Impact of COVID-19 on Agriculture

Enhanced Coverage Option Provides Shallow Loss Coverage on Crop Insurance

Market Intel / December 18, 2020

Credit: Kimberly Vardeman CC BY 2.0 

USDA’s Risk Management Agency’s Enhanced Coverage Option (ECO) is a new federal crop insurance product available as an add-on to the underlying crop insurance policy for 31 spring-planted crops. Crops eligible for coverage during the 2021 crop year include corn, soybeans, wheat, cotton, peanuts, rice, oats, barley, hybrid corn seed, popcorn, silage sorghum, canola, dry peas, dry beans, millet, sunflowers, hybrid seed rice, cotton ex long-staple, flax, sugar beets, buckwheat, flue-cured tobacco, fire-cured tobacco, burley tobacco, dark air tobacco, cigar binder tobacco, hybrid sorghum seed, grain sorghum, cultivated wild rice, sesame and safflower.

ECO pays for losses on a county basis and an indemnity is triggered by an area-level loss in yield or revenue. ECO is a complement to the underlying policy that pays for losses on an individual unit basis when an indemnity is triggered by an individual loss in yield or revenue.

ECO will provide area-based coverage for a portion of the deductible of the underlying policy, similar to the Supplemental Coverage Option (SCO). ECO uses the same expected and final area yields, projected and harvest prices and payment factors as SCO. However, while SCO ends coverage at 86% of the expected crop value, ECO will cover from 86% up to the producer’s choice of 90% or 95% of expected crop value. The coverages do not overlap, so ECO can be purchased in addition to SCO. ECO will not impact a farmer’s participation in the Agriculture Risk Coverage Program like SCO does, and farmers may purchase ECO for the same crop, on the same acres they’ve enrolled in ARC.

ECO follows the coverage provided in the underlying policy and must be chosen by the sales closing date of the underlying policy. If the underlying policy is Yield Protection, then ECO covers yield loss. If the underlying policy is Revenue Protection, then ECO covers revenue loss. ECO may not be purchased in conjunction with Margin Protection, Area Risk Protection Insurance or Hurricane Insurance Protection – Wind Index Endorsement,  or for any acres insured under the Catastrophic Risk Protection Endorsement, High-Risk Alternative Coverage Endorsement, or Stacked Income Protection.

A payment is triggered for ECO when the county average revenue falls below 90% or 95% of the expected level of whichever coverage option the producer selected. ECO payments are calculated using the county average revenue or yield. The ECO payment is decoupled from a producer receiving an indemnity payment from the underlying policy.

Figure 1 is an example of how a producer would stack available coverage options to cover an eligible crop.

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Cotton Example

In our first example, a cotton producer selects Revenue Protection for 75% coverage with a liability of the underlying Revenue Protection policy at $435 per acre. This would mean the total expected crop value is $580. The remaining 25% of coverage, or $145, would not be covered in the Multiple-Peril Crop Insurance policy. This same cotton producer decides to add on another level of coverage, choosing between ARC if the farm has cotton listed as base acres or SCO, for coverage on an additional $81.20 of the crop value. This addition brings the maximum expected crop value coverage to $498.80. Now the producer can purchase another level of coverage with the ECO endorsement. Choosing between 90% or 95% coverage, this endorsement could cover the expected crop value by an additional $58.00 or $29.00, respectively. The total amount of crop coverage for the cotton producer could be $522.00 or $551 (depending on the producer’s choice of coverage). Since the cotton producer in this example selected Revenue Protection as the underlying policy, then, if triggered, the ECO coverage would also provide a revenue protection indemnity. The ECO indemnity would only be triggered, however, if the county triggered an indemnity.

Figure 2 shows the 90% coverage and Figure 3 shows the 95% coverage ECO endorsement options for the cotton Revenue Protection policy example.

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Corn Example

In the second example, a corn producer purchases Yield Protection for 75% coverage. This assumed policy covers 150 bushels per acre at the projected price of $3.95 per bushel for 75% total liability coverage of $444.37 per acre. Thus, the total expected crop value would be $592.50. For the remaining 25% of coverage, or $148.13, not covered in the underlying policy, the corn producer adds an additional level of coverage, either ARC  if the farm has corn listed as base acres or SCO, to cover the next $65.18 of the total expected crop value, bringing the total maximum amount of crop value covered under insurance to $509.55. With an ECO endorsement, the corn producer can purchase another level of coverage of up to 90% or 95%. This coverage protects the expected crop value by an additional $23.70 or $53.33, respectively, bringing the maximum of expected crop value covered for the producer to $533.25 or $562.88 (depending on the producer’s choice of coverage). In this example, the corn producer purchased Yield Protection as the underlying policy, so the ECO coverage, if triggered, is also a yield protection indemnity. Keep in mind, the ECO indemnity would only be triggered if the county triggered an indemnity.

ECO payments are decoupled from the underlying policy and are not affected if a producer receives a payment from the underlying policy. It is possible for a producer to experience an individual loss but not receive an ECO payment, or vice-versa.

Figure 4 shows the 90% coverage and Figure 5 shows the 95% coverage ECO endorsement options for the corn Yield Protection policy example.

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Summary

The new ECO product offered by USDA-RMA provides more coverage on a portion of a farmer’s crop insurance deductible. It will be available for farmers to add on to their insurance policies in 2021 for 31 spring-planted crops: corn, soybeans, wheat, cotton, peanuts, rice, oats, barley, hybrid corn seed, popcorn, silage sorghum, canola, dry peas, dry beans,  millet, sunflowers, hybrid seed rice, cotton ex long-staple, flax, sugar beets, buckwheat, flue-cured tobacco, fire-cured tobacco, burley tobacco, dark air tobacco, cigar binder tobacco, hybrid sorghum seed, grain sorghum, cultivated wild rice, sesame and safflower.

The benefit of ECO is that it provides additional shallow loss coverage on a portion of the deductible that tends to have more frequent losses. Given tight farm margins, this may be an appealing option for farmers who need risk management options that provide more reassurance to credit lenders or landowners. ECO must be purchased as an endorsement to the Yield Protection, Revenue Protection, Revenue Protection with the Harvest Price Exclusion, Actual Production History, or Yield-Based Dollar Amount of Insurance policy. There is a premium associated with the ECO coverage, but premium subsidies are offered to help make the option more affordable to producers.

Contact:
Shelby Myers
Economist
(202) 406-3724
shelbym@fb.org
 

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