2014 Farm BillCotton Decisions and Implications

Don ShurleyDepartment of Agricultural and Applied Economics

University of Georgia

National Farm Bill Education ConferenceSeptember 3-4, 2014

Kansas City, MO

Cotton and the 2014 Farm Bill

• DCP Program discontinued;Cotton not included in PLC and ARC

• CTAP for 2014 on 60% of 2013 cotton base acres

• STAX available beginning with 2015 crop

• 2013 cotton Base Acres become Generic Base

• Marketing Loan continues but Loan Rate allowed to vary

STAXStacked Income Protection Plan

• County/area revenue policy available on all upland cottonacres planted

• Coverage is for a maximum band of 20%-- starting at a high of 90% (10% county/area loss) to 70% (30% county/area loss); not below 70%

• May be purchased as a stand-alone policy or may be purchased in additional to the farm’s “Companion Policy”

• Indemnity paid when county/area revenue falls below90% (or maximum selected) of the county/area

guarantee

None CAT Yield Revenue RevHPE0

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8580757065605550CATNonePe

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Crop Insurance Policy Type and Coverage LevelGeorgia Cotton 2014 (as of 9/1/2014)

10.58% 11.95%

21.58%

55.57%

0.3%

None CAT Yield Revenue RevHPE Area Revenue

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908580757065605550CATNonePe

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Crop Insurance Policy Type and Coverage LevelTexas Upland Cotton 2014 (as of 9/1/2014)

1.21%

7.78% 7.40%

83.47%

0.11% .004%

Cotton Decisions

• STAX is optional

• If enrolled in STAX , must select level/range of coverage

• If enrolled in STAX, type and level of Companion Policy

• SCO may be selected rather than STAX

• Comparison of net returns on Generic Base

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Illustration of STAX Example

Example:65% Companion Policy

STAX

10% Deductible

Gap b/t STAX andCompanion policy

STAX ParametersCoverageProvides coverage for loss up to 20% of expected county/area revenue.

Coverage BandLoss payments are received when actual county/area revenue is lessthan 90% of expected revenue– unless a lower loss trigger is selected.Coverage is in increments of 5%. Payments are maximum when actualrevenue is 70% or less of expected revenue.

Expected County/Area RevenueRMA established yield 1 x Projected Price2 1/ Higher of 5-yr OA yield or trend yield, but RMA methodology and yields not yet known2/ Same price used in Revenue Policy. Harvest Price used if higher and HPO is elected.

Actual County/Area RevenueActual County/Area Yield x Harvest Price1

1/ Same price used in Revenue Policy

STAX Parameters

STAX Protection/LiabilityCounty/Area Expected Revenue x Coverage Band x Protection Factor

Protection Factor (PF)120% to 80%; The PF may be used to increase or decrease the amount of indemnity paid for any county/area loss.

STAX Expected Producer PremiumSubsidy will be 80%; Premium expected to average 40% of Liability Example: $560 expected revenue x 20% band x 1.2 PF = $134 liabilityProducer Premium = $134 x 40% x 20% producer share = $10.72/acre

None CAT/50

55 60 65 70 75 80 850

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Per

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Coverage Cannot Overlap

Uninsured

Companion Policy

STAX

Deductible

2009 2010 2011 2012 2013County/Area Yield 1 738 730 636 1148 901 790Projected Price 2 $0.70Expected County/Area Revenue $553STAX Band Selected Max 90 Revenue Guarantee $498

Min 70 Maximum Indemnity $100Protection Factor 1.00 Maximum Indemnity With PF $1001/ Uses USDA-NASS data for illustration purpoases but Yield will be determined using RMA data.2/ Dec15 futures as of 8/29/2014. PP will be 1/15/2015 - 2/14/2015 average of Dec15 futures.

Actual County/Area Yield 750Harvest Price 3 $0.65Actual County/Area Revenue $488Indemnity (higher of (Expected - Actual Revenue)*PF, or the Maximum) $103/ For example illustration only. Actual HP = 10/1/2015 - 10/31/2015 average of Dec15 futures

STAX Example-- Dooly County, GA 2015

Comparison of STAX and SCO

10% Deductible14% Deductible

Maximum 20% BandCoverage to Companion Policy

STAX SCO

Example 65% Companion Policy Example 65% Companion Policy

Comparison of STAX and SCO

STAX SCONo Companion Policy required Companion Policy required

Based on county revenue Based on county yield or revenue; same as underlying policy

Maximum 20% coverage from 90% to 70%

Coverage from 86% down to level of Companion Policy

May elect to receive payment above actual loss (PF) N/A

80% premium subsidy 65% premium subsidy

Decisions and Considerations• STAX is “the cotton program” but it’s optional.

