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Crop Insurance and the Supplemental Coverage Option in the 2018 Farm Bill

Crop Insurance and the Supplemental Coverage Option in the 2018 Farm Bill. Ben Brown Department of Agricultural, Environmental, and Development Economics. Federal Crop Insurance Program: Outline. Background of the Federal Crop Insurance Program Changes in the 2018 Farm Bill

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Crop Insurance and the Supplemental Coverage Option in the 2018 Farm Bill

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  1. Crop Insurance and the Supplemental Coverage Option in the 2018 Farm Bill Ben Brown Department of Agricultural, Environmental, and Development Economics

  2. Federal Crop Insurance Program: Outline • Background of the Federal Crop Insurance Program • Changes in the 2018 Farm Bill • Supplemental Coverage Option (SCO) • Questions to ask your Crop Insurance Agent • Final Thoughts Photo Credit: Carah Hart (Top) Paige Clawson (Bottom)

  3. Crop Insurance: Background on Program 1990 Farm Bill • Crop Insurance has not always been in the Farm Bill • Modern Crop Insurance Policy is tied to 1994 when we tied them to Title 1 Programs; cat coverage; higher subsidies. • Largely due to the 1995 Uruguay Round and the 1996 Farm Bill- Crop Insurance has become more Market Orientated • The term “Risk Management” for producers is key in D.C. • Very little change in the last 2 Farm Bills 1994 Crop Ins. Act 1996 Farm Bill 1995 Uruguay Round 2000 ARPA 2002 Farm Bill 2008 Farm Bill 2014 Farm Bill 2018 Farm Bill Slide Reference: Keith Coble, OSU Farm Bill Summit

  4. Crop Insurance: Background on Program Insured Acres Data Source: Risk Management Agency, Summary of Business

  5. Federal Subsidy Levels per Acre 2018 Corn, but could show a similar one for Soybeans Source: Keith Coble, 2019 Farm Bill Summit

  6. Crop Insurance Expected Payments Data Source: Congressional Budget Office- May 2019 Baseline

  7. Crop Insurance Plan Premiums- Nationwide 2018 Data Source: Risk Management Agency, Summary of Business

  8. 2018 Farm Bill Changes to Crop Insurance 1. Allows producers to establish a single enterprise unit by combining across counties or enterprise units with basic units and optional units in one or more counties. 2. Cover Crops defined as Good Farming Practice 3. New Product Research Photo Credit: Aaron Diedrich

  9. What did not happen to Crop Insurance in 2018 • Capping the total subsidy at $40,000/ farmer or entity • Tightening Adjusted Gross Income Limits- similar to the Title I commodity Programs • Unsubsidizing the Harvest Price Option (HPO) • Reducing Subsidy Percentages by 14% Senator Pat Roberts, Chairman of the Senate Committee on Agriculture, Nutrition and Forestry, Retiring 2020 - Photo Credit: Library of Congress

  10. Definitions of Crop Insurance Units • Optional Units: Each farm is separate • Basic Units: Combine owned and cash rented acres in same county • Enterprise Units: Combine all acres of the same crop in same county* • As long in adjacent counties as long as it’s not available for an enterprise unit in another county • Whole Farm: Combine all crops on farm

  11. Enterprise Units as Share of Insured Acres 2018 Corn, but could show a similar one for Soybeans Enterprise Units- Share Source: Keith Coble, 2019 Farm Bill Summit

  12. Mandated Research Projects to Strengthen Program • Whole Farm Revenue Protection • Tropical Storm or Hurricane Insurance • Quality Loss • Citrus • Hops • Subsurface Irrigation practices • Grain Sorghum • Limited Irrigation Practices • Rice Irrigation • Greenhouse • Local foods • Requires Data Collection through NAP • Separate Crop Insurance Policies for grazed and mechanically harvested grain • Allows hemp to be added to the list of insured crops

  13. Supplemental Crop Insurance Program (SCO) What is it? • First rolled out in the 2014 Farm Bill to increase crop insurance protection at a cheaper rate. • Covered under the Federal Crop Insurance Program with a premium similar to COMBO and Yield Insurance products • Separate Administration Fee • Based on typically county revenue or yield benchmark • (Not an individual benchmark like the underlying policy) • Only available on individual policies not area • Enrollment Period- Ends March 15 • (Similar to COMBO and Yield products)

