2014 Farm Bill How does it affect you and your operation? Cotton STAX & SCO

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1 2014 Farm Bill How does it affect you and your operation? Cotton STAX & SCO 1

2 2014 Farm Bill Cotton Chuck Danehower Extension Area Specialist Farm Management University of Tennessee Extension

3 Cotton Transition Assistance Program Cotton no longer covered commodity, not eligible for ARC/PLC. Since STAX not available until 2015, cotton producers will receive transitional payment. Enroll August 11, 2014 October 7, 2014 at FSA office. Payments to cotton producers for Rate of 9 cents per lb. on 60% of cotton base. 5.4 cents on 100% cotton base Before October cents ; 7.2% reduction After October cents ; 7.3% reduction Payment on 36.5% of base acres in 2015 if STAX not available in county. Paid on base acres not planted acres. If you have a cotton base, sign up. 3

4 Insurance Programs for Cotton Traditional Crop Insurance - Yield Protection (YP); Revenue Protection (RP); Revenue Protection with Harvest Price Exclusion (RP-HPE); or Area Risk Protection Insurance (ARPI) Stacked Income Protection Plan (STAX) Traditional Crop Insurance & STAX No overlap Traditional Crop Insurance & Supplemental Coverage Option (SCO) No overlap 4

5 What is STAX? Crop insurance policy that provides area based coverage for a portion of expected area revenue. May be purchased with an individual or area crop policy (companion policy) or can be stand alone. YP, RP, RP-HPE, ARPI By itself Cotton producers only planted acres. Provides only revenue coverage & not tied to companion policy. 80% premium subsidy Separate premium & administrative fee 5

6 Crop Year 2015 Stacked Income Protection (STAX) Availability for Cotton Legend Program Offered

7 Overview of STAX Coverage depends on expected area yield and the higher of projected or harvest price (except for harvest price exclusion) May start at 90% of area revenue (or lower, if selected) Ends at 70% of area revenue ( or higher if selected, can t overlap companion policy) Maximum range is 20% If there are multiple types or practices for the insured crop in the county, the policy protection for STAX will be determined separately for each level, type, and practice. Protection Factor May choose from 80% - 120% 7

8 Example: Grower purchases an individual revenue policy, 75% coverage Percent of Expected Grower Revenue 100% 95% 90% 85% 80% STAX Coverage Individual Loss Area-Based Loss 75% 70% Individual Policy 65% 60% 55% 50% 45% 40% 35% (75% coverage) 30% (Optional) 25% 20% 15% 10% 5% 0% Percent of Expected County Revenue 100% 95% STAX 90% 85% (90% to 75%) 80% 75% 70% 65% 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 6

9 Example: Grower purchases an individual revenue policy, 60% coverage Percent of Expected Grower Revenue 100% 95% 90% 85% 80% 75% 70% 65% 60% STAX Coverage Individual Loss Area-Based Loss 55% Individual Policy (60% coverage) (Optional) 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Percent of Expected County Revenue 100% 95% STAX 90% 85% (90% to 70%) 80% 75% 70% 65% 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 7

10 Example: Grower purchases an individual revenue policy, 80% coverage Percent of Expected Grower Revenue STAX Coverage Individual Loss Area-Based Loss 100% 95% 90% 85% 80% 75% Individual Policy 70% 65% 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% (80% coverage) (Optional) STAX (90% to 80%) Percent of Expected County Revenue 100% 95% 90% 85% 80% 75% 70% 65% 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 8

11 17 Cost rough estimate STAX with a 90% area loss trigger and 20% coverage range, assuming 15% price volatility: Premium rate is likely to average around 40% with majority between 20% and 65% Covers active range of losses Varies based on location and practice Assume expected yield of 850 lbs/acre, projected price of $0.75, protection factor = 1.2 Amount of coverage: $153 per acre Average grower premium: $12.24 per acre Will vary significantly based on location and practice

12 Sales Closing/Cancellation/ Termination Dates 21 Insurance applications to add STAX must be completed and signed no later than the applicable sales closing date The policyholder can elect STAX as a stand alone policy for cotton or can have a companion policy under the Common Crop Insurance Provisions or Area Risk Protection Insurance Companion policy and STAX must be with the same AIP. If the companion policy has the Supplemental Coverage Option (SCO) it can t be for the same cotton acres as STAX. Must designate STAX acres and SCO acres by sales closing date Done by providing production reports

13 Sales Closing/Cancellation/ Termination Dates 22 The STAX coverage is continuous Can be cancelled by providing a written notice no later than the cancellation date Any changes a policyholder wishes to make to STAX coverage must be made by the applicable crop sales closing date STAX may be terminated by the insurance provider for the following crop year for nonpayment of outstanding debt by the termination date

