2014 – Cotton’s Transition Year

2014 Farm Bill Overview

Agricultural Council of ArkansasBoard of Directors Meeting

West Memphis, ARMay 13, 2014

2014 – Cotton’s Transition Year• Transition program for cotton for the 2014 crop

– 9 cents on 60% of 2013 upland cotton base acres and DP yield (can also think of it as 5.4 cents/lb. on all 2013 base acres and DP yield)

• Totals about 95% of 2013 DP– Extends to ‘15 at 9 cents on 36.5% of base for any

counties for which STAX not available• Subject to separate $40k/legal entity• ‘14 payments occur on/after Oct 1, 2014

Stacked Income Protection Plan• In 2015, new revenue insurance product

available for purchase on all acres planted to upland cotton; administered by USDA’s RMA

• STAX indemnities triggered by revenue experience at county level (or combined counties if necessary for actuarially sound product); STAX indemnities NOT based on individual experience

• STAX premium subsidy @ 80%

Basic STAX Concept

Current products needed in the event of deeper losses

More affordable protection for losses in this range

Deductible

STAX90%

70%

County income > 90%, then no STAX indemnity

County income at or below 70%, STAX indemnity at max

Basic STAX Concept

Deductible

STAX90%

70%

Individual Coverage

Deductible

Individual Income County Income

STAX Calculations• Max coverage band is 90% to 70% of Expected

County Income (or combined counties)– If Actual County Income falls below 90% of

Expected County Income, an indemnity is triggered– Actual County Income is insurance harvest price x

actual county yield– Expected County Income is insurance projected

price x expected county yield– Indemnity is lesser of amount that 90% of Expected

County Income exceeds Actual County Income or 20% of Expected County Income

STAX & Existing Insurance Coverage• Designed to be a complement to existing

coverage• May be purchased as the only insurance policy

covering that acre; or purchased in addition to CAT coverage or existing buy-up product – Note: Lower band of STAX coverage may not

overlap the coverage level of another insurance policy on that same acre

Cotton Crop Insurance Usage

None CAT <=60% YLD

65% YLD

70% YLD

>=75% YLD

<=60% REV

65% REV

70% REV

>=75% REV

0%

10%

20%

30%

40%

50%

60%% of 2012-13 Planted

US AR

Insurance Coverage Choices

None 50% 55% 60% 65% 70% 75% 80% 85%0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Underlying Coverage Level

% o

f Exp

ecte

d In

com

e

Underlying Coverage

Uncovered Range

Maximum STAX

Deductible

STAX Features• Offered by irrigated/non-irrigated practices to

greatest extent possible• Harvest Price Option

– Same as under existing revenue products• Select Protection Factor

– Feature in existing area-wide insurance products– Choose in percentage increments between 80% and

120%

Impact of Protection FactorAssuming Expected County Income = $800

0 0.050.10.150.20.250.30.350.40.450.50.550.60.650.70.750.80.850.90.95 1$0

$40

$80

$120

$160

$200

$240

% Loss in County Income

Inde

mni

ty

120% Protection Factor

80% Protection Factor

Sample STAX Calculations*Scenario #1:Price Decline

Scenario #2:Low Yield

1. Insurance Projected Price $0.80 $0.80

2. Expected County Yield/Pltd Acre 1,050 1,050

3. Expected County Income (#1 * #2) $840 $840

4. 90% of Expected Income (90% * #3) $756 $756

5. Insurance Harvest Price $0.68 $0.80

6. Actual County Yield/Pltd Acre 1,050 900

7. Actual County Income (#5 * #6) $714 $720

8. Income Shortfall (#4 - #7) $42 $36

9. Maximum Indemnity (20% of #3) $168 $168

10. Indemnity (Lesser of #8 & #9) $42 $36

11. Indemnity w/120% Protection Factor $50 $43

* Illustration does not assume Harvest Price Option. Producer may add HPO to STAX policy, allowing coverage to increase if harvest price is above projected price.

* Calculations illustrate indemnity if producer purchases maximum protection factor.

