How does NCC crop revenue insurance proposal stack up?

Before the Joint Select Committee on Deficit Reduction announced its failure to develop recommendations for budgets cuts, it received a letter from House and Senate agricultural committees recommending cuts to agricultural programs of $23 billion, a figure which includes nutrition and conservation programs.

Under that possible scenario, cuts to commodity programs would have been $13 billion to $15 billion, or an approximate 30 percent reduction in the $50 billion which the Congressional Budget Office projected would have been spent on commodities during the coming years.

In mid-November, a number of farm policy proposals were under consideration to modify or eliminate the traditional target price payment structure. Four are revenue insurance proposals which would cover a producer’s shallow losses – those ranging between 5 percent and 30 percent.

Funding for these programs would come from the elimination of counter-cyclical and direct payments, said Gary Adams, vice president, economic and policy analysis, National Cotton Council, speaking at the Delta Council’s Mid-Year, board of directors meeting at the Capps Center, in Stoneville, Miss.

The proposals have been developed by the NCC, National Corn Growers Association, American Soybean Association and Sens. Sherrod Brown, D-Ohio, John Thune, R-Ind., Dick Durbin, D-Ill., and Dick Lugar, R-Ind. The latter is the Aggregate Risk and Revenue Management plan.

Adams says the NCC’s Stacked Income Protection Plan, which has also been referred to as STAX, incorporates many features of existing area-wide plans and is designed to complement current individual crop insurance purchase decisions. No changes are proposed for current crop insurance products.

Under this plan, the producer would have to pay a premium to enroll, and there would be some level of a deductible. “We’re hoping to get a subsidy somewhere in the neighborhood of 80 percent where the producer would pay 20 percent of the total premium,” Adams said.

The four plans differ in the way they compute losses and there are differences in coverage.

In the STAX proposal, a loss as low as 5 percent could trigger support and STAX would reach its maximum payout at a 30 percent loss. Respectively, lower versus upper percentages for the NCGA are 5 percent and 15 percent; ASA, 10 percent and 25 percent for non-irrigated; and for ARRM, 10 percent and 25 percent. The NCC, NCGA and ASA plans pay on 100 percent of acreage, while the ARRM plan pays on 85 percent of acreage.

Here’s a closer look at the NCC’s STAX plan:

The NCC plan establishes a county-wide projected income by multiplying expected county yield by a county-wide projected price, which is the higher of a futures price and a fixed reference price.

For much of the Cotton Belt, the futures price would be the average of December futures between Jan. 15 and Feb. 14. The fixed reference price in the NCC’s current proposal is 65 cents. This could move up and down from year to year, depending on budget constraints.

At harvest, if realized income is below a defined percentage of projected income, then an indemnity is triggered to all program participants in the county.

Here are examples of how STAX might have paid out for two crop years, 2009 and 2010, for cotton producers in LeFlore County, Miss.

In 2009, the projected price based on December futures was 54.7 cent per pound. Therefore, the fixed reference price of 65 cents becomes the area-wide projected price. Expected yield for the county is 905 pounds, which results in an area-wide income protection of $588.

At harvest, the price is 65.63 cents. It is multiplied by the county-wide average yield of 905 pounds, resulting in an area-wide income of $594. This figure is multiplied by 95 percent, creating a reference income of $564. This reference figure is used to compute the payment.

If the actual county-wide yield falls to 602 pounds, then the area-wide realized income drops to $395, resulting in an income shortfall of $169 per acre. (compared to the reference figure). The maximum indemnity (25 percent of the area-wide reference income) of $148 would be triggered.

In 2010, the projected priced based on the average of December futures is 71.81 cents per pound. This becomes the area-wide price protection. Expected yield for the county is 910 pounds, which results in an area-wide income protection of $654.

At harvest, the price is $1.1233 per pound. It is multiplied by the area-wide average yield of 910 pounds, resulting in an area-wide reference income of $1,022. The figure is multiplied by 95 percent, leaving a reference income of $971.

If the actual area-wide yield is 1,145 pounds per acre, then the area-wide realized income is $1,286 per acre, which results in no income shortfall.

“In a bad year, it does generate an indemnity,” Adams said. “In a good year, like in 2010, when there is a price run-up in the market, there was no shortfall and there’s no indemnity paid to the producer.”

Adams noted that agriculture committees “have been working hard over the last few weeks to come to some sort of consensus. It’s hard to tell where things stand right now, but it’s clear that these types of shallow loss revenue programs are still very much in the mix.

“Some are still trying to look at target prices for commodities as well. For us in cotton, we still have the challenge of the Brazil ruling, so we feel like our version of a revenue insurance program does the best job of resolving the trade dispute with Brazil.”