Insurance products that are practically not used against the background of rising prices, costs 15.02.2022

The harvest insurance policy, which was supposed to guarantee cotton producers do without traditional commodity programs, never kept its promises after entering the market in 2015. But amid sky-high market prices and resource costs this year, the product has suddenly become an attractive way for manufacturers to protect their revenue.

Experts say the cotton policy, known as the Revenue Protection Plan, or STAX, indicates that insurance products for other goods can be modified to help producers manage risks in times of high prices and production costs.

STAX and similar policies available for other crops, including the option of additional coverage, are designed to allow farmers to reduce deductibles and insure against “shallow” losses that are not covered by their basic income protection policy.

With STAX, the most profitable of the two products, farmers can provide up to 90% of their county’s expected income, while the government takes 80% of the premium. The SCO covers up to 86% of revenues with 65% of the federal subsidy.

What makes STAX so attractive this year is the price of cotton and fertilizer. Cotton prices are more than $ 1.20 a pound, about 30 cents above last year’s average closing price and nearly twice the average in 2019 and 2020. And with such high prices there is a relatively small chance that producers will receive payments under the Farmer’s Loss Program.

Farmers know that a relatively small drop in prices or yields of local crops can trigger STAX payments.

“Our operation doesn’t even have a choice, we’re going to pay for this revenue protection,” says Sean Hollade, who runs farms near Lamesa, Texas, about his decision to buy STAX this year.

An example presented by producers attending the annual meeting of the National Cotton Council in Houston last weekend illustrated the potential payoff: farmers who insure their cotton harvest at $ 1 a pound and expect to receive 900 bushels per acre will pay a surcharge for STAX at $ 17 per acre. But if the price drops to 80 cents per bushel during harvest, and if yields fall by just 5%, farmers can claim net compensation of $ 134 per acre.

SCO is also available for cotton, but the potential net compensation will be lower and is $ 90 per acre in the NCC example.

Kent Fountain, NCCKent Fontaine, a cleaner from Georgia who also grows cotton and peanuts himself, says he encourages farmers in his area to consider the policy.

“This year it really makes a lot of sense because you have the risk and the cost,” said Fontan, the immediate chairman of the NCC. “Any small hiccup and that would be a way to reduce some of the risks. I think this year you will see a great subscription to STAX ”.

Travis Mires, who farms near O’Donnell, Texas, is also seriously considering buying STAX this year, given the price of cotton and how dry this winter has been in the region.

“We just need to have some coverage, and if STAX works, it will be a very good, very nice payment,” he said.

Favorable STAX conditions are rooted in Brazil’s successful trade struggle with U.S. cotton subsidies. Congress allowed STAX in the 2014 farm bill after cotton producers agreed to give up subsidies to their conventional commodity program in a bid to satisfy Brazil, which won the World Trade Organization right to retaliate against U.S. exports.

However, many cotton producers even with a large subsidy say that STAX proved to be too expensive for the coverage it provided. In 2018, they persuaded Congress to re-entitle them to commodity programs, leaving powers for STAX with one snag: farmers who buy STAX policies may not have the same base acres recorded in the pay-as-you-go program. if market prices fall below the reference price for the commodity or the agricultural risk coverage program.

The price of this year’s cotton crop would have to fall to about 70 cents a pound so farmers can get paid under the PLC program, by far the most popular commodity cotton program.

Last year, cotton growers purchased STAX policies for just 1.5 million acres, while acquiring revenue protection policies for 9.5 million acres out of the 11.1 million acres they planted.

Bart Fisher, an economist at the University of Texas A&M who was a member of the House Agriculture Committee when STAX was authorized, says products like STAX and SCO fill a gap in agricultural programs.

Commodity programs such as PLCs are countercyclical in that they are designed to protect farm incomes when “prices are really bad,” he said. They do little to help farmers manage risks during periods when production prices and costs are high.

Additional policies, such as STAX, which are run on the basis of loss of income across the county, give farmers “a tool when prices are reliable and all other support is off,” Fisher said.

bart_fischer_300.jpgBart Fisher, Texas A&M

Additional policies “are even more important this year because the margin is so low with input prices. … It makes managing this franchise even more important than it would have been in other years,” he said. And when it comes to writing the next bill on agricultural enterprises, there is interest in bringing the SCO in line with STAX when it comes to factors such as the level of subsidies, he said. (However, this will probably require the House and Senate committees to find money to pay for the improvements.)

Corn and soybean producers are in a similar situation when it comes to getting more revenue this year. And in a recent analysis, economists at the University of Illinois and Ohio State University suggested manufacturers consider buying an SCO or other additional policy, the Enhanced Coverage Option (ECO). Neither PLC nor ARC is likely to trigger payouts this year, the analysis said.

“SCO and ECO are based on county yields, which leaves the risk that the county will have a good harvest and the farm will not. … In addition, premiums from additional policies should be compared with the expected net return, given that yields and prices are close Often, surcharges on additional policies significantly reduce the expected profit, “- write economists.

In 2021, American farmers purchased SCO policies on about 11.8 million acres and IVF policies on about 7 million.

PLC base prices for corn and soybeans are $ 3.70 and $ 8.40 per bushel, respectively; March corn futures traded at just under $ 6.40 on Tuesday, while March soybean futures were up more than $ 15.60.

For more news, go to the page Insurance products that are practically not used against the background of rising prices, costs 15.02.2022

Back to top button