Supplemental Coverage Option• New product for upland cotton & other crops

beginning in 2015• May not be purchased on cotton acres covered

by STAX• Must purchase underlying insurance policy

– Provides coverage for portion of a producer’s deductible

• Indemnities triggered on county yield or revenue experience, depending on underlying coverage

Additional SCO Features• SCO deductible is 14%

– Indemnities triggered if county yield/revenue falls below 86% of expected yield/revenue

– % by which county yield/revenue falls below 86% determines indemnity that is adjusted based on value of the producer’s individual indemnity

• SCO coverage extends down to the coverage level of the underlying policy

• SCO premium subsidy is 65%

Covered Commodities• Wheat, feed grains, rice by type, pulse crops,

soybeans, other oilseeds, peanuts• Choice between price- or revenue-based

programs• Benefits will be tied to base acres for covered

commodity or generic acres attributed to covered commodity

* Subject to change based on interpretation of language and implementation.

Determining Base Acres• In 2014, upland cotton base in effect for 2013

crop is automatically converted to generic base • In 2014, choice to either retain 2013 base acres

of covered commodities or reallocate base– Reallocation applies only to base acres of 2014

covered commodities; Calculated using avg ‘09-12 plantings; See examples in Table 3

– Reallocation may not result in total base for farm exceeding base in effect on Sep 30, 2013

* Subject to change based on interpretation of language and implementation.

Covered Commodities: PLC or ARC• Choice between PLC and county ARC is 1-time,

irrevocable decision on commodity-by-commodity basis for the 2014-18 crops– If no choice made for 2014, Secretary may not

make payments to the farm for 2014 crop, and 2015-18 crops are automatically enrolled in PLC

– Payments decoupled from production (except on generic base acres)

– Payments made beginning Oct 1 following the end of the applicable marketing year

* Subject to change based on interpretation of language and implementation.

Payment Yields for PLC• May update yields for purposes of PLC on a

commodity-by-commodity basis beginning with 2014 crop

• Calculated as 90% of average yield per planted acre for 2008-12 crop years, excluding years when acreage planted to the crop was zero– If yield in any year is less than 75% of 2008-12

average county yield, plug in 75% of the 2008-12 average county yield

* Subject to change based on interpretation of language and implementation.

Payment Limits & Income Tests• Limit per entity is $125,000 for total of PLC,

ARC, MLGs and LDPs– Separate limit for peanuts is extended

• AGI test: if 3 year-avg exceeds $900,000, then ineligible for commodity and conservation benefits; – AGI test for commodity benefits starts in FY14 and

applies to conservation benefits in FY15– Does NOT apply to eligibility for crop insurance

premium subsidies* Subject to change based on interpretation of language and implementation.

Actively Engaged in Farming• Provision authorizes Secretary to define what

constitutes significant contribution of management, effective with 2015

• Provides discretionary authority to establish limit on number of individuals who may be considered AEIF when significant contribution of management is used

• New rules do not apply to individuals in operations composed solely of family members

* Subject to change based on interpretation of language and implementation.

Summary of 2014 Decisions• Decide between PLC or county ARC on

commodity-commodity basis or place all covered commodities in farm-level ARC– If PLC is chosen, decide whether to update

payment yields– If ARC is chosen, grower not eligible to purchase

SCO starting in 2015• Decide whether to retain or reallocate covered

commodity bases

* Subject to change based on interpretation of language and implementation.

Summary of 2015 Decisions• Growers will have a range of new insurance

products to choose from• For cotton, decide between STAX and SCO• Decide between the appropriate level, if any, of

individual insurance to pair with STAX (or SCO)• Possible based on availability/implementation

– Different coverage levels for irrigated and non-irrigated practice

– Enterprise units by practice– Option to update APH yield

* Subject to change based on interpretation of language and implementation.

Final Thoughts• Advice to Producers

– Seek out education opportunities– Investigate reliable decision tools– Inquire, at the appropriate time, about program

details from local FSA officials– Ask questions of insurance agents regarding the

new products and coverage options

* Subject to change based on interpretation of language and implementation.

Additional Farm Bill detailsavailable for NCC members

at www.cotton.org

MerchantsGinners Cottonseed

Producers Cooperatives

Warehouses Manufacturers