-irrigated practices.
STAX is a hacked acronym for Stacked Income Protection Plan. STAX is only available for cotton, whereas most insurance products are available for the majority of crops. STAX covers revenue from 90% down to 70%, meaning the maximum coverage amount is 20% of revenue. STAX does not require an underlying insurance policy, but the program is designed to be “stacked” on top of an underlying policy. STAX and your underlying policy can not both cover the same acre. So if your underlying policy is revenue protection up to 75%, then STAX covers from 90% down to 75%, instead of 70%. Coverage is specified in 5% increments when you purchase STAX. As mentioned earlier this is an area wide program. STAX is triggered when actual revenue for the county falls below 90% of expected revenue. Expected revenue is the projected price times the expected yield for the county. Our understanding is that the projected price is the same that is used in other insurance products. This should be the average of the December cotton futures contract close from mid-January to mid-February. For Texas cotton, I think it is the average close for the October contract for the month of January. The expected yield is based on RMA data for the county/area, which is why some areas are multiple counties and/or practices to ensure that enough data is used in the calculations. Actual revenue is the insurance harvest price times actual county yield. Harvest price is the same as the harvest price used in other insurance products which is the closing price of the December cotton futures contract in mid-October.
Another feature of STAX is the protection factor. The protection factor can be set in 1% increments from 80% up to 120%. The protection factor does not play into what triggers an indemnity payment. You must still have at least a 10% (90% of revenue) to trigger a payment. But that payment can be enhanced or reduced depending on protection factor. Basically you multiply expected indemnity by the protection factor. If the expected indemnity is $100 and you chose the 120% protection factor, then you get $120 payment. If you choose 80%, then you get $80.
As with other Farm Bill decisions, the easiest and least stressful thing to do would be to plug in your data into a decision aid to speed up calculations. Several decision aids with STAX computation abilities can be found on our homepage. I previously wrote about the USDA-RMA insurance decision aid not long after it was put on their website.
In 2014 Farm Bill Part 1 I covered some of the important things that you need to know, mainly dates, regarding the 2014 Farm Bill. I also touched on the yield update and base acre reallocation decisions. Yield and base acre decisions are the first topics to tackle, once you’ve made those decisions then you move on to the ARC/PLC decision. PLC decisions are for each farm (FSA#) and each crop. ARC is the same unless you take the ARC-Individual option, then all of your crops on that farm are in ARC-Individual. For this discussion I will only discuss the ARC-County option which will be more popular than the ARC-Individual option for our smaller counties in the South. ARC-Individual was mainly designed for very large counties in the West.
Agricultural Risk Coverage (ARC) is a program similar to ACRE in the 2008 Farm Bill. ACRE signup was pretty much non-existent in the Southeast because the Direct Payment and Counter-Cyclical programs were still offered. If a producer elected ACRE they were not eligible for Counter-Cyclical payments and took a reduction of Direct Payments. ACRE also was based on moving averages of yields and prices to calculate a target revenue (priceXyield=revenue), and therefore was harder to figure out whether a payment would be triggered. ARC is a county wide program and is similar ACRE in that a payment is triggered when actual county revenue is less than 86% of the benchmark revenue for the county. 86% is considered the ARC program guarantee (kind of like an insurance guarantee). Benchmark revenue is the 5 year olympic average yield (drop high and low year) for the county and 5 year olympic average price. Actual crop revenue is determined by actual county yield times the higher of loan rate or average marketing year price. ARC covers losses down to 76%, therefore ARC has a 10% coverage band from 86-76%. All county yield data used for calculations is FSA data, not NASS data and producers are paid on 85% of their base acres (similar to recent Farm Bills). Therefore, if you are looking at enrolling in ARC you will need a good idea of what the prices and yields for your ARC enrolled crops will be for the next 5 years. If you think that prices and yields will be declining in the future, then ARC will trigger a payment (if below the 86% level). If you think prices and yields will rise in the next 5 years, then ARC will not trigger payments. The more likely senario is that prices may decline while yields increase, or yields decrease and prices rise. Generally speaking, price and yield are inversely related in US agriculture, meaning when there are big yields and a bumper crop, prices drop. When there are bad yields and a short market, prices rise. The basic supply and demand principle. This makes the ARC decision extremely complicated because no one has a crystal ball and can predict the weather and other forces for the next 5 years that will affect the prices and yields for ARC enrolled crops. The easiest way to muddle through this decision is to use one of the decision tools found on our homepage.
Price Loss Coverage (PLC) is a program similar to the old Counter-Cyclical program of the ’02 and ’08 Farm Bills. A payment is triggered when the Effective Price falls below the Reference Price. The Reference Price is set in the bill and therefore does not change throughout the life of the bill (5 years). The Effective Price is the higher of the loan rate or the average marketing year price. PLC is a little easier to calculate in that you know a payment is triggered if the average marketing year price is lower than the listed Reference Price (the loan rate will always be lower than the reference price as it is set in the bill as well, therefore for a payment trigger you just look at average marketing year price). As with the old Counter-Cyclical program, PLC pays on payment rate (Reference Price – Effective Price) times program yield times base acres times 85% (usually referred to as 85% of base). If you have a good idea that the commodity prices will stay below the Reference Price, then you know PLC should trigger a payment. What is very important to understand is that the average marketing year price is a national price and not your local price. This local price could be either a spot price (cash price) or a contract price. This could factor in heavily when you look at some differences in the national price of peanuts or corn versus a local price in Georgia. Again, the PLC payment rate is the Reference Price minus the higher of the average marketing year price or the loan rate. The average marketing year price may be very close to the reference price but your local price could be a good bit lower. This is something that has to be factored into your decision. As with ARC, I would suggest you use on online decision tool to aid in making PLC calculations and trying to figure out any potential future payments.
In closing, it shouldn’t have to be noted that the ARC/PLC decision is a very complex one. These program are not like the older programs where you just sign up your acres; you have to take time to see which program works best for you. Since these are a crop by crop and farm by farm decision, you may end up with farms with both PLC and ARC, or all PLC, or all ARC. My best advice is to understand the basics of how each program works and put your data into a decision aid to help you calculate potential future payments.