A new federal crop insurance pilot product giving cotton producers the opportunity to purchase additional yield-based coverage on the cottonseed they produce is making its way through the implementation process and appears to be on-track for a 2011-crop debut, according to Lubbock-based Plains Cotton Growers, Inc., (PCG). The FCIC Board approved the new program for pilot status on July 30, 2009.

Called the Cottonseed (Pilot) Endorsement (CPE), the innovative new product was developed by PCG with a two-fold purpose: (1) to provide growers the ability to insure the value of the cottonseed they produce in a similar manner as they insure their cotton lint; and, (2) to provide growers another reason to include cotton in their crop mix since a greater portion of the value they derive from the crop can be covered by insurance.

The idea of the new product has been well received, and strongly supported, by growers and cotton industry groups throughout the Cotton Belt.

As a result of that support and the nature of the new product the Federal Crop Insurance Corporation Board of Directors and the USDA Risk Management Agency agreed to approve the product for sale throughout the Cotton Belt.

The new CPE product will be an add-on endorsement available for growers who purchase a qualifying buy-up policy of insurance in 2011. The cottonseed endorsement can be purchased by growers who select either Yield or Revenue coverage policy of insurance under the new Combo Policy provisions that qualify as buy-up plans of insurance.   As such the CPE premium is eligible for the full range of federal crop insurance premium subsidy just like the growers cotton lint policy.  Growers who purchase catastrophic (CAT) or group risk (GRP or GRIP) policies of insurance will not be able to purchase the cottonseed endorsement add-on.

Additional information about the endorsement will be distributed to Approved Insurance Providers (AIP) as they are apprised of 2011 insurance offering by the USDA Risk Management Agency over the next few months.   Since it will be in pilot status for 2011, all AIPs that sell eligible federal crop insurance products to cotton producers will have the option of offering the Cottonseed Pilot Endorsement to their customers.

Understanding the program

Understanding the new product and how it works should come quickly by both AIPs and producers since the program will require virtually no extra effort to purchase or service.

 In a nutshell, the Cottonseed Pilot Endorsement (CPE) utilizes a proxy approach to crop insurance, converting cotton lint production to cottonseed equivalent by a state-based seed-to-lint conversion factor to form the basis of insurance and to calculate indemnities.   Premium rates will mirror the premium rates applicable for the underlying cotton lint insurance policy based on the direct correlation that exists between cotton lint and cottonseed yield.  

Extensive agronomic and statistical data support the CPE's use of a cottonseed factor as an actuarially sound method of providing an effective guarantee for producers without imposing an additional reporting or underwriting burden on producers and the program.   Also, use of the state-based factor does not affect the probability of an individual loss because the same conversion factor is used to set the guarantee and to determine production to count.   

In simple terms a producer buying a qualifying buy-up policy of insurance product (MPCI, CRC, RA or their equivalent under the new Combo Policy Provisions – Yield Coverage and Revenue Coverage) who purchases the cottonseed endorsement will have a companion policy of insurance covering a percentage (equal to the coverage level selected for their cotton lint policy) of their cottonseed equivalent yield.   The cottonseed equivalent yield will be calculated using the applicable state cottonseed factor multiplied by their current Actual Production History (APH) yield.

The cottonseed equivalent yield will then be used to create the cottonseed guarantee—calculated by multiplying the cottonseed equivalent yield times coverage level. Total dollars of coverage will then be figured using the cottonseed guarantee yield times the applicable cottonseed price established by the USDA Risk Management Agency.

The CPE premium will be calculated using the applicable premium rate associated with the producers APH lint yield that is used to calculate premiums under the Combo policy of insurance. The CPE will also utilize the current federal crop insurance premium subsidy structure tables to calculate the amount of the actual producer paid premium.   For additional information about the Cottonseed Pilot Endorsement, contact Plains Cotton Growers at 806 -792-4904.

 

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