Do You Qualify For Supplemental Crop Insurance?

Do You Qualify For Supplemental Crop Insurance?

FBN Insurance

Jan 21, 2022

In the coming months, farmers across the U.S. will make their decision on crop insurance for the year before hitting the fields for spring planting season.

How confident are you in your coverage? Do you feel like there is more you can be doing to reduce risk?

In this article, we'll break down the three options for supplemental insurance policies to make sure you are set up for success in 2022. These three options are:

  • Supplemental Coverage Option (SCO)

  • Enhanced Coverage Option (ECO)

  • Stacked Income Protection (STAX)

When 85% Revenue Protection Just Isn’t Enough

We are all aware that input costs continue to rise and approved trend adjusted yields are not keeping up with expected yields. This has caused many producers who have historically purchased an upper level Revenue Protection (RP) policy to look at the 80% or 85% revenue guarantee and realize this may not be enough revenue to satisfy their risk management program.

The Supplemental Coverage Option (SCO) and the Enhanced Coverage Option (ECO) provide an opportunity to increase both yield and revenue coverage to a level that provides better financial coverage.

[Overwhelmed by options? Our team is here to help you choose the right crop insurance program to manage your unique situation. Call us at 877-576-4468 to speak to an agent about which solutions are right for your farm.]

Supplemental Coverage Option (SCO)

SCO is a county-level crop insurance option that provides additional coverage for a portion of a producer’s underlying crop insurance policy deductible. Producers must buy it as an endorsement to either the Yield Protection, Revenue Protection, or Revenue Protection with the Harvest Price Exclusion policies.

It was originally offered in 2015 for select counties. Thanks to its success, the program has expanded throughout the country for many different crops. The federal government provides a 65% premium subsidy for SCO total premium.

How Does SCO Work?

SCO follows the coverage of your underlying policy. If you choose Revenue Protection, then SCO covers revenue loss. If you choose Yield Protection, then SCO covers yield loss. The amount of SCO coverage depends on the liability, coverage level, and approved yield for your underlying policy. However, SCO differs from the underlying policy in how a loss payment is triggered.

The underlying policy pays a loss on an individual basis and an indemnity is triggered when you have an individual loss in yield or revenue. SCO pays a loss on an area basis, and an indemnity is triggered when there is a county level loss in yield or revenue.

The following is an example of a corn grower’s policy:

Grower APH: 200

County Expected Yield: 205

Underlying Policy: 75% RP

County SCO Coverage: 86%

Spring Price: $5.50

Harvest Price: $5.00

Producer Yield: 180

County Yield: 180

Expected Revenue: $1,100

Expected County Revenue: $1,127.50

The underlying policy covers 75% (or $825) of the expected crop value and leaves 25% (or $275) uncovered as a deductible.

In this example, SCO would begin to pay when the County Average Revenue falls below 86% of its expected level ($969.65). 

It would pay out fully when the county average revenue falls to the coverage level of the underlying policy ($845.62, 75% of expected county revenue).

This example would provide $121.00 of coverage per acre based on 11% of the producer’s expected revenue (86%-75%). 

The dollar amount of SCO coverage is based on the percent of crop value covered. In this example there are 11 percentage points of coverage (from 86% to 75%).

11% of the expected crop value is $121.00 (or 11% • $1,100.00).

The SCO policy can cover up to $121.00 of the $275 deductible amount not covered by your underlying policy.

Is SCO a Good Fit for You?

This policy is a good fit for producers that trend with or better than the county. SCO payments are determined only by county average revenue or yield, and are not affected by whether you receive a payment from your underlying policy.

It is possible to experience an individual loss but to not receive an SCO payment, or vice-versa.

This policy may not be a good fit for producers that do not have yields that trend on average below the county. If you have a crop that yields less than the county, you may miss out on an indemnity even though you had a poor crop.

The 65% subsidy makes this attractive to many producers because this allows them to increase their coverage to 86% at a much more affordable premium versus the higher cost upper level RP plans in certain areas of the country.

