February 1, 2011
Thinning out the alphabet soup of acronyms that populate the federal crop insurance program and eliminating duplicative policy provisions was a major goal of the recently completed USDA Risk Management Agency effort to develop the new combination insurance plan that will be used to establish yield and revenue coverage starting with the 2011 crop year.
Add in the new Cottonseed (Pilot) Endorsement and it’s clear that cotton producers across the nation have an exciting new risk management option to consider and a new set of acronyms as they finalize 2011 risk management plans.
While the new Combo plan provisions do not eliminate the specialty products available to growers, they do try to simplify choices and align terminology for the two most used types of insurance sold—yield and revenue coverage.
The new combination plan, also known as the Combo rule, revises the Common Crop Insurance Regulations to combine the Actual Production History (APH), Crop Revenue Coverage (CRC), Revenue Assurance (RA), Income Protection (IP), and Indexed Income Protection plans into a single plan.
These five plans represent the products producers have previously bought most often. Under the Combo plan these policies will be governed by a single set of program regulations and use common terminology to describe various aspects of the coverage they provide.
In a further effort to streamline the delivery and effectiveness of the different plans, RMA also developed a single rating and pricing component to ensure that all of the insurance coverage provided under the Combo plan remains consistent in terms of insurance protection and cost to producers.
Under the new Combo rule, growers will purchase insurance policies under two main categories. Yield protection (YP) will essentially replicate what was previously referred to as the APH (Actual Production History) plan.
Revenue protection (RP), with options to re-create the various plans of insurance it replaces, will be used to replicate insurance previously offered under the revenue-type plans mentioned previously.
The most visible difference for cotton growers, aside from the change in acronyms, is the establishment of the insurance price for the various options. Instead of a mixture of price discovery methods, the Combo plan will now use a single price discovery model to establish both Base and Harvest prices for the various insurance plans.
An example of the effect these changes will have is that the Base price for both Yield and Revenue insurance plans will always be the same because they will both use the price discovery mechanisms outlined in the Commodity Exchange Price Provisions (CEPP).
For cotton producers on the High Plains of Texas who share the March 15 federal crop insurance sales closing date for initiating or cancelling insurance coverage, the Base price for Yield and Revenue protection policies will be established during the month of February by averaging each trading day's closing value of the new crop (i.e., 2011) December Cotton futures contract traded on the New York-based InterContinental Exchange (ICE).
That average will constitute the 2011 Base price and be used to establish coverage under the Yield protection plan for the insurance period, as well as establishing the minimum level of protection provided through the Revenue protection plan of insurance.
On the back-end of the season, beginning this year, High Plains growers who select a Revenue plan utilizing a Harvest price will have that price established during the month of October using the same cotton futures contract (i.e., December 2011) used to establish the Base price.
Upland cotton growers in other regions can download the Commodity Exchange Price Provisions (CEPP) for 2011 and succeeding years to see what the Base and Harvest price discovery periods are for their areas. To download the Cotton CEPP file go to: http://www.rma.usda.gov/policies/2011/11-cepp-cotton.pdf
An exciting new crop insurance option for cotton growers across the U.S. in 2011 is the Cottonseed (Pilot) Endorsement, an optional endorsement that growers can use to insure the cottonseed as well as their cotton lint.
To purchase coverage under the Cottonseed Endorsement a grower (Upland or Extra Long Staple) must purchase a qualifying buy-up policy of insurance (Yield or Revenue) under the new Combo plan provisions for cotton. The endorsement will not be available to growers who purchase CAT, GRIP or GRP cotton policies.
Under the endorsement, cottonseed is insured against yield losses that might occur during the growing season. There is no revenue component attached to the Cottonseed Endorsement.
Yield coverage is established using the grower's approved APH (actual production history) cotton lint yield, a national cottonseed price (which has been set by USDA RMA at $0.09 per pound, or $180 per ton, for the 2011 growing season) and the same level of coverage that applies to their cotton lint policy.
Premiums for the Cottonseed Endorsement will be calculated using the coverage level of the grower's lint policy, the national cottonseed price and the premium rate applicable to the grower’s approved lint yield for Yield protection coverage under USDA RMA's Combo plan provisions. Growers purchasing Revenue protection on their cotton lint will also have their Cottonseed Endorsement premium calculated based on the rate applicable to Yield only coverage at their approved APH yield level.
Premiums applicable to the Cottonseed Endorsement will qualify for the same level of federal premium subsidy as the producer’s underlying cotton lint policy.
For additional information about the Combo plan or the Cottonseed (Pilot) Endorsement producers are encouraged to contact their insurance agent or crop insurance provider to learn how the new provisions and the Cottonseed Endorsement will affect their 2011 risk management decisions.
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