NCC Opposes Prevented Planting Provisions Changes
In response to a study conducted by USDA’s Risk Management Agency on prevented planting coverage levels, the NCC was joined by producer and ginner organizations in submitting comments to the agency opposing any change to coverage levels for upland and extra-long staple cotton.
April 14, 2015
Director, Product Administration and Standards Division,
Risk Management Agency,
United States Department of Agriculture,
P.O. Box 419205,
Kansas City, MO 64133-6205
The undersigned cotton organizations appreciate the opportunity to provide comments to USDA's Risk Management Agency (RMA) regarding the recommendations put forth by Agralytica regarding the coverage levels for prevented planting (PP) for upland and Extra Long Staple (ELS) cotton.
The U.S. cotton industry appreciates the strong working relationship with RMA on cotton insurance issues including the development and introduction of the Stacked Income Protection Plan (STAX) and the Supplemental Coverage Option (SCO) for cotton, as well as other major enhancements for the 2015 crop. After reviewing the analysis performed by Agralytica (Evaluation of Prevented Planting Program, Contract Number D13PD001146), as commissioned by RMA, and the resulting conclusion, the represented industry organizations strongly oppose the proposed reduction of PP coverage from 50% to 30% for upland and ELS cotton (and 50% to 35% with the cottonseed endorsement).PP provisions are an important component of crop insurance coverage especially during periods of excessive moisture during the planting season or in areas deficit in federal or state irrigation water supplies.
U.S. cotton producers rely heavily on crop insurance for yield and revenue coverage as a major component of their overall risk management plan. This reliance was further increased with changes in farm policy contained in the 2014 Farm Bill with the introduction of STAX and SCO coverage for upland cotton versus income support programs and continued crop insurance coverage for other major commodities.
Compared to most other major row crops, upland and ELS cotton production requires considerable pre-plant expenditures. These costs are exacerbated by the frequency and year-round control of resistant noxious weeds and heavy insect pressures across the Cotton Belt. Cotton production also requires specialized capital expenditures for harvest equipment which increase fixed cost requirements. These expenditures are considerably higher for cotton as compared to other row crops with a cotton harvester costing in excess of $700,000.
Our opposition to the conclusions reached by Agralytica are based on several concerns, both in terms of the data employed in the study and specific assumptions incorporated into the analysis. Specific points of concern are detailed below.
The pre-plant expenditures included in the Agralytica report are low and underestimate actual pre-plant costs incurred by producers. The Agralytica team relied primarily on Economic Research Service (ERS) data to estimate pre-plant expenditures.The ERS cost of production data, which is obtained through ARMS surveys, is a widely-cited source for production costs.However, the most recent ARMS survey for cotton was in 2007.Price indexes are used to project costs forward through 2013 using 2007 as the base year. As a result, the 2013 data does not incorporate changes in production practices that have occurred since 2007.Specifically, the increasing prevalence of glyphosate-resistant weeds has caused producers to alter their chemical applications, and in particular, rely on more pre-planting sprayings. Cost adjustments based on price indices would not adequately reflect the increase in chemical use and cost since the last ARMS survey.
However, the main concern is that the costs attributed to pre-planting period are too low. According to Agralytica, pre-planting costs have remained at about 30% of total costs for the last decade based on the ERS analysis. However, since ERS does not report pre-plant costs separately, it is unclear how this percentage was calculated. In comparison, Mississippi State University publishes crop budgets with a breakdown of expenditures by month. Using those monthly 2015 budgets, the average fertilizer, chemical, and custom lime pre-plant costs are about $105 higher than the Agralytica costs for the Mississippi Portal.