Enhanced Coverage Option (ECO)

ECO is a county-level crop insurance option that provides additional coverage for a portion of a producer’s underlying crop insurance policy deductible. Producers must buy it as an endorsement to either the Yield Protection, Revenue Protection, or Revenue Protection with the Harvest Price Exclusion policies.

Originally offered in 2021 for select counties, the program has expanded throughout the country for many different crops. The federal government provides a 44% premium subsidy for ECO with a RP underlying policy and 51% premium subsidy with a YP underlying policy .

How Does ECO Work?

ECO follows the coverage of your underlying policy. If you choose Revenue Protection, then ECO covers revenue loss. If you choose Yield Protection, then ECO covers yield loss. Coverage levels can be purchased at a 90% or 95% level. This will provide 4% or 9% of the total expected crop revenue for coverage.

The amount of ECO coverage depends on the approved yield for your underlying policy. However, ECO differs from the underlying policy in how a loss payment is triggered. The underlying policy pays a loss on an individual basis and an indemnity is triggered when you have an individual loss in yield or revenue.

ECO pays a loss on an area basis, and an indemnity is triggered when there is a county level loss in yield or revenue.

The following is an example of a corn grower’s policy:

Grower APH: 200

County Expected Yield: 205

Underlying Policy: 75% RP

County ECO Coverage: 95%

Spring Price: $5.50

Harvest Price: $5.00

Producer Yield: 180

County Yield: 180

Expected Revenue: $1,100

Expected County Revenue: $1,127.50

The underlying policy covers 75% (or $825) of the expected crop value and leaves 25% (or $275) uncovered as a deductible.

In this example, ECO would begin to pay when the County Average Revenue falls below 95% of its expected level ($1,071.12). 

It would pay out fully when the county revenue falls to the 86% level ($969.65, 75% of expected county revenue).  

This example would provide $99.00 of coverage per acre based on 9% of the producer’s expected revenue (95-86%). 

The dollar amount of ECO coverage is based on the percent of crop value covered. In this example there are 9 percentage points of coverage (from 95% to 86%).

9% of the expected crop value is $99.00 (or 9 percent • $1,100.00).

The ECO policy can cover up to $99.00 of the $275 deductible amount not covered by your underlying policy, but more importantly bring the trigger on any loss up to 95%.

Is ECO a Good Fit for You?

This policy is also a good fit for producers that trend with or better than the county. ECO payments are determined only by county average revenue or yield, and are not affected by whether you receive a payment from your underlying policy. It is possible to experience an individual loss but to not receive an ECO payment, or vice-versa.

This policy would be considered a better fit for the producers that do not have yields that trend with or below the county average. Since this is a product that provides coverage above the maximum level of an underlying Multi Peril policy (RP, YP).

However, if you have yields that do not trend with the county, there are multiple other private products that allow you to purchase an additional level of coverage on your individual yields and not rely on county averages.

Coverage Levels

You do not have to purchase both SCO and ECO. If you purchase ECO, your underlying MPCI policy does not have to be at an 85% level.

You can purchase a lower level coverage (i.e.: 75%). 

This would provide a “donut hole” from 86% down to the 75% level where your underlying policy would begin coverage. 

You would still have 84% coverage on your crop (75% RP and 9% ECO), it is just that a portion of the coverage would be based on a county yield instead of your individual protection. 

If you historically track with the county this may be a good option to consider.

Indemnity Payment Timing

Since SCO and ECO are both based on county yields, the ability to calculate any losses will be delayed until all county yields are reported.

In Iowa, the Production Reporting Date is April 29. Even though it’s typical to have production reported earlier than this, county yields can not be calculated until this date due to producers who may wait til the last minute to report production. This means that any indemnity through these endorsements would not be paid until June of the year following your crop (i.e.: June 2023 for the 2022 corn crop). 

Keep this in mind to avoid a cash flow bind as the exact dollar amount would not be known until well after harvest.