Do you want STAX?

• How would SCO compare to STAX ?

• How does the farm yield history (yield level, variability)compare to the county/area?

• What is your indemnity experience with CompanionPolicy? Is a Companion Policy + STAX or SCO beneficial?What level?

• STAX is an insurance product, but will it be an effectiverisk-management tool? Depends on correlation.

Decisions and Considerations

• Neither STAX or SCO likely to pay out as much as DCP

• Cash-flow of any indemnity; actual county/area yieldnot known until the following year after harvest

• Combination of STAX + Companion Policy is a criticaldecision; producers may be tempted to forgo theCompanion Policy or reduce coverage level of CP

Impact of the Farm Billon Planting Decisions

• Cotton’s competition for acreage includes “covered commodities”corn, soybeans, peanuts, and grain sorghum.

• Covered commodities may be enrolled in PLC or ARC

• Acreage planted of a covered commodity will automatically beassigned to Generic Base by FSA.

• Most cotton-producing farms likely have more cotton/Generic Basethan other crop bases.

• If acreage planted of all covered commodities < Generic Base, all acreage will go to Generic Base

• If acreage of all covered commodities > Generic Base, acreage ofeach covered commodity assigned will be reduced

proportionately.

Current 2015 Crop Comparison Planted on Generic Base

Cotton1 Corn Soybeans PeanutsExpected Price2 $0.70 $3.99 $10.40 $0.20Expected Average Farm Yield 1200 200 60 4700Crop Returns $840 $798 $624 $940

Expected PLC Rate3 N/A $0.00 $0.00 0.0675PLC Payment Yield4 N/A 160 48 3760% Base Acres N/A 85 85 85Expected PLC Payment/Acre N/A $0 $0 $216

Total Returns $840 $798 $624 $1,156Estimated Variable Cost5 $559 $692 $314 $689Expected Net Return $281 $106 $310 $4671/ Excludes STAX or SCO Indemnity2/ Based on 2015 harvest-time futures on 9/2/2014, no adjustments for basis. Peanut price is forecast.3/ PLC Reference Price minus Expected Price if RP > EP4/ Assumed to be 80% of expected farm yield5/ 2014 costs, University of Georgia estimates

Example Comparison of Expected Net Returns With PLC on Generic Base

Cotton1 Corn Soybeans PeanutsExpected Price2 $0.70 $3.99 $10.40 $0.20Expected Average Farm Yield 1200 200 60 4700Crop Returns $840 $798 $624 $940

ARC Price3 N/A $5.30 $12.17 0.258ARC Yield4 N/A 160 48 3760Benchmark Revenue $848 $584 $971ARC Guarantee5 N/A $729 $502 $835ARC Actual Revenue6 N/A $638 $499 $752ARC Payment/Acre7 $72 $3 $71

Total Returns $840 $870 $627 $1,011Estimated Variable Cost8 $559 $692 $314 $689Expected Net Return $281 $178 $313 $322

1/ Excludes STAX or SCO Indemnity2/ Based on 2015 harvest-time futures on 9/2/2014, no adjustments for basis. Peanut price is forecast.3/ Estimated 5-year Olympic Average (2009-2013)4/ Assumed 5-year Olympic Average. Assumed to be 80% of expected farm yield.5/ 86% of Benchmark Revenue6/ Actual county yield assumed to be the same as ARC Yield. ARC Yield x Expected Price7/ ARC Guarantee minus ARC Actual Revenue or 10% of Benchmark Revenue, whichever is less, x 85%8/ 2014 costs, University of Georgia estimates

Example Comparison of Expected Net Returns With ARC-C on Generic Base

Decisions and Considerations

• Existing “hip pocket” base of covered commodities will beeligible for any PLC or ARC regardless of acreage planted.

• Covered commodities planted will be assigned to GenericBase and also eligible for any PLC or ARC.

• Planning and budgeting should include any expected PLC andARC payments. Decision aids could include expected

cropplanting and net returns in addition to PLC and ARC

payments.

• Planting decisions on Generic Base should include anyexpected PLC and ARC. If cotton acreage is in competitionwith covered commodities on Generic Base, cotton net returnsshould be compared with the covered commodity + PLC/ARC.Otherwise, not.

Don ShurleyDepartment of Agricultural and Applied Economics

University of Georgia

donshur@uga.eduwww.caes.uga.edu/departments/agecon/

www.ugacotton.com