Minding Ag's Business

"I don't see the need to purchase SCO at all," a crop insurance agent asked at an ag economics meeting last week in Louisville. "Wouldn't the money be better spent to buy an extra 5% or 10% extra in individual revenue insurance coverage?"

Good question. If commodity prices continue to flounder, more growers may be leaning toward adding the Supplemental Coverage Option (SCO) to their Production Loss Coverage under the new 5-year farm bill. But just be aware that all crop insurance coverage isn't created equal.

Most of the Midwest buys crop revenue coverage at 75% to 85% levels. In the rest of the country, 50% to 65% coverage has been the norm.

Growers in regions that can't afford or can't even acquire revenue coverage above 75% pushed for SCO. In effect, it will let them buy area revenue coverage (similar to the old county-based group-risk policies) up to 86% of their insurable revenue. Some might mistakenly think SCO is identical to an individual Revenue Protection policy that insures your actual yield. Not so. It can be a particular problem if you farm in a large county with highly variable soils and weather patterns. For example, you might farm in a flood plain but the rest of the county is highland, or vice versa.

Irrigated producers sometimes prefer area coverage because their yields don't vary as much as county averages. In the Midwest, some large growers favored GRIP and GRP policies because they nearly always generated yields higher than the county average so could increase odds of payouts.

The danger is SCO's "area" coverage reflects county-average yields and may not mirror actual yield losses on your farm, cautions Keith Coble, a Mississippi State University economist and adviser to the Senate Agriculture Committee during the 2014 farm bill debate. "I'm not trying to dissuade people from buying it, but they need to be aware of how it works."

To illustrate, he analyzed yields and prices from 1999-2008 on an actual Mississippi Delta farm (see table).

If SCO had applied to this operation, it would have triggered payments four times in the 10-year period. The problem was that on-farm yields rarely correlated when the grower would have needed supplemental payments the most. In 2008, the grower would have a real shortfall of $155/acre due to a 29% drop in yields, but because county yields ran above average, SCO never would have triggered. Over the 10-year period, SCO paid $199/acre less than his actual losses.

Insurance is best used when disaster strikes an individual farm, not a whole county. Hail is the best example of that, Coble says. "We've gone down a road that's difficult to insure with our crop insurance programs. SCO just might not be there when you need it."

Follow me on Twitter@MarciaZTaylor

Follow me on Twitter@MarciaZTaylor

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