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New crop insurance programs offer option for small losses

Excerpted from: 2014 Farm Act Shifts Crop Commodity Programs Away From Fixed Payments and Expands Program Choices; Amber Waves, Aug. 2014; by Anne Effland, social science analyst, USDA/Economic Research Service; Joseph Cooper, agricultural policy and models branch chief – ERS Market and Trade Economics Division; and Erik O’Donoghue, ERS agricultural economist.

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Under the 2014 Farm Act, two new commodity programs were introduced - Price Loss Coverage (PLC) and Agriculture Risk Coverage (ARC) – that share some design elements with the repealed CCP and ACRE programs.

The act also established several new programs aimed at providing support for revenue or yield losses smaller than those covered by traditional crop insurance programs unless the highest coverage levels are selected.

In addition to the ARC program, administered by USDA’s Farm Service Agency (FSA) as a Title I commodity program, these programs include the Supplemental Coverage Option (SCO) and Stacked Income Protection Plan (STAX), administered by the USDA Risk Management Agency (RMA) as Title XI crop insurance programs. ARC and SCO are alternative options producers who elect to enroll in ARC in a given crop/county cannot also purchase SCO in the same crop/county. STAX is available only to upland cotton producers who are not eligible for ARC. (Upland cotton growers may purchase SCO policies, but not for the same acres they have covered with STAX.)

SCO will be made available with the 2015 crop and will offer producers the opportunity to purchase area-based insurance coverage in combination with traditional crop insurance policies. The program will allow producers to cover up to 86 percent of their individual revenue or yield losses. While traditional insurance policies can cover up to 85 percent of farm level revenue or yield losses, producers typically insure for around 70 - 75 percent of losses.

SCO policies provide an option for additional loss coverage at a fixed premium subsidy rate of 65 percent, a higher rate than many traditional insurance policies for the same coverage level. In addition, SCO, like traditional crop insurance, is not subject to payment limitations or adjusted gross income (AGI) eligibility limits, making it available to producers who might be ineligible for benefits under ARC or other commodity programs.

STAX will provide area-based revenue insurance policies to producers of upland cotton, also beginning with the 2015 crop. The STAX program was developed to address U.S. obligations under the World Trade Organization (WTO) ruling that U.S. upland cotton subsidies affected world prices and thus distorted trade. Similar to SCO, STAX policies will be area policies, basing the loss calculation on the difference between expected and actual county average revenues, rather than individual farm losses. The more closely an individual producer’s yields vary with the area average, the better the program will cover individual farm losses. Unlike SCO, which must be purchased in conjunction with a traditional crop insurance policy, cotton producers will be able to purchase STAX either in conjunction with their insurance policies or as stand-alone policies to cover up to 20 percent of revenue losses, in five percent increments. Federal subsidies will cover 80 percent of producers’ premiums. STAX, like SCO, is not subject to payment limitations or adjusted gross income (AGI) eligibility limits.

Participation in the STAX program is expected to be strong, given the 80-percent premium subsidy rate offered by the program and the ineligibility of upland cotton producers for most other programs. Despite these expectations, Government outlays for upland cotton support were estimated by the Congressional Budget Office in January 2014 to be lower than levels would have been had the Direct and Countercyclical Payments (DCP) programs been continued.

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