Recently announced by USDA’s Risk Management Agency, the Enhanced Coverage Option (ECO) is a federal crop insurance product available alongside the underlying crop insurance policy for 31 spring-planted crops. Crops eligible when coverage starts for the 2021 crop year include corn, soybeans, wheat, cotton, peanuts, rice, oats, barley, hybrid corn seed, popcorn, silage sorghum, canola, dry peas, dry beans, millet, sunflowers, hybrid seed rice, cotton ex long-staple, flax, sugar beets, buckwheat, flue-cured tobacco, fire-cured tobacco, burley tobacco, dark air tobacco, cigar binder tobacco, hybrid sorghum seed, grain sorghum, cultivated wild rice, sesame and safflower.
ECO would pay for a loss on a county basis and an indemnity is triggered when there is an area-level loss in yield or revenue. It is a complement to the underlying policy that would pay for a loss on an individual unit basis when an indemnity is triggered in the event of an individual loss in yield or revenue.
ECO will provide area-based coverage for a portion of the deductible of the underlying policy, similar to the Supplemental Coverage Option (SCO). ECO uses the same expected and final area yields, projected and harvest prices and payment factors as SCO. However, while SCO ends coverage at 86% of the expected crop value, ECO will cover from 86% up to the producer’s choice of 90 or 95% of expected crop value. The coverages do not overlap, so ECO can be purchased along with SCO. While SCO impacts a farmer’s participation in the Agriculture Risk Coverage program, ECO does not and farmers may purchase ECO for the same crop, on the same acres they’ve enrolled in ARC.
ECO follows the coverage of the underlying policy and must be chosen by the sales closing date of the underlying policy. If the underlying policy is Yield Protection, then ECO covers yield loss. If the underlying policy is Revenue Protection, then ECO covers revenue loss. ECO may not be purchased in conjunction with Margin Protection (MP), Area Risk Protection Insurance (ARPI), Hurricane Insurance Protection – Wind Index Endorsement, (HIP-WI), or for any acres insured under the Catastrophic Risk Protection Endorsement (CAT), High-Risk Alternative Coverage Endorsement (HRAC), or Stacked Income Protection (STAX).
A payment is triggered for ECO when the county average revenue falls below 90 or 95% of the expected level, whichever coverage option the producer selected. ECO payments are calculated using the county average revenue or yield. The payment is decoupled from a producer receiving a payment from the underlying policy.
Figure 1 is an example of how a producer would stack available coverage options to cover an eligible crop.
As an example, we’ll say a producer purchases Revenue Protection for soybeans with a 75% coverage level. The liability on the underlying Revenue Protection policy is $427.50 per acre. Therefore, the total expected crop value is $570.00. The remaining 25% of coverage, or $142.50, would not be covered in the underlying policy. The next level of coverage, ARC or SCO, provides an additional $62.70 of coverage, bringing the maximum amount of covered expected crop value to $490.20. If a producer purchases the ECO endorsement, it could cover the expected crop value plus an additional $22.80 or $51.30, bringing the total policy coverage to $513.00 or $541.50 (depending on the producer’s choice of coverage). Keep in mind, in this example, the underlying policy is Revenue Protection, and the ECO will also provide revenue protection if, and only if, the county triggers an indemnity. ECO payments are decoupled from the underlying policy and are not affected if a producer receives a payment from the underlying policy. It is possible for a producer to experience an individual loss but to not receive an ECO payment, or vice-versa.
Figure 2 shows the 90% coverage and Figure 3 shows the 95% coverage ECO endorsement options for the soybean crop insurance policy example.
ECO provides more coverage on a portion of the deductible where losses tend to be more frequent and gives producers flexibility as they work to manage risk in their operations. As producers renew or change policies, particularly in tightened financial times when credit lenders may be looking for additional reassurance of a loan, the new Enhanced Coverage Option could be a helpful addition to the producer’s risk management plan. ECO must be purchased as an endorsement to the Yield Protection, Revenue Protection, Revenue Protection with the Harvest Price Exclusion, Actual Production History, or Yield-Based Dollar Amount of Insurance policy. There is a premium associated with the ECO coverage, but premium subsidies are offered to help make the option more affordable to producers.