INFORMATIONAL MEMORANDUM: R&D-97-006 TO: All Reinsured Companies All Risk Management Field Offices FSA Headquarters, Program Delivery & Field Operations - Information Only FROM: Tim B. Witt Acting Deputy Administrator SUBJECT: Cotton Harvest Incentive Pilot Program BACKGROUND: The Cotton Harvest Incentive (CHI) was a pilot program for the 1995 and 1996 crop years in Bailey, Cochran, Dawson, Fisher, Hale, Haskell, Howard, Jones, Lamb, Mitchell, Nolan, and Scurry Counties, Texas. It was requested by interests from the High Plains of Texas with the objective of reducing losses by increasing harvested acres, thereby increasing the cotton delivered to gins. The Board of Directors of the Federal Crop Insurance Corporation (FCIC) approved a new modified CHI Pilot Program for the 1997 and 1998 crop years. It will continue to be available in the same Texas counties as listed above. The new CHI includes the following changes from the previous CHI: 1. The incentive is changed from 35 pounds to 7.5 percent of the approved yield with a 35 pound maximum. 2. The penalty for unharvested acres is eliminated. 3. The option is restricted to basic units. 4. The surcharge is 12 percent of the base premium. 5. The rate option code is IH' for the cotton harvest incentive effective for the 1997 crop year. ACTION: The Cotton Harvest Incentive Endorsement is available electronically via the Reporting Organization (RO) server. This release includes the FCI-35 Coverage and Rate Tables and the CHI Endorsement. A copy of the CHI Endorsement and an example showing how the amount of production-to-count is affected by these provisions is attached. If you have any questions about this pilot program, please contact Vondie O'Conner at 816) 926-6343 or by fax at (816) 926-7343. Attachments 97-21A UNITED STATES DEPARTMENT OF AGRICULTURE Federal Crop Insurance Corporation COTTON CROP INSURANCE HARVEST INCENTIVE ENDORSEMENT This endorsement is available for the 1997 and 1998 crop years only in counties identified in the Actuarial Table. If you elect this endorsement for the 1997 crop year, it will continue in force for the 1998 crop year unless you or we cancel it on or before the cancellation date contained in your policy. This endorsement will be canceled automatically at the end of insurance period for the 1998 crop year. 1. You must elect this endorsement in writing on or before the sales closing date for the initial crop year in which you wish to insure your cotton under its terms and conditions. 2. If you elect this endorsement: (a) All acreage of cotton insured under your Cotton Crop Provisions will be subject to the provisions of this endorsement; and (b) Your Cotton Crop Provisions will be changed as follows: (1) Add the following to section 11.(c)(2) after the existing language: however, the harvested production to count will be reduced by the smallest of the amounts described below whenever the total production to count is less than the production guarantee for the unit: (i) Seven and one-half (7.5) percent of the approved yield (not to exceed 35 pounds) multiplied by the number of harvested acres; or (ii) The difference between the total guarantee for the harvested acres and the harvested production to count; or (iii) The harvested production to count. (2) Delete section 2, Unit Division. Optional units are not available under this endorsement. COTTON HARVEST INCENTIVE ENDORSEMENT FOR THE 1997 AND 1998 CROP YEARS Incentive Calculation Example EXAMPLE Irrigated Approved Yield 720 lbs. x .65 coverage level = 468 production guarantee Non-irrigated Approved Yield 316 lbs. x .65 coverage level = 205 production guarantee Irrigated production guarantee = 468 lbs x 80.8 acres = 37,814 lbs. Nonirrigated production guarantee = 205lbs. x 64.2 acres = 13,161lbs. Production Guarantee for the Unit = 50,975 lbs. THE 1997 AND 1998 COTTON HARVEST INCENTIVE DOES NOT IMPACT THE CALCULATION OF APPRAISED PRODUCTION TO COUNT FOR UNHARVESTED ACRES Appraised Production To Count (APTC) Stage Acres Practice Appraisal APTC UH 9.8 I 15 147 UH 10.0 I 35 350 UH 10.0 NI 10 100 UH 9.2 NI 5 46 Total 39.0 643 pounds No penalty or incentive applies to unharvested acres. The appraised production to count of 643 pounds will be used. IMPACT OF THE INCENTIVE TO THE HARVESTED PRODUCTION TO COUNT Total Harvested Production to Count (After quality adjustments) = 21,521 pounds CALCULATION OF INCENTIVE FOR HARVESTED ACRES Incentive Maximum Approved Yld/ Per Acre Harvested Calculated 65% Total Practice 7.5% Appr. Yld) Incentive Acres Incentive Guar. Guar. I 720 / 54 35 61.0 2,135 468 28,548 NI 316 / 24 24 45.0 1,080 205 9,225 TOTALS 106.0 3,215 37,773 When the total production to count is less than the production guarantee for the unit, the harvested production to count will be reduced by the smaller of: 1. Seven and one-half (7.5) percent of the producer approved yield (not to exceed 35 pounds) multiplied by the number of harvested acres (24 lbs x 45 NI. acres = 1,080) plus (35 lbs. x 61 irr. acres = 2,135 lbs.) equals 3,215 pounds; or 2. The difference between the total guarantee for the harvested acres and the harvested production to count (37,773 lbs. - 21,521 lbs. = 16,252); or 3. The harvested production to count (21,521 lbs.). The harvested production to count is reduced by 3,215 lbs. as follows: 21,521 lbs. Harvested Production To Count - 3,215 lbs. Reduction = 18,306 lbs. Harvested Production To Count.