Further discussion of the supplemental coverage option
Example farm 1 has an actual yield of 200 bushels per acre, resulting in actual revenue of $780 per acre. Farm 1 would receive an SCO payment equal to the SCO payment rate multiplied by the farm's max SCO payment, or $10.64 per acre (0.20 x $52.44 = $10.64). Since actual revenue for farm 1 is greater than the RP-HPE guarantee, there would be no payment from the individual plan of insurance.
Example farm 2 has an actual yield of 160 bushels per acre, resulting in actual revenue of $624 per acre. Farm 2 would receive an SCO payment equal to the SCO payment rate multiplied by the farm's max SCO payment, or $9.52 per acre (0.20 x $46.92 = $9.52). Since farm 2's actual revenue also falls below their RP-HPE revenue guarantee, it would also receive an indemnity payment of $1.60 per acre or total insurance payments of $11.12 per acre.
click image to zoom In table 3 an example is provided where the harvest price is at an even lower level of $3.50 per acre. The actual county yield in this example is 188 bushels per acre, resulting in actual county revenue of $658 per acre. The SCO payment rate for farms with 80% RP-HPE coverage in this example would then be 100% since the actual revenue of $658 falls below 80% of the county guarantee (0.80 x $828 = $662). Thus, farms in this county which coupled SCO with an 80% RP-HPE plan would receive the full portion of their farm deductible covered by SCO (from 86% down to 80% of their expected farm revenue).
Farm 1 has an actual yield of 195 bushels per acre and actual revenue of $683 per acre in this example. The SCO payment for farm 1 is the maximum payment of $52.44 per acre. Farm 1 would also receive a $16.70 payment from their 80% RP-HPE plan, and a total insurance payment of $69.14 per acre. Farm 2 has an actual yield of 180 bushels per acre and actual revenue of $630 per acre. While farm 2 would also receive the maximum SCO payment of $46.92, their actual revenue is not low enough to trigger a payment from the 80% RP-HPE policy.
Understanding SCO coverage and how it works with the various individual insurance plans has important implications for producers as they evaluate commodity program options (i.e. PLC vs. ARC) and risk management decisions (i.e. individual insurance plan choices). Because SCO is limited by the statute to the deductible range of the underlying policy, it will operate as individual-based coverage, but the indemnity is triggered and scaled by area-wide (county) losses.
One strategy that has been discussed extensively is the option to reduce individual insurance plan coverage (i.e. from 85% to 80% or 75%) and adding SCO coverage. While this strategy may reduce premium costs due to the 65% subsidy rate on SCO premiums, it does create some additional basis risk for the farm because the deductible coverage provided by SCO required county losses to be triggered. The farm could suffer losses at the individual level and not receive SCO payments if losses are not experienced on a county wide basis.
Furthermore, while the analysis of the decision to use SCO can be delayed until the 2015 crop year when the program is intended to be introduced, producers need to consider their potential desire to use SCO in future crop years when making the choice between the PLC and ARC commodity program decisions. Further analysis of the farm-level impacts of the SCO program is underway and will be shared via farmdoc and farmdocDaily over the coming months.