FOCUS ON AG
January 30, 2023
SCO INSURANCE COVERAGE CONSIDERATIONS FOR 2023
As has been often said with farming …… “every year is different”, and many times decisions for the current crop year are based on what happened in the previous year or two. That could be the scenario in some cases with considering Supplemental Coverage Option (SCO) insurance coverage for corn in 2023. SCO insurance coverage has been around for several years but has not been considered on a widespread basis due to the reduced potential benefits from SCO coverage. However, that scenario may be different this year due to the price spread between the potential Spring price for crop insurance coverage versus the Ag Risk Coverage (ARC) benchmark prices.
Details on SCO Insurance Coverage
SCO coverage is only available to producers that choose the Price Loss Coverage (PLC) farm program option for the 2023 crop year and is not available for farmers that choose ARC coverage with county yields (ARC-CO) or ARC coverage with farm yields (ARC-IC). The PLC farm program option is price only, and the 12-month average price for a crop needs to drop below pre-set reference prices in order to earn a farm program payment. The payment calculations for the ARC-CO program calculations are based on a pre-set benchmark (BM) revue (BM price and average county yield) and the final 2023 revenue (county average yield times the 12-month average price).
The deadline for 2023 farm program sign-up is March 15, 2023, which is the same as the enrollment deadline for 2023 crop insurance. As a result, farm operators will need to consider SCO insurance coverage at the same time that they are finalizing their 2023 farm program choice. The federal government subsidizes 65% of the premium for SCO coverage, so farm-level premiums are quite reasonable, which helps make SCO a viable option for producers that choose the PLC farm program option.
SCO allows producers to purchase additional county-level crop insurance coverage up to a maximum of 86 percent over and above the underlying crop insurance policy. SCO insurance coverage is available for both Revenue Protection (RP) or Yield Protection (YP) policies and will follow the underlying policy. This means that SCO with a YP policy will be based on yield only and a RP policy will be revenue based (price and yield). For example, a producer that purchases an 80% RP policy could purchase an additional 6% SCO coverage with revenue protection.
The most popular crop insurance coverage for Midwest corn and soybean producers is some type of RP insurance policy with either “enterprise units” or “optional units”. Enterprise units combine all acres of a crop in a given county into one crop insurance unit, while “optional units” allow producers to insure crops separately in each individual township section. Enterprise units typically have considerably lower premium costs compared to optional units for comparable RP policies. SCO insurance coverage is available for the same premium price with either enterprise or optional units on a given farm unit.
SCO is a county revenue-based insurance product that is somewhat similar to the area risk protection crop insurance products that are available. The calculations for SCO function very similarly to RP insurance policies. since they utilize the same crop insurance base price and harvest price. The biggest difference between SCO and most RP insurance policies is that SCO uses county level average yields, rather than the farm-level APH yields that are used for most RP and YP policies. As a result, the SCO and RP insurance policies may achieve different results.
It is possible for a producer to collect on an individual RP policy, but not collect on a SCO policy, or vice versa. For example, a producer with an 80% RP policy may have a loss that qualifies for an insurance indemnity payment on a farm unit, while the county as a whole may not meet the threshold to qualify for a SCO payment. It could also be possible to collect a SCO payment for a county-level revenue loss, while not qualifying for a RP insurance indemnity payment at the farm-level.
SCO insurance coverage will use county yields that are very similar to the ARC-CO yield, since both programs utilize USDA Risk Management Agency (RMA) yield data for calculations. The biggest difference in the calculations between ARC-CO and SCO is that ARC-CO utilizes the BM price, based on 5-year national average price (2017-2021) and the 12-month average price (9-01-23 to 8-31-24). SCO utilizes the 2023 crop insurance Spring price, based on the average Chicago board of Trade (CBOT) prices in February of 2023 for December corn futures, November soybean futures, and September wheat futures and the 2023 crop insurance harvest price, based on the averages of the same CBOT futures months in October for corn and soybeans and August for spring wheat.
Following is brief overview of how the SCO insurance coverage option and farm program options might function for corn in 2023:
The 2023 BM price for corn is $3.98 per bushel, compared to the 2023 PLC reference price of $3.70 per bushel. PLC payments are only made if the final MYA price is below $3.70 per bushel, while potential 2023 ARC-CO payments will be dependent on both the final 2023 MYA price and the 2023 county average yields. At a final 2023 MYA price of $3.98 per bushel, the final 2023 county yield would need to be 15 percent or more below the county BM yield to initiate a 2023 ARC-CO payment.
For example, if the county BM yield is 200 bu./A., the final 2023 county yield would need to be 170 bushels per acre or lower to initiate a 2023 ARC-CO payment. Another way to look at the ARC-CO decision for corn is to consider that if the final 2023 county average yield is the same as the county BM yield, the final 2023 MYA price would need to decline below $3.43 per bushel in order to initiate an ARC-CO payment. At a $3.43 per bushel final MYA price, there would be a $.27 per bushel PLC payment. The PLC program provides corn MYA price protection from $3.70 down to $2.20 per bushel.
One option for a producer to consider for corn in 2023, might be to enroll in the PLC program for very low-price protection, sign up for an 80% RP crop insurance coverage (either enterprise or optional units), and the sign up for SCO coverage (6%). This is especially a favorable option for a producer that is more worried about price risk than yield risk for the 2023 growing season. The SCO base price is the same as the crop insurance Spring price (est. at
$5.90/Bu. as of 2-01-23). Based on one estimate in a Southern Minnesota county, an 80% RP policy with enterprise units with 6% SCO coverage would cost $3.50 per acre less total premium than an 85% RP policy. If the final farm and county yield are close to the APH yields, there might be a slight advantage to the 6% SCO coverage with 80% RP coverage versus the 85% RP coverage, while still maintaining the PLC protection through the Summer of 2024.
The SCO insurance option seems to be best suited in situations where a farmer:
- Is more concerned with price decline that yield reductions for the 2023 growing
- Feels that there is greater chance for county yield reductions in 2023 than on their own farm
- Wants to maintain good insurance coverage (86%) at a slightly reduced premium
- Already planned to sign-up for the PLC farm program option (required for SCO insurance coverage).
Farmers should contact their crop insurance agent for details and spreadsheets on crop insurance and SCO coverage. Kent Thiesse, Farm Management Analyst, has prepared two information sheets titled “2023 Farm Program Decision Cheat Sheet” and “2023 Crop Insurance Decisions” To request a free copy or either, send an e-mail to: firstname.lastname@example.org. Other good farm program and crop insurance resources include:
- U of Illinois FarmDoc website — https://farmdoc.illinois.edu/
- Kansas State University — https://agmanager.info/
- Iowa State University — https://www.extension.iastate.edu/agdm/#
- USDA Risk Management Agency (RMA) — https://www.rma.usda.gov/
Note — For additional information contact Kent Thiesse, Farm Management Analyst and Sr. Vice President
MinnStar Bank, Lake Crystal, MN. (Phone — (507) 381-7960)