ABCs of Supplemental Crop Insurance

Sales of Enhanced Coverage Option (ECO) crop insurance policies for corn soared by more than 325% last spring after USDA increased the federal subsidy for the low-deductible insurance plan to 65%.

"That's a pretty large subsidy," says University of Illinois ag economist Gary Schnitkey. "The way it's designed, if the government pays 65%, a farmer should receive more back in payments than they pay in out-of-pocket premium."

Interest in USDA's suite of shallow-loss insurance products -- including ECO, Supplemental Coverage Option (SCO) and Margin Protection (MP) policies -- has grown as spring crop insurance prices fell below many producers' cost of production, or in the case of Margin Protection, as input prices gyrated postpandemic.

"If you're triggering an 85% revenue protection policy on cash rent farmland, you're in a loss situation given where cash rent levels are at," Schnitkey says. "Our costs are close to 90% of expected revenue."

But, enrollments in these programs, which can cover revenue up to 95%, lagged as the programs' county-based payment formulas and higher premiums made it difficult to determine if a potential indemnity would cover the additional premium costs.

Falling prices triggered many ECO and SCO payments in 2024, even without sharp yield declines in some counties. Enrollment in programs tends to increase after farmers see their neighbors get payments.

Schnitkey says these products are intended to be layered on top of the farm's revenue protection or base crop insurance policy. Because indemnities are triggered based on county yields instead of the farm's historical average, they may not pay out in the year when the farmer has a loss or vice versa.

"That's the risk. I would view them as two separate policies. One at the farm level, and one at the county level," Schnitkey says, adding that he wouldn't advise changing their farm-level coverage if they add ECO, SCO or MP.

Following is a more detailed explanation of the three policies, including advantages and disadvantages of each.

MARGIN PROTECTION (MP)
-- Protects against input price changes
-- Early price discovery period

The most complex of the three policies, Margin Protection, pays when there's an unexpected decrease in operating margin caused by lower county yields, lower commodity prices, increased input prices or any combination of the above. Its early price discovery period -- from Aug. 15 to Sept. 15 the year prior to harvest -- also offers a way for farmers to lock in a price early if they anticipate a long-term downward trend in the market.

"You've got to really peer into the future trying to think about where you're at," Princeton, Indiana, farmer Scott Wallis says.

USDA calculates operating margin by creating an estimate of costs using futures prices for inputs like diesel, fertilizer and interest rates, as well as estimating other fixed costs. Expected costs are subtracted from expected county revenue projections using the higher of the September projected price or harvest price (if selected) to generate an insured profit margin.

Farmers can select coverage levels from 70 to 95% of that profit margin. The subsidy rate varies based on the level of coverage.

Wallis bought 95% margin protection policies for his 2022, 2023 and 2024 corn crops, and has received meaningful indemnities in two of those three seasons. The first payment triggered due to changes in input prices. The second year's payment was mostly wiped out by outstanding farm yields. The third year paid on declining corn prices.

He elected not to purchase Margin Protection on the 2025 crop. The projected price, based on the average December 2025 corn contract close from mid-August to mid-September 2024, was $4.40 per bushel.

"Ninety percent of $4.40 ain't nothing," he says, adding he'll be watching this month to see where prices land.

Ag economist Schnitkey says farmers need to consider the premium cost carefully. Like an option, its extended time value makes it more expensive.

ENHANCED COVERAGE OPTION (ECO)
-- Highest band of coverage
-- Highest subsidy rate

Enhanced Coverage Option, the newest product, has only been available for corn and soybean growers since 2021. It provides county-based revenue protection, meaning it can trigger based on declining prices or yields.

It covers from 86% to the farmer's choice of 90 or 95%. Farmers can enroll in ECO regardless of their Agriculture Risk Coverage (ARC) and Price Loss Coverage (PLC) program choice.

The low deductible made it an expensive product to purchase until USDA's Risk Management Agency's decision to boost the subsidy rate from 44 to 65%. That, and the sharply negative profit picture for many farmers, drove a spike in sales.

"This is the first year where we've seen payments," Schnitkey says. Some areas of the "I" states will see payments on 95% ECO policies for 2024's corn crop, while 86% of counties growing soybeans will see payments at the 95% level. Nearly 75% of counties will trigger payments at the 90% level, Schnitkey adds.

"I suspect we'll see more interest in ECO in particular because of the payment levels," he explains.

SUPPLEMENTAL COVERAGE OPTION (SCO)
-- Lower band of coverage
-- Impacts ARC/PLC decision

Congress created Supplemental Coverage Option in the 2014 farm bill, but many Midwestern farmers couldn't use it until 2019. That's because one of the requirements is farmers can't be enrolled in the Agricultural Risk Coverage program, which was initially a five-year decision. Farmers now make ARC/PLC decisions annually.

SCO lets farmers buy an additional band of coverage from 86% down to the coverage level of their policy, which is usually 75, 80 or 85% in the Corn Belt. It's currently subsidized at 44%.

It has traditionally drawn less interest, Schnitkey says, because it doesn't add much additional coverage above the farm-based policy. Proposed improvements in the reconciliation bill would increase SCO's band of coverage up to 90% while boosting the subsidy to 80%.

"At that point, you'd see a lot of farmers take it," he believes.

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