Enhanced Coverage Option (ECO)

Enhanced Coverage Option (ECO)

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In the 2019 Farm Bill a new crop insurance coverage option was developed and implemented. This coverage option is now available for the first time, starting with the 2021 crop insurance year.

This new coverage is called “Enhanced Coverage Option” or as we all know, Federal Crop Insurance loves to use acronyms, ECO.

This new coverage option allows us to measure our coverage from whatever level we have chosen on our underlying M.P.C.I policy (Multiple Peril Crop Insurance) up to 95%. Remember on our underlying M.P.C.I policy we can choose to insure our A.P.H (Actual Production History) anywhere from 50% to 85% in increments of 5%. E.C.O operates differently from what we are used to with our M.P.C.I, A.P.H base policy. M.P.C.I policy is based on our own individual farm and our own individual production/yields. E.C.O is referred to as an area-based coverage. For most of us in W.N.Y, the area is the county we farm in. Each individual county is an area. I have been told that in some states such as North and South Carolina an area could include 2,3 or 4 counties. So, the coverage is based on the county as a whole. The insurance responds to the county as a whole not based on the performance or experience of our own individual farm.

This E.C.O coverage option has 2 moving parts that will determine if we qualify for an indemnity payment. The 2 moving parts are, Expected County Yield vs. Actual Harvest Yield and Projected Price vs. Harvest Price.

Let’s look at the operation of this new coverage, what sets our insurance level of coverage and what events would trigger an indemnity payment.

Our level of coverage starts with expected county yield multiplied by projected price (for either corn or soybeans) multiplied by 95% E.C.O coverage level.

The Federal Government through the United States Agricultural Department, the Farm Service Agency, and Risk Management Agency determines each year what they expect each crop will produce for that year for each county.

The projected price is determined by the average trading days in February on a futures contract for corn and soybeans. A December futures contract is used for corn and a November futures contract is used for soybeans.

Let’s look at an example using corn as our crop and Orleans county for the crop year 2020 (Remember, E.C.O was not available in 2020, this is only an example).

Expected county yield 162 BU/A X 3.88 BU (average trading days in February 2020 on a December futures contract) x 95% E.C.O level of coverage = $597.00/A income coverage.

What determines if we receive an indemnity payment is when the actual harvest production for that county x the harvest price for corn is less than $597.00. The harvest price is the average trading days in November on that same December futures contract.

In any given year will not know the actual harvest yield/acre for a given county until all farms have reported that year’s product through the FSA office or to their crop insurance agent. That means the final calculation to determine if an indemnity will be paid won’t happen until late spring or early summer of the following year.

We can make a calculation to see how low our actual harvest production would have to be in Orleans County for 2020 to review an indemnity payment.

We take our level of coverage, $597.00/Acre, and divided it by the harvest price, those average trading in November. We know that the 2020 harvest price for corn came in at $3.99/bushel

$597.00/Acre ÷ $3.99/bushel = 149.6 bushel/acre. So, if the Orleans county actual harvested production for corn for 2020 comes in lower than 149.6 bushels/Acre an indemnity payment would be paid under the enhanced coverage option.

Let’s backtest this coverage concept by looking at a few past years and compare these two moving parts:

 

A.    Expected County Yield vs Actual harvested production

B.     Projected Price vs Harvest Price.

 

1.    2018 Corn in Orleans County:

 

Expected Yield        x     Projected Price

162 Bushel/Acre     x     $3.96/Bushel      =      $642.00

95% E.C.O coverage level

                                                   ____________________

Actual Harvest Yield   x   Harvest Price             $610.00 Income coverage

160 Bushel/Acre       x     $3.68/Bushel     =      $589.00 Actual Income

                                                                                   $21.00 / Acre Indemnity Payment

 

2.     2016 Corn in Orleans County

 

Expected Yield     x   Projected Price

162 Bushel/Acre  x   $3.86 / Bushel          =      $625.00

           95% ECO Coverage level

          _____________________

Actual Harvest Yield   x  Harvest Price             $594.00 Income Coverage

139 Bushel/Acre             $3.49/Bushel       =     $485.00 Actual Income

                                                                                   $109.00 /Acre Indemnity Payment

 

