Cottonseed (Pilot) Endorsement

Useful Links:
Cottonseed (Pilot) Endorsement Policy
Cottonseed (Pilot) Endorsement Insurance Standards Handbook

The Cottonseed Pilot Endorsement (CPE) is a pilot program submitted to the Federal Crop Insurance Corporation (FCIC) by Plains Cotton Growers, Inc. The CPE development effort was undertaken through the FCIC’s 508(h) product development program with support and cooperation from allied industry partners who provided data and the support of Texas grower organizations, the National Cotton Council and other regional industry groups.

Our objective for the CPE was to secure final approval by the FCIC Board early enough to be considered eligible for implementation beginning with the 2010 growing season. On July 30, 2009 this goal was achieved when the FCIC Board of Directors voted to approve the CPE as a 4-year pilot program available to ALL cotton producers in ALL states where cotton insurance is offered. Unfortunately, implementation was subsequently delayed until the 2011-growing season.

The CPE will offer yield coverage for cottonseed as an optional endorsement applicable to buy-up Upland and Extra Long Staple (ELS) cotton insurance policies. The CPE is designed to integrate seamlessly with the existing federal crop insurance cotton program rules and procedures, while allowing producers to insure their cottonseed without additional administrative record-keeping burden. The CPE will be available to growers purchasing qualifying Actual Production History (APH) -based buy-up insurance coverage (MPCI, CRC, RA or their equivalent under the new Combo Policy Provisions – Yield Coverage and Revenue Coverage). The CPE will NOT be available to growers purchasing policies at the Catastrophic (CAT) level or to growers who purchase group risk (GRP or GRIP) cotton policies.

BACKGROUND: The cotton crop insurance program is among the oldest in the Federal Crop Insurance Corporation portfolio. The cotton program enjoys very high participation at high levels of buy-up coverage. In 2008 cotton was the fifth largest program (behind only corn, soybeans, wheat, and rangeland) offered through RMA. The cotton program offers coverage for cotton lint, but does not offer coverage for cottonseed, an increasingly important part of cotton producer income.

In recent years the cotton industry has seen major changes in the value of cottonseed. Producers are now receiving an average of 14 percent (14%) of their cash incomes from the sale of cottonseed. Cottonseed value has become an important component of producer incomes and is a part of their operation that producers recognize a need to insure.

More than most industries, cotton producers take risk management seriously and use crop insurance extensively. Cotton producers, led by Plains Cotton Growers, Inc, see the addition of coverage for cottonseed as a natural extension to their current cotton risk management tools and submitted a 508(h) application to make this valuable tool available to manage a significant and currently uninsured risk.

PROGRAM GOALS: The CPE program is designed to accomplish the following risk management goals: (a) immediately fill a gap in currently available coverage, (b) provide a mechanism to verify the efficacy of coverage, and (c) provide a mechanism by which potentially more effective cottonseed products might be developed in the future.

HOW IT WORKS: 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 Actual Production History (APH) -based buy-up policy of insurance product (MPCI, CRC, RA or their equivalent under the new Combo Policy Provisions – Yield Coverage and Revenue Coverage) that 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. The cottonseed guarantee is 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 set 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.

Gross premium calculation:
Coverage Level X Cottonseed Equivalent Yield X Cottonseed Price X MPCI Premium Rate Producer paid premium calculation: Gross Premium X Applicable Premium Subsidy Rate

For additional information about the CPE contact Plains Cotton Growers, Inc. by telephone at 806-792-4904.

Page created by Plains Cotton Growers, Inc., 2003
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