Considerations for Adding SCO Crop Insurance

Steve Johnson, headshot

Contributed by Steve Johnson, Extension Farm Management Field Specialist, sdjohns@iastate.edu

The decision to purchase Supplemental Coverage Option (SCO) crop insurance in 2020 must be confirmed with your crop insurance agent on or before March 15, 2020. This deadline for making crop insurance changes for spring planted crops now becomes the same deadline for electing and enrolling annually in the ARC/PLC program at your local USDA Farm Service Agency (FSA) office.

The SCO product is available to producers who elect and will enroll in the Price Loss Coverage (PLC) commodity crop program on a farm in 2020. With the ongoing election/enrollment in the ARC/PLC program this winter, the expectation of many experts is that most farmers will choose the PLC program on their corn base acres. However, the ARC-County (ARC-CO) program will be the choice for most soybean base acres.

The SCO band of coverage is based on the county revenue given that the underlying COMBO crop insurance product, likely Revenue Protection (RP) is also purchased. SCO provides a protection in a band at an 86% maximum level down to the coverage level selected for RP. An example would be a farmer who selects a 75% coverage level for RP and adds the SCO product. Thus, SCO could provide county-based revenue coverage from the 86% to the 75% level, or 11% total SCO.

To trigger an indemnity claim the actual county revenue must fall below 86% of the county revenue guarantee before SCO would trigger a payment. As a result, the RP-SCO combination provides mixed coverage: Farm-level coverage is provided from the RP product downward (65%, 70%, 75%, 80% and 85% levels) while county-level coverage provides between 86% and the coverage level of the RP product.

The primary disadvantage of the RP-SCO combination is that the county-level coverage may not match losses on a farm. Sometimes a farm may have a large revenue loss while SCO will not trigger a payment. It’s also possible that the farm does not have a loss while the county-based SCO product triggers a payment. Note that if an SCO indemnity payment is made, the farmer will not receive it until the June following harvest when USDA’s Risk Management Agency (RMA) releases the final county yields.

The primary advantage of purchasing an RP-SCO combination product is a lower overall farmer-paid premium. However, consider if your county yields are typically less variable than your farm’s yields. This could result in fewer indemnity claims for a county-based product than for that farm-level product at the same coverage level. SCO has a government subsidy rate of 65% which is higher than the rate for RP at the 85% coverage levels using enterprise units. This 65% subsidy rate is higher than all subsidy levels for basic and optional units when the coverage level is above 50%.

Farmers who typically purchase RP at high coverage levels (80% and 85%) will likely find a slightly lower farmer-paid premium by adding SCO. But consider a couple cautions before you add the SCO product in 2020. First, make sure your farm’s yields are reflecting your county’s yields. Second, if an SCO indemnity payment is triggered, don’t expect to receive those proceeds until the June following harvest.

Be aware of the time constraints that both FSA county office staff and crop insurance agents will have as this March 15, 2020 deadline approaches. Prepare now to elect and enroll in the ARC/PLC programs for your farms and perhaps update your PLC yields that will be effective for the 2020 crop. Then discuss with your agent the crop insurance changes you’ll be making in 2020 including the possibility of adding the SCO product if you will be enrolling in the PLC program for that crop.

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ARC/PLC Decision Deadlines Loom

Steve Johnson, headshot

Contributed by Steve Johnson, Extension Farm Management Field Specialist, sdjohns@iastate.edu

Iowa producers on row crop farms have until March 15 to make a 2-year election and then enroll by commodity crop and USDA Farm Service Agency (FSA) farm number. There really is no reason to delay, as no ARC-CO/PLC payments are projected for the 2019 crops. Besides, many FSA offices could be swamped as the deadline approaches.

Undecided producers should start by understanding the importance of the effective reference prices of $3.70 per bushel for corn and $8.40 per bushel for soybeans. In order to trigger a PLC payment, the final national cash for the entire marketing year must be below these levels. The national cash price projections for the 2019 crop as of January 10, 2020 are $3.85 per bushel for corn and $9.00 per bushel for soybeans, respectively. Thus, no PLC payments are expected for corn and/or soybean base acres that are elected and enrolled in the PLC program.