From a methodological standpoint, Agralytica's assumptions relating to crop insurance in the pre-plant budget do not adequately reflect the cost incurred by producers. The method used by Agralytica was to include the portion of the average farmer-paid premium per acre from RMA's Summary of Business data that one can attribute to prevented planting protection. The ratio of prevented planting indemnities to total indemnities for the 1994-2013 period was used. Since cotton has a very low incidence of prevented planting, the factor for cotton was 1.65%.Therefore, only 1.65% of the total producer premium was included as a pre-plant expenditure (e.g. 1.65% of the average $10.28/acre premium in 2012 for the Mississippi Portal is $0.17).This is not a realistic assumption since a producer incurs the full cost of the crop insurance premium regardless of whether or not the prevented planting coverage is actually utilized. Overall, once the total crop insurance premium is included, the pre-plant costs for the Mississippi Portal region are now $116 higher (i.e. $160 in direct costs compared to $45 in direct costs from the Agralytica report).
Upland and ELS cotton production require high levels of inputs and adoption of technology. Using the Mississippi Portal as an example since the state received the largest dollar amount of PP indemnities from 2003-2012, the Agralytica report shows total costs of $1,046 for 2012, with $684 in operating costs and $362 in allocated overhead costs. With the most common level of revenue coverage for cotton producers in the 65% range, these average levels of coverage insure only a portion of all input costs. It is important to note that Agralytica estimated the ratio of RMA PP payments to estimated PP costs using a 100% liability. The estimated 2012 liability for the Mississippi Portal was $847/acre with 50% PP coverage at $423/acre. Using their estimated PP costs of $317/acre, the ratio was 1.33, which was deemed to be too high. However, their conclusion was based on faulty methodologies and assumptions. If a more realistic coverage level of 65% is used, the liability is reduced to $550 and the 50% PP coverage is $275.This lowers the ratio to 0.86.It should be reiterated that this ratio is based on pre-plant costs that have been demonstrated to be too low. Using more realistic cost numbers would lower the ratio even further. Agralytica recommended an increase in the PP coverage level if the ratio was less than or close to one and a decrease when the ratio was larger than one.
The Mississippi Portal has been used as an example to illustrate the concerns with the Agralytica recommendations. However, the implications cited in the preceding paragraphs would also apply to other regions of the Cotton Belt.
As a final point, Agralytica acknowledged that their recommendations were only valid if prices remained at 70-80 cents per pound or higher. Of course, current cotton prices are significantly lower than the prices used in the Agralytica report.Recent projections by USDA and the Food and Agricultural Policy Research Institute (FAPRI) call for the current price environment to persist for the foreseeable future. At a projected price of $0.64/lb and an expected yield of 1,100 lbs/acre, the expected revenue would be $704.A 65% policy would protect $457 in revenue. The current 50% PP coverage would only protect $228 in revenue. The proposed 30% PP coverage would reduce this to $137.Using the PP costs of $317 from the report, the ratio would be 0.72. Using the 2015 PP cost data from Mississippi State, the PP costs are even higher at $433 and the ratio is 0.53.Therefore, under current economic conditions, it appears that the Agralytica report would not recommend lowering the PP payment rate.
The cotton production segment's heavy reliance on crop insurance in these difficult economic conditions further justifies no reduction in crop insurance coverage levels, including PP protection.
For all of the above reasons, the National Cotton Council and the undersigned national, state and regional cotton organizations strongly urge RMA to maintain the upland and ELS cotton PP coverage at 50%. Staff of the respective organizations are available to provide additional input or answer any questions. Specific data resources are also available upon request. We appreciate consideration of this position.
National Cotton Council
Arkansas Farm Bureau Federation
Blacklands Cotton Association
CA Cotton Ginners Association
CA Cotton Growers Association
GA Cotton Commission
LA Cotton and Grain Association
MS Farm Bureau Federation
North Carolina Cotton Producers Association
OK Cotton Council
Plains Cotton Growers Association
Rolling Plains Cotton Growers Association
St. Lawrence Cotton Growers Association
Southern Cotton Growers Association
Southern Rolling Plains Cotton Growers Association
South TX Cotton and Grain Association
TX Farm Bureau Federation