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SCO Sticker Shock
Tuesday, January 27, 2015 6:41AM CST

By Marcia Zarley Taylor
DTN Executive Editor

AUSTIN, Texas (DTN) -- The normal weather around Chris Nemec's central Texas farm vacillates between "constant drought and intermediate flooding," he likes to say. Despite those extremes, Nemec -- who farms with his father Don and brother Andrew -- won't be taking the government up on its new crop insurance offering this season.

What's more, the Nemecs aren't the only ones saying "no thanks" to the Supplemental Coverage Option, even though it was specifically designed to help growers in high-risk regions cover shallow losses, crop insurance agents report.

SHALLOW-LOSS SOLUTION

While growers throughout the Midwest routinely purchase 80% or 85% Revenue Protection policies, 50% to 65% is the norm in higher-risk regions like Texas or the Great Plains. Farm bill architects designed SCO for growers outside the Midwest who couldn't afford or couldn't even acquire Revenue Protection coverage above 75%. In effect, the new law will let them buy area revenue coverage up to 86% of their insurable revenue for the first time -- but only if they combine it with Price Loss Coverage under the new farm program. Unfortunately, SCO's high cost remains a deterrent even for operators likely to opt for Price Loss Coverage.

(Sale closing dates to sign up for SCO, as well as conventional crop insurance, start as early as Jan. 31 in Southern states but run until March16 for most of the Midwest).

"It's just out of line," Nemec says of the $5 an acre he'd spend on SCO premiums to buy another $40 of protection per acre. "I could buy 85% Revenue Protection coverage for about the same amount of money as SCO, and it protects my actual revenue, not a county average."

After droughts in 2011 and 2008 left "goose eggs" in his yield history, Nemec's crop insurance Actual Production History tumbled about 20%. But he's also not exercising a last-minute offer from USDA that would allow him to exclude repeated yield disasters in his APH.

"The cost of that was also unbelievably high," Nemec said. "My crop insurance agent said he just had a gut feeling there must be something wrong with the (APH-exclusion) software."

LACK OF CONFIDENCE IN COUNTY YIELDS

Worth Eubanks, a crop insurance specialist for Farm Credit Mid-America in Humboldt, Tenn., has spent much of the winter so far explaining farm program details to customers, but is meeting similar sticker shock on SCO.

"There's not a lot of interest in my area even after the conversation," he said. If crop insurance guarantees March 1 are close to late-January prices, SCO would cost about $8 to $12 an acre on corn in western Tennessee, he added.

"That's a little higher than we anticipated. Plus farmers don't have a lot of confidence in using county yields as a trigger," Eubanks said. Like Nemec, he thinks most growers would simply prefer to bump up their individual coverage under Revenue Protection for the same dollar. So instead of a 75% Revenue Protection policy, they might buy 80%.

GAPS IN SCO's AREA COVERAGE

Individual coverage -- rather than SCO's county yield formula -- may turn out to be a better deal for farmers like Nemec whose corn yields do not always correspond with the county average anyway. SCO is what's known as an area crop insurance program, triggering only when revenue of county yields and national average prices fall below preset thresholds. For growers whose personal yields are consistently above average, that could mean payments without suffering a loss. On the other hand, it's a hardship when farms suffer an individual yield disaster, but the overall county fares average or above and fails to trigger assistance.

A study by Mississippi State University economist Keith Coble found this disconnect a problem for a real Mississippi Delta farm had SCO been in effect between 1999-2008 (see the October Minding Ag's Business blog "Beware Gaps in SCO" at http://bit.ly/…) In 2008, when the farm generated only 71% of its normal yield, the county averaged 105%, so no payment would have triggered. Over the 10-year period, SCO underpaid the farm about $199 per acre, based on its actual losses.

DO YOUR HOMEWORK

James Richardson, co-director of the Agricultural and Food Policy Center at Texas A&M, cautioned growers not to take shortcuts or make generalizations about their farm program decisions. "We are discouraging rules of thumb. Every farmer should use a risk-based decision tool to analyze Agriculture Risk Coverage, Price Loss Coverage and SCO on their actual farm," he said. "Do not make a decision based on someone else's decision. Every farm is different. SCO will have to have a year in use before we will know how it works."


Editor's Note: For a link to podcasts and the Texas A&M farm bill calculator (which includes insurance choices), go to https://www.afpc.tamu.edu/…

Marcia Zarley Taylor can be reached at marcia.taylor@dtn.com

(ES/SK/AG)


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