3.     2016 Corn in Niagara County

 

Expected Yield     x    Projected Price

153 Bushel/Acre  x    $3.86/bushel            =      $590.00

                                           95%  E.C.O Coverage Level

______________________

Actual Harvest Yield  x  Harvest Price                $561.00 Income Coverage

130 Bushel/Acre      x     $3.49/Bushel                $454.00 Actual Income

  $107.00 /Acre Indemnity Payment

 

4.     2016 Corn in Monroe County

 

Expected Yield     x    Projected Price

161.5 Bushel/Acre  x    $3.86/Bushel        =       $623.00

 95% E.C.O Coverage Level

______________________

Actual Harvest Yield   x    Harvest Price             $592.00 Income Coverage

118 Bushel/Acre         x     $3.49/Bushel             $412.00 Actual Income

           $180.00 /Acre Indemnity Payment

 

Now lets us look at how E.C.O works with our soybean crop. We are going to look at three different counties and three different years. You will notice that the formula and the math are always the same. The projected price starts with those same average trading days in February. However, it is on a November futures contract. That means the harvest price for soybeans is based on the average trading days in October.

 

5.    2020 Soybeans in Orleans County

Expected Yield   x   Projected Price

48 Bushel/Acre   x   $9.17/Bushel              =      $440.00

 95%    E.C.O Coverage Level

________________________

Harvest Yield    x    Harvest Price                        $419.00 / Acre Income Protection

?            x     $10.55/Bushel

 

Just like our 2020 Corn example, we do not yet know what the actual harvest yield will be for 2020 soybeans. We can make the same calculation to determine how low the actual harvest has to come in to have an indemnity payment paid.

$419.00/Acre income protection ÷ $10.55/Bushel (the average trading days in October on a November soybean contract) = 39.7 Bushel/Acre

 

6.     2018 Soybeans in Niagara County

 

Expected Yield   x    Projected Price

42 Bushel/Acre   x   $10.16/Bushel             =      $467.00

  95% E.C.O Coverage Level

_____________________

Harvest Yield      x     Harvest Price                      $405.00/Acre Income Protection

49 Bushel/Acre  x    $8.60/Bushel                       $421.00 Actual Income

No Indemnity Payment

 

7.     2016 Soybeans in Monroe County

 

Expected Yield     x   Projected Price

46 Bushel/Acre    x    $8.85/Bushel            =    $407.00

95%

__________________

Harvest Yield      x      Harvest Price                  $389.00/Acre Income Protection

41 Bushel/Acre          $9.75/Bushel                   $399.00 Actual Income

No Indemnity Payment

 

It is interesting to look at our last two examples, 2018 soybeans in Niagara County and 2016 soybeans in Monroe County, that no indemnity payment would have been made. However, for two different reasons. There would not have been an indemnity payment in 2018 soybeans in Niagara County because the actual harvest yield was higher than the original expected yield. Even though the harvest price fell by $1.56/Bushel the actual harvest was up by 7 Bushel/Acre. So, the actual harvest yield x Harvest price was higher than our income protection level. The opposite happened in 2016 with soybeans in Monroe County. The actual harvest yield was down from the original expected yield, at the same time the harvest price was up by .90¢/Bushel. So, the actual harvest yield x harvest price was higher than our income/Acre protection.

 

Looking at these two examples for these two different years for the same crop is a great example of the relationship between the two moving parts that are important to understanding the working elements of the enhanced coverage options.

 

1.      Expected yield for a crop/county vs Actual harvest production of that crop.

2.      Projected price for a crop vs harvest price of that same crop

 

Enhanced Coverage Option now allows us to build a risk management strategy for our farm to protect farm income. Realizing that our projected prices for corn and soybeans for2021 will be relatively high compared to the last 5 to 6 years. We need to carefully consider if this is the year to add E.C.O to our crop insurance program

If you would like our help in understanding E.C.O or in determining if this strategy is for your farm, call us at 585-589-6236.