February 21, 2021

New Crop Insurance Option Provides Higher Levels of Coverage

SCO lets a farmer buy an additional band of coverage from 86% to the coverage…

SCO lets a farmer buy an additional band of coverage from 86% to the coverage level of their policy, which is usually 75%, 80% or 85% in the Corn Belt. Unlike revenue policies that pay based on the farm’s yield history, SCO payments are triggered by county yields.

ECO also pays based on county yields, but it covers a higher band, from 86% to your choice of 90% or 95%. Farmers can purchase it regardless of their farm bill program selection, and they don’t have to purchase SCO first.

“So, ECO rides on top of the SCO coverage, and SCO rides on top of the RP coverage,” Schnitkey said.

Because ECO covers a relatively shallow level of loss, Schnitkey expects it will pay out often. For example, if a farmer chooses the 90% coverage option on corn, he or she will pay about $10.74 per acre in out-of-pocket premium. A historical analysis suggests it will pay out 50% of the time with an average indemnity payment of $22.

The 95% option on corn is expected to trigger payment 67% of the time. The premium is more than double at $28.69, but the average indemnity payment is $58.21.

Schnitkey said ECO doesn’t pay out quite as often on soybeans, about 27% of the time with 90% coverage and 50% of the time with 95% coverage.

“I would think about adding ECO before SCO, and here’s why. Before you get any payment on SCO, you get the maximum ECO payment,” he said.

In the webinar, Schnitkey walks through a number of examples, including side-by-side comparisons of premium prices for RP, SCO and ECO. You can view a replay of the webinar here: https://farmdocdaily.illinois.edu/….

He said ECO and SCO tend to be good choices for farmers that like using options strategies. Since they’re based on county yields, they may also be a good choice for farms that tend to strongly reflect their county yields or vice versa. The area component provides a little extra protection against more general economic uncertainties.

Bruce Sherrick, director of the TIAA Center for Farmland Research at the University of Illinois, said that, empirically, area crop insurance products have paid out more often than revenue policies.

“They just don’t necessarily pay back in the years where you need coverage,” Sherrick said. “I think SCO and ECO have some of those same features in that, even if they pay you back more than they cost, they may not occur in the same years that you have the actual revenue shortfall.”

Schnitkey said these supplemental options are not “game changers” and that farmers need to make sure their underlying crop insurance policy and protection levels are adequately suited to their operation. “But they’re good. They will provide useful coverage. They’re worth considering, and whether you want to, it’s largely a matter of costs.”

Katie Dehlinger can be reached at [email protected]

Follow her on Twitter @KatieD_DTN