  14. Eligibility for Supplemental Coverage Option Elect a Federal Commodity Program Price Loss Coverage Agricultural Risk Coverage- County Agricultural Risk Coverage- Individual Paid on 85% of Base Acres Paid on 85% of Base Acres Paid on 65% of Base Acres Supplemental Coverage Option Paid on COMBO Purchased Planted Acres Data Source: USDA-FSA, ARC and PLC Landing Page

  15. Supplemental Crop Insurance 2019 Because crop insurance election and ARC/PLC selection didn’t happen at the same time in 2019: • A producer is only eligible for SCO if he or she signed up before March 15, 2019 with the underlying crop insurance policy • Producers were supposed to notify RMA of ARC/PLC choice by July 15, but could drop SCO if ARC was chosen later • This did not lock in the ARC/PLC decision for producers In the past and in the future: • A producer can drop SCO from their policy if he or she selects ARC, but with a penalty of 20% of SCO premium • (given that enrollment due date will be the same going forward- this shouldn’t be a problem • For 2019- the 20% penalty for misreporting eligible acreage will not apply due to the delayed ACR/PLC sign-up

  16. Availability of SCO- Corn Image Source: USDA-RMA Map Viewer

  17. Availability of SCO- Soybean Image Source: USDA-RMA Map Viewer

  18. Availability of SCO- Wheat Not Available in Ohio Counties: Belmont, Gallia, Guernsey, Jackson, Jefferson, Meigs, Monroe, Morgan, Noble, Vinton Image Source: USDA-RMA Map Viewer

  19. Purpose of Supplemental Coverage Option • Provides additional coverage on top of an already existing individual policy • But not area or index policies • Allows coverage to equal 86% • Uses the same coverage as your underlying policy (i.e. yield or revenue) • Designed to make PLC comparable to ARC-CO. • ARC-CO coverage range is 76%-86% • Only available on PLC elections

  20. SCO and Federal Crop Insurance

  21. SCO Nuts and Bolts • Yield SCO: Based on AreaYields • Payment triggers when: actual county yield falls below 86% of expected county yield • Revenue SCO: Based on AreaRevenue • Expected County Revenue- expected county yield * crop insurance price • Payment triggers when: actual county revenue falls below 86% of expected county revenue • Crop Insurance SCO Price and County Revenue: • Revenue Option- the higher of the Projected or Harvest Price • Yield Option- the Projected Price

  22. SCO Nuts and Bolts Possibilities • RP and SCO both make payments • (drought years like 2012) • RP makes a payment and SCO does not • Farm has worse yield comparable to history than the county historical comparison • SCO makes a payment and RP does not • Price declines, but not low enough to trigger RP payment. (Low coverage levels) • Neither trigger a payment • Ohio crop insurance policies the last few years

  23. SCO- Example Producer purchases Revenue Protection with 70% coverage level and SCO. • Two Independent Payments • RP 70% provides farm-level coverage up to a 70% coverage level • SCO provides county-level coverage from 86% to 70% • It is the RP policy that covers prevented planting coverage and payments. SCO is an area policy and does not cover prevented plant.

  24. SCO Coverage with RP- Coverage • Farm Example: • 170 Trend Adjusted Actual Production History • $4.00 Projected Price • RP at 70% Coverage Level • Actual County Yield 140 • $3.80 Harvest Price Supplemental Coverage Range: 0.86- 0.70= 0.16 Supplemental Coverage: Coverage Range x TA-APH x (higher of projected price or harvest price) * Supplemental Coverage: 0.16 x 170 x $4.00= $108 (Max payment) *If Yield policy it would have been projected price only

  25. SCO Coverage with RP- Loss • Farm Example: • 170 Trend Adjusted Actual Production History • $4.00 Projected Price • RP at 70% Coverage Level • Actual County Yield 140 • $3.80 Harvest Price Loss Occurs when actual county revenue is less than 86% of expected county revenue Expected County Revenue: Expected Yield X Projected Price Expected County Revenue: 170 x $4.00 = $680 Revenue Trigger: Expected County Revenue x SCO Coverage Level Revenue Trigger: $680 x 86%= $584.80 Actual Revenue: County Yield x Harvest Price Actual Revenue: 140 x $3.80 = $532 Since $532 < $584.80, we know there is going to be a SCO payment

