Dramatic Difference in Expected Yields between Corn, Soybeans, and Cotton for Area-Based Insurance Products

By Gary Schnitkey and Nick Paulson et.al

Both the House and Senate Reconciliation Bills include provisions to encourage the purchase of the Supplemental Coverage Option (SCO), a crop insurance product providing county coverage above Revenue Protection (RP) and other farm-level products.  The performance of SCO is greatly influenced by how the Risk Management Agency (RMA) calculates expected yields.  Those expected yields are used to determine guarantees for area-based products.  Since 2015 when SCO was first offered, actual county-level yields of corn and soybeans in the Midwest have been above expected yields in most years, implying a continuation of historical increases in yield and lower expectations for indemnities.  On the other hand, actual county-level yields have been below expected yields for the majority of years for cotton, raising a question of whether the historical increase in cotton yields has slowed or plateaued.   There is little reason to expect different results in the future.

Background

The Stacked Income Protection Plan (STAX) for upland cotton, Supplemental Coverage Option (SCO), and Enhanced Coverage Option (ECO) are examples of area products offered through the Federal crop insurance programs (see farmdoc daily, June 13, 2024, June 10, 2025).  Those products have their insurance guarantees based on expected yields. For example, an area-based product offering revenue coverage defines the revenue guarantee as the product of the coverage level, expected yield, and the applicable insurance price.

The expected yields are developed by the Risk Management Agency (RMA) using analysis of historical time series data on actual yields.  Accurate expected yields are crucial for achieving optimal area-based coverage performance.  Expected yields that are too high for an area will result in payments being triggered too frequently, with payments that are too large relative to actual losses. Expected yields that are too low will result in payments that are not triggered enough and are too small to cover realized losses.