If there are 2019 ARC-CO or PLC payments, it will likely be in a county with exceptionally low 2019 final yields. These final county yield numbers from the USDA Risk Management Agency (RMA) will not be known until later this year. The 2019 Iowa yields from the USDA National Agricultural Statistics Service (NASS) January report were estimated to be 198 bushels per acre corn and 55 bushels per acre for soybeans. Such levels indicate that most final county yields are likely too high to trigger a 2019 ARC-CO payment.

If there is a 2019 payment, it will likely be under the ARC-Individual (ARC-IC) program. The producer probably has a farm with poor 2019 yields and possibly prevented planting acres. That producer should consider electing and enrolling all crops by FSA farm number in the ARC-Individual (ARC-IC) program if a likely payment will be generated. It will require further examination and production evidence for each commodity crop produced on that farm since the 2013 crop year.

It’s actually for 2020, that an ARC/PLC payment seems more likely. Corn and soybean planted acres are expected to increase by roughly 11 to 12 million total planted acres for both crops as a result of the large prevented planting acres in 2019. Two sources of 2020 price projections released last fall are the USDA Outlook and the Food Agricultural Policy Research Institute (FAPRI) at the University of Missouri. Both sources project an increase in 2020 US corn planted acres by 2.5 to 4.5 million acres and use 30-year trendline yields assuming normal production. Those 2020 crop cash price projections for corn are $3.40 and $3.53 per bushel, respectively. Thus, the likelihood of a 2020 PLC payment for corn that would be received in October 2021, as the final cash price would fall below the reference price of $3.70 per bushel.

Using those same two sources for 2020 soybean cash price projections, US soybean planted acres would increase between 7.5 and 8.5 million acres as compared to 2019.  Again, they use 30-year trendline yields and normal production. Those 2020 crop cash price projections for soybeans are $8.54 and $8.85 per bushel, respectively. Thus, no 2020 PLC payment for soybean base acres is expected as the final cash price is not below the effective reference price of $8.40 per bushel. However, the lower national cash price improves the chances of ARC-CO payments for soybean base acres depending on the final county yields.

Producers will also have a one-time chance to update their PLC Farm Yields starting with the 2020 crop. Even if a producer elects the ARC-CO or ARC-IC program option, the PLC yield can be updated and becomes the public record of the farm’s yield. Supporting evidence for the PLC Yield Update will likely come from a producer’s crop insurance records if a program crop was produced in the 2013 thru 2017 crop years. In some cases, the yields for a crop insurance unit might not match with the FSA farm number and will need to be averaged. Note the farmland owner on cash rent farms will need to approve this PLC Yield Update and sign the form CCC-867 unless a power of attorney form is on file.

Use the ISU Ag Decision Maker ARC/PLC Payment Estimator and PLC Yield Update Tools to provide your analysis. More Information on the 2018 Farm Bill, including web casts on various pieces of the program, can be found on the Ag Decision Maker Farm Bill page.

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Supplemental Coverage Option for 2019 Crops

Contributed by Steve JohnsonFarm Management Specialist, Iowa State University Extension and Outreach, sdjohns@iastate.edu

Headshot of Steve JohnsonSupplemental Coverage Option (SCO) crop insurance was introduced in the 2014 Farm Bill but was limited to acres enrolled in the Price Loss Coverage (PLC) commodity program. SCO was not available when Agricultural Risk Coverage (ARC) was chosen by crop by FSA farm number. ARC was the choice for nearly 98 percent of the Iowa’s base corn acres and over 99 percent of the base soybean acres from 2014 through 2018.

As a result, SCO was not a crop insurance choice for very many farms through 2018. Similar to the 2014 Farm Bill the 2018 Farm Bill again gives farmers a choice by crop by FSA farm number to elect and enroll in either the ARC-County or the PLC program.

However, with the 2018 Farm Bill being implemented in 2019, the expectation of some experts is that many farmers will eventually enroll in the PLC program for the 2019 and 2020 crop years, especially on their corn base acres. That’s because of the potential for the PLC program to trigger payments should the final national average cash price fall below the $3.70 per bushel reference price. Enrollment in PLC will lead to more insured crop acres being eligible for the purchase of SCO. For 2019, SCO premiums appear very attractive as compared to Revenue Protection (RP) at higher coverage levels.