  26. SCO Coverage with RP- Payment • Farm Example: • Expected County Revenue: $680 • Revenue Trigger: $584.80 • Actual Revenue: $532 SCO only pays on a portion remember! The Revenue Policy pays on the 70% Actual Revenue Percent= Actual Revenue divided by Expected Revenue Actual Revenue Percent= $532/ $680= 78% SCO Range: 86% minus original coverage SCO Rage: 86%- 70%= 16% Loss Range: 86% minus Actual Revenue Percent Loss Range: 86%- 78%= 8% County Payment Factor: Loss Range/ SCO Range County Payment Factor: 8/16

  27. SCO Coverage with RP- Payment • Farm Example: • SCO Range: 16% • Loss Range: 8% • County Payment Factor: 0.5 • SCO Coverage (Max Payment) = $108 Payment: SCO Coverage x Payment Factor Payment : $108 x 0.5 = $54

  28. Supplemental Coverage Option- Premiums Example: Union County Ohio, Corn, APH- 166, 160 Acres, $4.00 Projected Price, Revenue Protection, Non-Irrigated Source: FAST Tools University of Illinois Make sure to consult with your crop insurance agent as premiums change based on multiple indicators

  29. Supplemental Coverage Option- Premiums Example: Union County Soybean, Soybean, APH- 50, 160 Acres, $4.00 Projected Price, Yield Protection, Non-Irrigated Source: FAST Tools University of Illinois Make sure to consult with your crop insurance agent as premiums change based on multiple indicators

  30. Supplemental Coverage Option- Premiums • Why is 70% RP with SCO less than 85% RP? • Chance of a payment • County Yields are traditionally less variable than farm-level yields and so have a lower risk and premium. • Premium assistance rates provided by the federal government also differ • (SCO premium assistance is 65%) Source: USDA Risk Management Agency Summary of Business

  31. Pros and Cons of SCO Producer Currently with 70% or 75% (Less than max) Pro: Get county-level coverage up to 86% at a lower cost. Con: Adds additional costs to premium for more coverage than they usually buy Producer Currently with 85% RP Coverage Pro: Reduces the Premium to get 86% coverage Con: Gives up the top end of farm-level coverage and replaces it with typically less volatile county-coverage

  32. Is SCO Right for my Operation? • Not Available if enrolled in the ARC-CO or ARC-IC programs. • Relationship of Base Acres to Planted Acres • SCO is on Planted Insured Acres and ARC/PLC is on 85% of Base Acres • If planted acres > base acres: then SCO could be a cheaper option to get higher coverage levels. • Relationship of Individual Yields to County Yields • SCO is not available on area policies, but triggers based on area revenue or yield

  33. Is SCO Right for my Operation? Under PLC- the producer has decisions to make related to crop insurance 1) Add SCO to policy? • Uses County Trigger (will county coverage reflect farm loss?) • SCO has cheaper premium rates 2) Buy higher coverage levels on underlying policy? • Most Ohio farms already have a high coverage level (80% or 85%) 3) Maintain a low coverage level on existing policy?

  34. Is SCO Right for my Operation? For SCO- Yields and Revenue go to: https://webapp.rma.usda.gov/apps/actuarialinformationbrowser/

  35. Questions to Ask Your Crop Insurance Agent • Do I qualify for enterprise units across county lines? • Do I qualify for trend adjusted yields? • Do I qualify for Actual Production History Yield Exclusions (APH-YE)? • What is the premium for different coverage levels including SCO? • What about separate coverage levels by cropping practice?

  36. Complete Crop Risk Management • Financial Management • Liquidity, Solvency, Repayment Capacity Profitability, and Financial Efficiency • Cost Control- Managing Expenses • Cost and Revenue Benchmarking • Integrated crop insurance, commodity program and forward or futures pricing • Data and Record Collection and Analysis • Big Data and Geolocation Identifications

  37. Final Thoughts • Just because crop insurance has been successful in avoiding cuts in the last two farm bills- does not mean it will continue that way. • Prevented Planting in 2019 will bring increased attention to the design of the policy. • Ad hoc Disaster Legislation like the 2019 Federal Disaster Aid Bill and the Market Facilitation Program go against a fundamental reason for federal crop insurance. Crop Insurance does not protect stored grain as seen in Iowa and Nebraska in 2019, Photo Credit- KCCI News

  38. This material is based upon work supported by the USDA-NIFA under Award Number 2018-70027-28586 and prepared by Ben Brown- The Ohio State University College of Food Agriculture and Environmental Sciences with reference of information to Art Barnaby- Kansas State University, Keith Coble- Mississippi State University, Gary Schnitkey-University of Illinois and MonteeVandeveer- Kansas State University

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