14 Sales Closing/Cancellation/ Termination Dates 23 Insurance choices Select a protectionfactor: 80 to 120 percent for each type/practice Select an area loss triggerand coverage range The area loss trigger may be 90%, 85%, 80%, or 75% This is the percent of expected revenue at which a loss is triggered The coverage range may from 5%, 10%, 15%, or 20% The range is limited by the difference between area loss trigger and 70% (or the coverage level of the companion policy if greater than 70%) Example: Area loss trigger selected is 90%, and a 75% companion policy is purchased. In this case the maximum coverage range is 90% - 75% = 15%. Available values will be shown in the actuarial documents Selected for each type/practice

15 Sales Closing/Cancellation/ Termination Dates 24 STAX decision: Some factors to consider Area coverage aspect how closely does grower s yield move with county average yield? If they do not move together, greater chance of not getting paid when there is a loss, vice-versa How much area risk can the grower tolerate? Decision on companion policy

16 Insurance Attaches 26 STAX insurance attaches annually when planting begins STAX only covers planted acreage of the crop STAX does not provide payments for replanting or prevented planting No late planting period, all acreage must be planted by the final planting date FPD similar to ARPI Written agreements are not available for STAX

17 Acreage and Production Reports 27 All insurable planted acreage of the crop in the county will be insured by STAX EXCEPTION: Acreage designated for SCO can t be covered by STAX Acreage report will establish the amount of coverage and premium for STAX Production report required for STAX Date specified in the actuarialdocuments if stand alone Covered by companion policy, if applicable

18 Summary of Coverage 28 After the acreage report is processed, the policyholder is issued a summary of coverage that specifies: Insured crop, acres, and amount of insurance or guarantee (policy protection) Amounts are shown separately for STAX and any companion policy if applicable STAX policy protection is calculated for each type and practice for all the planted acreage of upland cotton in the county

19 Premium Billing 29 The annual premium is earned and payable at the time insurance coverage begins and is due by the premium billing date specified in the crop actuarial documents All information needed to calculate a STAX premium rate will be contained in the actuarial documents A separate administrative fee is owed for STAX Waivers of the STAX administrative fee are applicable for insureds who qualify as a limited resource farmer or a beginning farmer/rancher

20 Notice of Damage or Loss of Production 30 For Individual Companion Policy A written notice of damage or loss of production filed by the policyholder within 72 hours of the policyholder's initial discovery of damage or loss of production But not later than 15 days after the end of the insurance period unless otherwise stated in the individual crop policy. For STAX Notice of loss provisions contained in the CCIP BP are not applicable to STAX Individual farm yields or revenues are not considered under STAX for determination of any indemnity

21 Inspection 31 For Individual Companion Policy After the insurance provider receives the written notice of damage or loss, it will be processed and, if necessary, a loss adjuster will be sent to inspect the damaged crop and gather pertinent information concerning the damage For STAX The inspection has no impact on the STAX coverage

22 Indemnity Claim 32 For Individual Companion Policy After the claim for indemnity is processed for the underlying policy, an indemnity check and a summary of indemnity payment will be issued showing any deductions to the amount of indemnity for outstanding premium, interest, or administrative fees For STAX Any indemnity for STAX will be determined later than the indemnity process for the individual companion policy STAX indemnities are calculated following the release by FCIC of the Final Area Yields Will likely be in the summer of the subsequent year

23 Indemnity Claim 33 The actuarial documents will specify the data source for the Final Area Yields and the release dates Payment factors will be calculated and published by RMA Occurs later, after area yield data becomes available, similar to ARPI If an indemnity is due for STAX then the loss will be paid within 30 days after FCIC releases the Final Area Yields

24 Program Changes 35 RMA changes to STAX are made no later than the contract change date 11/30 The policyholder will have the opportunity to review the changes and, if desired: Continue the insurance coverage for the following crop year Change the policy coverage: Protection factor, area loss trigger, and coverage range Cancel the insurance coverage by the sales closing date If the policyholder wishes to cancel STAX, then a written notice must be submitted to the insurance provider on or before the crop cancellation date

25 STAX Example Farm s APH 900 pounds/acre Expected County Average 850 pounds/acre Projected price $0.72 pound County Benchmark - $612 (850 x $0.72) Area Loss Trigger (selected by producer) 90% Can range from 75% - 90% Coverage level (selected by producer) 90% Can range from 70% to 90% and cannot overlay companion policy. Protection Factor (selected by producer) 120% Can range from 80% - 120% 25

26 STAX Example Max STAX Protection per Acre = $ per acre (Protection factor X County Benchmark) x Coverage Range (1.2 x $612) x.2 26