Coverage based on county revenue

The SCO band of coverage will be based on the county revenue given that the underlying crop insurance product is RP. SCO provides a protection in a band at an 86 percent maximum level down to the coverage level selected for RP. An example would be a farmer who selects a 75 percent coverage level for RP in addition to the SCO product. Thus, SCO could provide county-based revenue coverage from the 86 percent to the 75 percent level.

To trigger an indemnity claim, a county-based revenue must fall below 86 percent of expected revenue before SCO makes a payment. As a result, the RP-SCO combination provides mixed coverage: Farm-level coverage is provided from the RP product downward while county-level coverage provides between 86 percent and the coverage level of the RP product.

The primary disadvantage of the RP-SCO combination is that the county-level coverage may not match losses on a farm. Sometimes a farm may have a loss while SCO will not trigger a payment. It’s also possible for the farm to not have a loss while the county-based SCO product triggers a payment.

Premiums under RP-SCO combinations

The primary advantage of using SCO is a lower farmer-paid premium. The costs of an RP-SCO combination product will usually be lower than the 85 percent RP product alone for two reasons.

First, the county yields are typically less variable than the farm yields, resulting in fewer payments for a county-based product than for a farm-level product at the same coverage level. Lower payments then result in a lower premium. Second, SCO has a subsidy rate of 65 percent which is a higher than the RP at the 85 percent coverage levels using enterprise units. This 65 percent subsidy rate is higher than all subsidy levels for basic and optional units when the coverage level is above 50 percent. These government paid premiums are reflected in Table 1 below.

table showing premium assistance levels on farm-level products

Who should consider SCO?

Farmers who typically purchase RP at high coverage levels could find SCO useful, particularly if a lower coverage level is selected that might result in a lower farmer-paid premium. However, the farmer should have the intention of eventually electing and enrolling those crops on those farms in the PLC program. Farmers interested in SCO coverage for 2019 should discuss premiums and choices with their crop insurance agent before the March 15 sales closing deadline on spring planted crops.

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Farm Bill Safety Net Payments Provide Producers Small Cushion

ajsmplastina_alejandro_2014Alejandro Plastina, ISU Extension Economist, and Ann Johanns, Extension Program Specialist, provide an explanation of the data used in calculating 2015 ARC-CO payments in Iowa.

Final data on 2015 county level yields was recently released by the USDA Farm Service Agency. This is the final information needed for calculating payment rates under the Agriculture Risk Coverage-County (ARC-CO) program.

The Marketing Year Average (MYA) prices for the marketing year starting Sept. 1, 2015 and ending Aug. 31, 2016 were $3.61 for corn and $8.95 for soybeans. The payments released by the USDA Farm Service Agency starting in October 2016 are for crop acres enrolled during the 2015 crop year.

Payments under the 2014 Farm Bill are tied to the base acres on a farm and are not influenced by the crop grown in the payment year.

ARC-CO Payments

2015 ARC-CO payments on corn base acres (payments rounded to nearest dollar)
2015 ARC-CO payments on corn base acres (payments rounded to nearest dollar)

ARC-CO payments by base acre for corn and soybeans are shown in Figures 1 and 2. Under the ARC-CO program, producers receive payment on 85 percent of their base acres. This 15 percent reduction is factored into the values seen in the related figures. Furthermore, a 6.8 percent deduction is applied due to the federal government’s sequestration of the budget. Seven counties (Appanoose, Decatur, Henry, Lucas, Marion, Monroe and Washington), all located in the south central and southeast portion of the state, will not see a payment for corn or soybean acres.

