Author: Fayu Chong

The risk in crop production, encompassing yield fluctuations and market price volatility, presents uncertain conditions for agricultural producers. To address and alleviate these uncertainties, the use of crop insurance is a key risk management strategy. The different crop insurance policies available for cotton producers frequently results in uncertainty concerning the variety of policies accessible and the specific regions where these policies are applicable.

For upland cotton, a range of Federal crop insurance plans serves to mitigate the inherent risks associated with cotton production. The Federal Crop Insurance Program (FCIP) for upland cotton encompasses three insurance plans offering farm-level protection against deep losses, which include complete losses. Yield Protection (YP) offers protection against only farm-specific yield losses, while Revenue Protection (RP) is designed to counter revenue losses triggered by variations in futures prices and farm yield. Revenue Protection with Harvest Price Exclusion (RP-HPE) also guards against revenue decline based on futures prices and farm yield but without the benefit of an adjusted revenue guarantee when harvest prices are above projected prices. 

In addition to farm-level deep loss insurance, shallow loss programs such as the Supplemental Coverage Option (SCO), Enhanced Coverage Option (ECO), and Stacked Income Protection (STAX) complement the risk management landscape. These policies are called shallow loss programs because none of these policies offer protection for complete losses. SCO and ECO function as add-on insurance products, which require enrollment in an underlying individual or farm-level plan of crop insurance (YP, RP, or RP-HPE) for enrollment. Both of these policies provide area or county-level protection. SCO and ECO follow the coverage of the underlying policy. If a producer chooses Yield Protection, then SCO and ECO cover yield loss. If a producer chooses Revenue Protection, then SCO covers revenue loss. SCO is only available for farms not enrolling in the Agricultural Risk Coverage (ARC) Program. Stacked Income Protection (STAX) functions as an add-on or a standalone product, which can be enrolled with or without the individual or farm-level plan of crop insurance (YP, RP, or RP-HPE). STAX is exclusively accessible to cotton producers whose base acres are not enrolled in the ARC or Price Loss Coverage (PLC) programs. Importantly, STAX may not be purchased with ECO or SCO. 

Biram and Connor (2023) provide a comprehensive discussion regarding how to utilize crop insurance programs with an overlap between the deep loss and shallow loss insurance programs. Aside from the deep and shallow loss programs previously mentioned, cotton producers have access to two more crop insurance options: Area Risk Protection Insurance (ARPI, including Area Revenue Protection and Area Yield Protection) and Hurricane Insurance Protection – Wind Index (HIP-WI). ARPI offers coverage based on the overall performance of a designated area, usually a county. ARPI safeguards against revenue or yield loss within a county. Meanwhile, HIP-WI assists by covering a part of the deductible of the primary crop insurance policy when a county or a neighboring one faces sustained hurricane-force winds. HIP-WI’s coverage can be combined with SCO and STAX when the insured acreage is also covered by a companion policy (YP, RP, or RP-HPE). A summary of these insurance programs available for cotton is summarized in Table 1. 

Ask your crop insurance agent if these plans of insurance are available in the county in which you produce cotton (see Agent Locator Tool offered by the U.S. Department of Agriculture Risk Management Agency). While insurance policies serve as vital tools in mitigating risks associated with cotton production, their intricacies underline the importance of understanding all the options and developing a comprehensive plan for managing price and yield risks.

Table 1. Individual and area crop insurance products with associated indemnity triggers and status as a standalone product for upland cotton (updated 2/8/2024)

Product	Type	Trigger	Standalone
Deep Loss Programs
Yield Protection (YP)	Individual	Farm Yield	Yes
Revenue Protection (RP)	Individual	Farm Revenue	Yes
Revenue Protection, Harvest Price Exclusion (RP-HPE)	Individual	Farm Revenue	Yes
Shallow Loss Programs
Supplemental Coverage Option (SCO)	Area	County Yield or County Revenue	No
Enhanced Coverage Option (ECO)	Area	County Yield or County Revenue	No
Stacked Income Protection (STAX)	Area	County Revenue	Yes, and can be purchased as an add-on Policy
Stacked Income Protection, Harvest Price Exclusion (STAX-HPE)	Area	County Revenue	Yes, and can be purchased as an add-on Policy
Additional Programs
Area Risk Protection (ARP)	Area	County Yield or County Revenue	Yes
Hurricane Insurance Protection – Wind Index (HIP-WI)	Area	Hurricane or Tropical Storm Incidence and Wind Speed*	No

*Hurricane and Tropical Storm triggers: Hurricane is wind speed, and Tropical Storm is wind speed plus county average rainfall total.

Reference:

H. Biram and L. Connor. (2023). Types of Federal Crop Insurance: Individual and Area Products. University of Arkansas Division of Agriculture Fact Sheet, Publication No. FSA75.

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Chong, Fayu, Yangxuan Liu, and Hunter Biram. “Exploring Diverse Crop Insurance Options for Cotton Producers.” Southern Ag Today 3(51.3). December 20, 2023. Permalink

Crop insurance is a widely adopted risk management tool for producers. Depending on a producer’s insurance plan, crop insurance can protect against losses due to yield or revenue. For cotton producers, if they select a crop insurance policy to protect them against the losses for revenue, several insurance plans are available, including Area Revenue Protection, Revenue Protection, and Stacked Income Protection Plan. For each of these insurance plans, producers have the choice of selecting the plan with the harvest price exclusion (HPE) option. The default choices for these crop insurance options are without HPE, in which indemnity payment is determined by crop yield and the higher value among the projected price and the harvest price for the insured year. If producers choose the insurance options with HPE, indemnity payments are determined by crop yield and only the projected price. 

The projected price serves as the minimum guarantee for cotton prices when calculating the crop insurance indemnity. With the default plan, the guarantee will go up if the harvested price is higher than the projected price. Discovery periods for projected and harvest prices for cotton differ among states and locations. For example, in Georgia, the cotton projected price is based on the average price for the December futures contract from January 15 to February 14 each year, and the harvest price is based on the average price for the December futures contract during October each year. For the insurance plans with HPE, because the price to calculate indemnity is only based on the projected price, HPE policies usually have lower premium costs for producers. A commonly asked question by producers is which option to select, with or without HPE. 

Figure 1 illustrates the ratio of the projected price and harvest price for cotton from 2011 to 2022 in Georgia. Cotton harvest prices exceeded projected prices only in 4 years out of the past 12 years. A high price ratio between the harvest and projected prices was observed in 2021, largely due to high volatility in the cotton market that year. This figure can provide some information when deciding whether to select or not to select HPE. For 2023, farmers should consider the risk and consult with their insurance agents for insurance choices. When making the insurance choices to protect their revenue, producers should consider the chances of whether the harvest price would exceed the projected price and whether the additional costs of premium paying for the protection for harvest price fit their risk management goals. If producers anticipate higher harvest prices for this year’s cotton crop than the projected price and can bear the additional premium costs, purchasing the default plan without HPE would be an option. 

Figure 1. The ratio of harvest price (HP) to projected price (PP) for cotton insurance plans from 2011 to 2022 in Georgia. A higher than one ratio indicates harvest price is higher than the projected price. Source: U.S. Department of Agriculture, Risk Management Agency. 

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Chong, Fayu, and Yangxuan Liu. “Cotton Crop Insurance to Protect Against Revenue Losses: Select Harvest Price Exclusion or Not?” Southern Ag Today 3(3.3). January 18, 2023. Permalink