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STAX or SCO? Another decision for cotton producers

STAX or SCO? That’s one of the decisions cotton producers will have the opportunity to make when they sign up for the Agricultural Act of 2014 over the next few months.

And it will be a decision for cotton growers alone because STAX or the Stacked Income Protection Plan is only available to them while they and producers of the 21 program crops can sign up for SCO or Supplemental Coverage Option.

The U.S. cotton industry signed on to the insurance-based concept of what became the Agricultural Act of 2014 early on during the 2014 farm bill debate. But producers were concerned about the lack of “shallow-loss” coverage in the existing crop insurance programs at the time.

That is, growers could produce just enough crop to keep them from receiving an indemnity from federal crop insurance revenue or yield coverage and still suffer a loss in the area between the maximum of their crop insurance coverage and the total cost of producing a crop. The Stacked Income Protection Plan is the industry’s answer to that dilemma.

On the other hand, National Cotton Council leaders understand there may be situations in which the Supplemental Coverage Option may be the better of the two for cotton producers.

“I’m going to run through some questions here that producers ought to ask themselves if they’re trying to decide between STAX and SCO,” says Gary Adams, vice president for economic and policy analysis with the National Cotton Council.

“Hopefully, this summarizes the differences and the similarities between the two products. One, for SCO, underlying coverage is required. For SCO, the trigger can be yield or revenue area-wide, depending on your underlying coverage. STAX will be a revenue product. The deductible for SCO is 14 percent.

“And that 86 percent coverage level for SCO is not adjustable. STAX has 10 percent at its minimum deductible, but it’s a flexible number. The coverage band goes down to underlying coverage on SCO, and it goes down to 70 percent on STAX.”

The premium subsidy is 65 percent on Supplemental Coverage Option and 80 percent on the Stacked Income Protection Plan, said Adams, who spoke at several STAX/Farm Bill update sessions held by the NCC in the Mid-South the week of Nov. 17.

“It’s a tough concept to illustrate without working through a couple of examples,” says Adams. “SCO is based off a county experience in terms of whether or not and indemnity is triggered. If an indemnity is triggered under SCO, that percentage loss at the county level is applied to the dollar value of your deductible.

“Why that is important is that you may be in a situation where you may have an APH yield that’s well above the county yield then the dollar value of your indemnity is going to be larger because it reflects your larger yield. So, in some ways, the difference between your yield and the county yield has the ability to kind of amplify the indemnity up.”

That doesn’t change the fact that the county experience has to trigger the indemnity, but it almost acts like the protection factor in STAX, according to Adams. (The protection factor in STAX is a means by which growers can increase or decrease the level of coverage so they can better tailor their coverage to their risks.)

Growers should ask two questions before making a decision, he notes. One, is the grower’s APH well above the expected county yield? “And if it’s 40 percent to 50 percent above the expected county yield, then that’s increasing the value of your indemnity.”

If your underlying coverage is less than 70 percent – since SCO has the ability to extend down to that lower coverage level – that might be a situation where a producer looks at SCO compared to STAX, says Adams.

“Now realize SCO doesn’t carry as large a premium subsidy, and it doesn’t trigger at the same level – one (STAX) is 90 vs. 86 percent for SCO. – so again there’s a lot of tradeoffs,” he said. “I encourage you to work through some of those examples and decide which one might be the best fit for your farming operation.”

At each of his presentations, Adams presented a comparison of STAX and SCO for the county or parish where the meeting was held. For Ouachita Parish, where Monroe, La., is located, Adams listed an insurance projected price of 65 cents per pound, an expected county yield per planted acre of 908 pounds and an expected revenue of $590 per acre (Price times yield) for the irrigated practice.

The trigger percentage of expected revenue (90 percent or 86 percent times the expected county revenue of $531 for STAX, $508 for SCO between 86 percent and 70 percent coverage and $508 for SCO between 86 percent and 60 percent coverage.

Those combinations would provide a maximum indemnity of $142 per acre for STAX (1.2 times 20 percent of $590), $94 for SCO 86 percent to 70 percent coverage (16 percent times $590) or $153 for SCO 86 percent to 60 percent coverage (26 percent times $590).

The premium rate would be 0.3999 for STAX 90 percent to 70 percent, 0.3442 for SCO 86 percent to 70 percent or 0.2745 for SCO 86 percent to 60 percent. The total premium for STAX 90 to 70 would be $57 per acre, for SCO 86 to 70 would be $33 per acre and for SCO 86 to 60 would be $42 an acre.

After the subsidies were applied, the producer premium for STAX 90 to 70 would be $11 an acre, for SCO 86 to 70 $11 and acre and SCO 86 to 60 $15 an acre.

For more information on using your computer to analyze your options, visit www.decisionaid.afpc.tamu.ed. The decision aid tool was developed by Texas A&M University through a grant from USDA.



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