Optimal Joint Program Election in Stacked Income Protection Plan for Upland Cotton Producers in Texas

To achieve the goal of the 2014 Farm Bill, many programs (direct payments, counter-cyclical payments, and ACRE) that relied on market trends were replaced with other types of risk management tools. Upland cotton producers now have the option between two new risk management programs, Stacked Income Protection Plan (STAX) and Supplemental Coverage Option (SCO). The objective of this research is to examine the new STAX and SCO programs to understand their effects on producers’ decisions to elect to enroll in the programs as a risk management tool. To analyze these new programs, a simulation model was built using the Excel add-in Simetar©. Fifty-eight scenarios were developed based on the STAX and SCO parameters to analyze the risk ranking preferences and optimal rate of additional coverage for a producer. The model resulted in several conclusions. Irrigated cotton production receives higher program net indemnities than non-irrigated due to irrigated cotton being a higher valued crop. STAX is preferred more often than SCO. Texas farms received higher probabilities of a positive program net indemnity more frequently than Arkansas from STAX and SCO. Risk averse decision-makers prefer to purchase lower and cheaper individual coverage with a subsidized companion policy that allows for the greatest indemnification of remaining liability on their cotton crop