Cotton Producers’ Prevented Planting Decision

Christopher N. Boyer, Tyson B. Raper, and S. Aaron Smith

May 20th (Final Planting date) has come and gone and June 4th (End of Late Planting) is around the corner for cotton producers. If you haven’t planted yet and have Revenue Protection or Yield Protection insurance policies, there are four options:

  1. Plant cotton in the late planting period. This option comes with reduced insurance; the farmer’s production guarantee would decrease 1% per day, for each day of delay after the final planting date until the crop is planted or the end of the late planting period. Production guarantee is the guaranteed revenue amount offered by a crop insurance provider and is calculated by multiplying guaranteed insurance price by actual production history (APH) yield, which is a 4 to 10-year trend adjusted average yield used for future crop insurance purchases, by insurance coverage level.
  2. Take the full prevented planting payment. The full prevented planting payment is the farmer’s production guarantee multiplied by the prevented planting coverage factor. The prevented planting coverage factor for cotton is 50%. This option requires leaving the land fallow or planting a summer cover crop after the late planting period that cannot be harvested or grazed before November 1st. This option does not impact the producer’s APH.
  3. Receive a 35% of their full prevented planting payment for cotton and switch to a second crop. If a partial indemnity payment was received for the first crop, the second crop will be uninsured, and a farmer must wait until after the late planting period for the first crop to plant the second crop.
  4. Forgo the prevented planting payment for cotton and plant a second crop. If a farmer did not receive an indemnity payment for the first crop, they can switch their insurance to a second crop and plant immediately.

In this report, we examine each of these alternatives by assessing the profit-maximizing option using historical crop yield data, and also lay out information producers should consider if they are faced with a prevented planting decision. 

Examination Using Historical Data

In this section, we present an example of the economic implications of the possible options cotton producers could consider if faced with a prevented planting decision. This example is used to help producers think about their options so they can examine potential economic outcomes that best fit their operation. Net returns to cotton are estimated for the four prevented planting options at 60%, 70%, and 80% insurance buy-up coverage for both revenue protection (RP) and yield protection (YP). In the example, we assume a producer would plant soybeans if they choose to switch crops. Yield data are from planting date experiments in Milan, TN. Market prices are the average prices of cotton and soybeans in Tennessee in the most recent weeks (Link) and the projected price are the crop insurance prices set by USDA RMA (Link). Production costs are the average costs from 2020 from the University of Tennessee field crop budgets for no-till, non-irrigated cotton and soybeans (University of Tennessee Department of Agricultural and Resource Economics 2019). Insurance premiums were estimated averages for Gibson County, TN from 2020 (USDA RMA 2020). Gibson County was selected because this location is where the agronomic data were collected. Table 1 shows a summary of the data used for this study.

Table 1. Data Used to Calculate Net Returns for Cotton and Soybeans
Variable Definition Cotton Soybeans
Market Price ($/bu or $/lb) $0.58 $8.38
Projected price ($/bu or $/lb) $0.68 $9.17
Actual Production History yield (bu or lb) 1124 44
Production cost before planting ($/acre) $186 $126
Production cost after planting ($/acre) $563 $334
RP Premium with 60% coverage ($/acre) $11 $9
RP Premium with 70% coverage ($/acre) $20 $15
RP Premium with 80% coverage ($/acre) $41 $32
YP Premium with 60% coverage ($/acre) $7 $7
YP Premium with 70% coverage ($/acre) $12 $12
YP Premium with 80% coverage ($/acre) $26 $25
Note: Pre-planting production costs include land rent and chemical and machinery costs for burndown and pre-emerge herbicides. If prevented from planting, fertilizer and seed costs are assumed to have not been incurred. Post-planting production costs are all costs not included in before planting costs.

 

Results – Cotton

Table 2 & 3 shows the same general findings for cotton production with RP and YP coverage. Taking the full prevented planting would provide the highest net returns.

Table 2: Estimated Net Returns for a Cotton Producer with Revenue Protection
  Estimated Net Returns ($/acre)
Option 60% RP 70% RP 80% RP
Late Planting Period -$199 -$208 -$222
Full Prevented Planting Option $32 $61 $78
35% Prevented Planting + Uninsured Soybeans -$185 -$174 -$168
Insured Soybeans -$256 -$262 -$279

 

             

Table 3: Estimated Net Returns for a Cotton Producer with Yield Protection
  Estimated Net Returns ($/acre)
Option 60% YP 70% YP 80% YP
Late Planting Period -$195 -$200 -$206
Full Prevented Planting Option $36 $69 $93
35% Prevented Planting + Uninsured Soybeans -$183 -$172 -$163
Insured Soybeans -$254 -$256 -$272

 

Important Considerations

Estimates in Tables (2-3) are averages; yield variability is a key variable in estimating net returns and can make the planting options riskier than prevented planting payments. It should be noted that planting later in the season typically comes with a decrease in yield. Therefore, a farmer may want to consider how the field(s) left to plant has (have) performed in past years when planted late.

Not all producers will be able to switch crops when dealing with a prevented planting situation. The prevented planting coverage factor is set to match a producer’s pre-planting costs, therefore, if a farmer already has seed and fertilizer for cotton and it cannot be returned or stored, switching to soybeans may not be a viable option. In this case, a farmer should carefully look at their costs to date and consider the amount of insurance coverage when deciding between late planting and the full prevented planting payment option. A farmer should contact their crop insurance provider within 72 hours of being prevented from planting by the final planting date to discuss their situation.

 

Important Links

For more information about important dates by crop and policy:

https://webapp.rma.usda.gov/apps/actuarialinformationbrowser2018/CropCriteria.aspx

 

For more information on prevented planting provision:

https://www.rma.usda.gov/News-Room/Frequently-Asked-Questions/Prevented-Planting-Coverage-Factor-Changes-for-2019

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