27 STAX Example Harvest price - $0.65 pound Farm yield 750 pounds/acre County yield 700 pounds/acre Will there be a STAX payment? Yes Actual county revenue of $455 ($0.65 x 700 lbs/ac) is less than $551 ( 90% x $612 expected county revenue) How much? 27

28 STAX Example Area Performance - $455/$612 = 74.35% Actual revenue/expected revenue Payment Factor ( )/ ( ) = 78.25% Capped at 1.00 STAX Indemnity = x $ = $ In this example an companion RP policy at 70% would not have had an indemnity payment. In this example an companion RP policy of 85% would have had an indemnity payment of $ STAX payment of $36.72 for total of $

29 STAX Example What if price went to $0.80? STAX Indemnity payment = $58.75 No payment with 70% companion RP policy. 85% companion RP policy would have had an indemnity payment of $ STAX payment of $40.80 for total of $

30 3 What is SCO? SCO provides area-based coverage for a portion of your insurance deductible SCO is an endorsement to the following plans Yield Protection (YP) Revenue Protection (RP) Revenue Protection with the Harvest Price Exclusion (RP-HPE) The endorsement will be available in select counties for corn, soybeans, wheat, sorghum, cotton, and rice starting with the 2015 crop year

31 4 What is SCO? Must be purchased with an underlying individual crop policy Liability (max payout) based on expected crop value for the individual grower But the amount paid out is based on how well the county does Payment generally occurs later than for individual policy Based on when county data becomes available Similar to Area Risk Protection Insurance (ARPI) 65% premium subsidy Regardless of coverage level of the underlying policy

32 5 Overview of SCO SCO coverage type follows underlying plan of insurance If underlying policy is yield-based (YP or APH), SCO also provides yield coverage If underlying policy is revenue-based (RP or RP-HPE), SCO provides revenue coverage Separate Premium and Administrative Fees for SCO by crop/county In addition to fees for underlying individual policy Separate insurance offers by irrigation practice (where actuarially sound) Follows underlying policy

33 6 Overview of SCO The amount of SCO coverage depends on the liability, coverage level, and approved yield of your underlying policy If there are multiple types or practices for the insured crop in the county, the supplemental protection will be determined separately for each coverage level, type, and practice Indemnity payments for SCO is based on whether the yield or revenue for an area (generally county) falls below its expected level Payment begins: Final Area Revenue (Yield) < 86% of Expected Area Revenue (Yield) Max payout: Final Area Revenue <= Coverage Level% of Expected Area Revenue (Yield)

34 Example: Grower purchases an individual revenue policy, 80% coverage Percent of Expecte d Grower Revenu e SCO Coverage Individual Loss Area-BasedLoss 100% 95% 90% 86% SCO Revenue 80% (86% to 80%) 75% Individual 70% 65% 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Revenue Policy (80% coverage) 8

35 9SCO Coverage Example: Grower purchases an individual revenue policy, 60% coverage Percent Individual Loss Area-BasedLoss of Expecte d Grower Revenu e 100% 95% 90% 86% SCO Revenue 80% 75% 70% (86% to 60%) 65% 60% 55% Individual 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Revenue Policy (60% coverage)

36 SCO Example Farm s APH 900 pounds/acre Expected County Average 850 pounds/acre Projected price $0.72 pound Area Loss Trigger 86% Expected Crop Value 900 lbs x $0.72 = $648 Underlying Liability 900 X$0.72 X 70% = $

37 SCO Example Coverage range 16% (86% - 70% RP policy) Coverage range of SCO is the Area Loss trigger minus the Coverage Level of the underlying policy. Supplemental protection (Crop Value X Coverage Range) $648 X.16 = $ Harvest Price $0.65 pound Farm Yield 750 pounds/acre Final County Yield 700 pounds/acre Area Performance $455/$612 = 74.35% Payment Factor.7281 ( )/.16 Limited to Indemnity payment for SCO with 70% RP.7281 X $ = $75.49 acre (STAX $114.93) 37

38 SCO Example In this example an companion RP policy of 85% would have had an indemnity payment of $ SCO payment of $6.48 for total of $ (STAX $100.02) What if price went to $0.80? SCO Indemnity payment = $26.28 (STAX $58.75) No payment with 70% companion RP policy. 85% companion RP policy would have had an indemnity payment of $ SCO payment of $7.20 for total of $ (STAX $52.80) 38

39 Crop Insurance Decision Tool

40 STAX or SCO Individual situations will vary Compare coverage, premiums, etc. and how they match up to your risk management needs. Look closely at Area Expected Yield. If STAX compare STAX only with STAX and companion policy. If SCO, compare SCO with companion policy at different coverage levels. 40