In addition to the Ag Risk Coverage (ARC) program in the Commodity Title, the Senate Ag Committee’s 2012 Farm Bill (summary, with more details on SCO) also includes an optional program to supplement individual insurance coverage with county-level yield or revenue coverage in the Crop Insurance Title. The Supplemental Coverage Option (SCO) offers county-level coverage for a portion of the individual farmer’s insurance deductible. For farmers who choose to enroll in the ARC program, SCO will cover losses ranging from their elected insurance coverage level to 79% of the SCO guarantee, resulting in a 21% deductible. For farms not enrolled in ARC, SCO coverage would range from their insurance coverage level to 90% of the SCO guarantee, resulting in a 10% deductible.

The SCO is a relatively complicated program for which I intend to provide a series of farmdocDaily posts. Today, I focus on the mechanics of the program and take a look at conditions under which SCO payments would be triggered using historical data for corn in McLean County, Illinois, as an example. I am also limiting discussion today to the case where the farmer is NOT enrolled in the ARC program. Future posts will compare ARC and SCO, and discuss the choice among the program alternatives.

The yields and prices used to set SCO’s guarantee and to determine losses in a given crop year are assumed to be similar to those used for the GRP and GRIP area insurance plans. One exception is that there will not be a payment multiplier for SCO (producers can elect a multiplier on GRP and GRIP of up to 150%). The current language of the Senate Ag Committee’s farm bill leaves many of these details up to the discretion of the Secretary of Agriculture and the Federal Crop Insurance Corporation as the program’s administrator.

For the example provided here, the yield guarantee is a simple linear trend yield estimate based on historical NASS yield data from 1972 to 2011. The SCO price component for this example is based on futures prices with the base or guarantee set at planting time. For yield coverage, actual yield for the county reported by NASS is compared to the trend yield with losses valued at the base price. For revenue coverage, the actual price is determined during a period around harvest. The revenue guarantee is the product of the base price and the trend yield, with losses for revenue coverage determined by comparing this guarantee to actual revenue – the product of the harvest price and actual yield for the county.

Regardless of the farmer’s insurance choice, SCO payments require a loss exceeding 10% of the guarantee to trigger a payment (alternatively, actual yield/revenue must fall below 90% of the guarantee). The maximum SCO payment that may be received is determined by the farmer’s insurance coverage. For example, for a farmer with 80% revenue protection, SCO payments would reach their maximum if actual county revenues fell below 80% of the SCO revenue guarantee. SCO is outlined as an insurance product with the premium subsidized at a flat rate of 70%.