Eight counties (Clarke, Jefferson, Keokuk, Pottawattamie, Ringgold, Van Buren, Warren and Wayne) will receive a payment on soybean acres and not on corn. Another 26 counties will receive a corn payment and no soybean payment (Adair, Bremer, Buena Vista, Calhoun, Carroll, Cerro Gordo, Clay, Davis, Dickinson, Emmet, Floyd, Franklin, Guthrie, Hancock, Howard, Humboldt, Kossuth, Madison, Mitchell, Monona, Palo Alto, Pocahontas, Sac, Winnebago, Worth and Wright). Base acres enrolled in ARC-CO in the remaining fifty-eight counties will receive a payment at some level for both crops.

soybeanpayments2016
2015 ARC-CO payments on soybean base acres (payments rounded to nearest dollar)

PLC Payments

With the 2014 Farm Bill, Iowa producers had two options to choose from, ARC-CO or Price Loss Coverage (PLC). The PLC program provided a safety net for producers should the MYA prices be below the set reference prices of $3.70 for corn and $8.40 for soybeans. No payments were seen in Iowa under the PLC program for 2014, but a small payment will be received for corn base acres enrolled in PLC for 2015. The payment per bushel will be $0.07 (after 6.8 percent sequestration) and based on yield information at the farm level. Producers were given the option to update their yield information with FSA during program sign-up.

Statewide Payments

The average ARC-CO payment per base acre on corn was $33.51 and $15.68 for soybean acres in Iowa. With over 22 million base acres in the state enrolled in ARC-CO or PLC, estimated payments for Iowa producers under ARC-CO for the 2015 marketing year is approximately $646 million with another $3.8 million going towards corn base acres enrolled in PLC.

More information on the 2014 Farm Bill, including decision tools to see detailed calculations of payments by county, are available through the Ag Decision Maker website. Maps of payments can be found through the Center for Agricultural and Rural Development Farm Bill mapping tool. Projections for 2016/17 payments are updated regularly as information is released by USDA FSA.

Why it is not OK to use NASS yields to calculate ARC-CO payments

plastina_alejandro_2014Alejandro Plastina, ISU Extension Economist, provides explanation of the yield data used in calculating ARC-CO payments in Iowa.

On February 22 2016, the USDA National Agricultural Statistical Service (NASS) released the final county crop production estimates for 2015: 73 Iowa counties had higher corn yields in 2015 than in 2014, 22 had lower yields, and 2015 corn yields were not reported for Mills, Monroe, Taylor, and Union County; 86 counties had higher soybean yields, 11 had lower yields, and 2015 soybean yields were not reported for Taylor and Mills County.

Knowing that higher county yields reduce the likelihood and the potential amount of ARC-CO payments, the NASS release spurred the interest of producers to recalculate their own projected ARC-CO payments for the 2015/16 crop marketing year. However, two important details often overlooked when calculating projected ARC-CO payments are (1) that county yields are determined on a per planted acre basis, as opposed to a per harvested acre basis; and (2) that the official county yields used in the final calculation of ARC-CO payments are published by USDA Farm Service Agency (FSA), as opposed to NASS.

NASS yields are calculated as production (in bushels) divided by harvested acres. Since they are not determined on a per planted acre basis, they cannot be used to calculate ARC-CO payments.

FSA yields are only available after the end of the crop year and are calculated on a per planted acre basis. Therefore, most of the difference between FSA and NASS yields is explained by failed acres. The average difference between FSA and NASS county corn yields in Iowa for 2014/15 (the only year for which both yields are publicly available), amounts to 4.75 bushels per acre.

arcco3232016In an effort to reflect the impact of failed acres on the yield used to project ARC-CO payments, the ISU Projected ARC-CO Payment Calculator uses “corrected” yields in the calculation of the 2015/16 actual county crop revenue. The “corrected” yields are based on NASS production data and obtained by dividing production (in bushels) by planted acres. For 63 Iowa counties the “corrected” yields in 2014/15 were closer to the official FSA yields than NASS yields were. For example, the corn yield used by FSA to calculate ARC-CO payments for Lyon County in 2014/15 is 149 bushels, while the NASS yield is 172.9 bushels, and the “corrected” yield is 155 bushels. The average difference between FSA and “corrected” corn yields amounted to 0.42 bushels per acre.

Judging by the release date of 2014 county yields by FSA on October 23, 2015, it can be expected that FSA will release final 2015 county yields in October 2016, at about the same time as the 2015 ARC-CO payments. Until then, the ISU ARC-CO Payment Calculator will use a “calculated” yield and projected marketing year price until the price for the marketing year is finalized the end of September.

All ISU Extension and Outreach Farm Bill decision tools are available online at: http://www.extension.iastate.edu/agdm/info/farmbill.html

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