Other Considerations to Keep in Mind

When purchasing SCO, be careful that you elect PLC (Price Loss Coverage) when signing up for the farm program. Electing ARC (Area Revenue Coverage) provides you with a revenue policy and in the eyes of the government are double insuring your crop if you also purchase SCO.

If you elect SCO and ARC for the same crop on a farm, your SCO coverage for that crop on that farm will be cancelled and you must report the crop on that farm as covered by ARC on your acreage report.

If you do not report a farm covered by ARC the acreage of that farm will be ineligible for an SCO payment, but you will still owe 60% of your SCO premium on that crop and farm to cover administrative expenses. However, your underlying policy will still be in effect.

If ECO is the only endorsement being purchased, you are able to elect either PLC or ARC.

SCO and ECO Coverage Options

SCO and ECO are federally subsidized products that provide an increased level of coverage. The products are based on county yields, but allow a producer to have up to 95% of the expected county yield.

The products are a good fit for producers who consistently produce yields in line with the county. It also provides a high trigger level to help ensure that a producer has a high level of revenue that is needed with the high price of inputs.

The 2018 Farm Bill Disaster Assistance programs can be an extremely intimidating and complicated subject for a grower. 

Below, we'll outline the high level basics of how Agriculture Risk Coverage (ARC) functions and provide some observations on the two underlying products; ARC-CO (county based coverage) and ARC-IC (individual based coverage).  

Stacked Income Protection (STAX / PLC-ARC)

Stacked Income Protection (STAX) was developed by RMA in response to the omission of a cotton program payment in the 2014/2018 Farm Bills. Upland Cotton producers were able to purchase risk management products heavily subsidized by the U.S. government to protect area yield and market losses in their market.

Recently, the USDA changed their products to include a version of cotton protection through the seed cotton. These protections allowed cotton producers to participate in USDA programs like other crops.

With that said, generic base was converted to either a mix of your recent annual plantings (crop mix) or 85% of your generic base could be re-assigned to cotton base. PLC has a set price for the period of the farm bill, and ARC uses an olympic average (5-year prices dropping the highest and lowest prices in that period). Payments are paid on the producer’s FSA yields for PLC and ARC-Individual, but paid on area average yields for ARC-County.

With the recent rise in cotton markets, upland cotton producers need to evaluate their individual situation as it relates to risk management. 2022 is yielding higher cotton prices than in the recent past, and area (county) yields have increased due to growing conditions, technology, and farming practices. Whereas FSA PLC/ARC programs focus on base acres and historical prices, STAX considers planted acres, current market prices, and recent yield trends. Though STAX does have an associated premium (80% subsidized by USDA), this may be a better option than PLC/ARC programs for 2022.

As with all Risk Management Solutions, this may not be applicable in your situation, but it is worth investigating in all scenarios.

Looking for (Free) Guidance on Your Crop Insurance?

At FBN, our team is here to help you choose the right crop insurance program to manage your farm's unique situation. We can even provide a free second opinion on your crop insurance so you have the peace of mind knowing that your coverage is best for your farm.

If you'd like to discuss these options with an agent, or if you want to learn more about FBN®’s crop insurance offerings, connect with a member of the FBN Crop Insurance team.

Watch Now: 5 Reasons to Break Up with Your Crop Insurance Agent

Resources

We are an Equal Opportunity Provider. FBN Crop Insurance services are offered by FBN Insurance LLC (dba FBN Insurance Solutions Services LLC in Texas, and FBN Insurance Solutions LLC in California and Michigan) and are only available where FBN Insurance LLC is licensed. FBN membership is not required to purchase through FBN Insurance LLC, but certain features are only available to FBN members. FBN Crop Insurance is currently offered in the following states: AL, AR, AZ, CA, CO, FL, GA, IA, ID, IL, IN, KS, KY, LA, ME, MI, MN, MO, MS, MT, NC, ND, NE, NM, NV, NY, OH, OK, OR, PA, SC, SD, TN, TX, UT, VA, WA, WI, WV, WY. 

FBN Insurance

Jan 21, 2022

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