The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
STAX-Cotton Stacked Income Protection Plan
May 12, 2014
We have done numerous posts on the new ARC and PLC programs, however, cotton producers are not eligible to participate in either of these programs, so we thought it would be helpful to update cotton producers on the new program available to them.
First, 2014 is a transition year for cotton producers. For 2014, they will be entitled to the following:
- 60% of cotton base acres times,
- The difference between the midpoint average year cotton marketing price as of June 12, 2013 as compared to December 10, 2013 times 597 (pounds per acre), and
- The payment yield for the farm divided by 597 (pounds per acre).
If the STAX program is not available in their county for 2015, then #1 will be equal to 36.5% not 60%. According to this column from the National Cotton Council, this amount will be equal to 5.4 cents/pound on all 2013 base acres and direct payment yield. There is a separate $40,000 limit for each crop year.
For example, if a cotton farmer had 1,200 cotton base acres with an average yield of 600 pounds per acre, this would equate to a total payment of $38,880. Since this amount is less than $40,000, the full payment would be allowed. If STAX is not available for the 2015 crop year, the farmer would be eligible for an additional $23,652 ($38,880 X 36.5%/60%).
Beginning in 2015, cotton farmers are eligible for an additional "crop insurance" product call Stacked Income Protection Plan or STAX. This plan is similar to supplemental coverage option, but is strictly for cotton producers. Producers would pay a premium and receive an indemnity (if a loss is triggered). It is designed to cover county-wide revenue losses (similar to the old GRIP program). It is a new concept since it allows the producer to "stack" an additional crop insurance policy on top of their current policy thus allowing a portion of that deductible to be covered by a county triggered program.
It does not provide double coverage, but allows a producer to stack layers of insurance protection to provide greater risk coverage. If the producer does not have an individual policy, the range of coverage is from 10% to 30% in 5% increments. However, if there is crop insurance coverage, then the amount of coverage available is 90% minus the amount of coverage elected under the policy (to a maximum 30%). For example, if the cotton producer has a 70% RP policy, then the maximum amount of STAX coverage available is 20%. STAX is subsidized at 80%, so producers would pay 20% of the premium (this subsidy is most likely greater than current crop insurance subsidies).
Producers could elect a payment rate multiplier of up to 120%. This concept works the same as the old GRIP or GRP insurance programs and has two purposes:
- Account for the increased variability of individual farm yields as compared to county-average yields, and
- Allow producers with above average farm yields to purchase a higher level of coverage.
The multiplier would increase the maximum protection per acre but would not impact the trigger revenue required to receive a STAX indemnity.
Assume a county has a trend yield of 600 pounds but a five-year average of 700 pounds. The projected price is 80 cents, but actual harvest price is 90 cents. The expected county revenue is:
- The greater of trend or five-year average or 700 times
- The greater of projected or harvest price or 90 cents for a total of $630.
The actual county yield is 500 pounds per acre. The actual county revenue is 500 times 90 cents or $450. This results in $117 per acre of payment loss. If the producer elected 20% coverage, then their loss would be limited to 20% of expected county revenue or $126.00. Since $117 is less than $126, then the full loss payment is allowed subject to the overall payment limitations.
This post is little longer than normal, but wanted to outline both the transition payment calculations and the new STAX program. The FSA has not issued final regulations on this policy, so some changes may occur.
I will keep you posted.