Two of the most prominent risks faced by all agricultural producers are production risk (i.e., yield) and marketing risk (i.e., price). Rice is somewhat unique in that its relative yield risk is lower than that of its competing crops (Biram and Mills, 2023). According to the article, corn, cotton, and soybean production risk in southern states can be anywhere from 2 to nearly 11 times higher than that of rice production risk. This is primarily driven by the fact that most all rice production is flood irrigated which provides risk protection against weeds, drought, and wind. With such a low relative production risk, this begs the question of how rice producers should protect themselves against price risk.
Historically, most rice producers in the U.S. have utilized target price programs authorized by the farm bill. The latest target price program is the Price Loss Coverage (PLC) coverage program which triggers a payment rate based on the difference between the national Marketing Year Average Price (MYAP) and the Effective Reference Price (ERP), whenever the MYAP is below the ERP. While some crops are expected to see an increase in the ERP driven by a higher Olympic Average MYAP (e.g., corn and soybeans), the ERP for rice is expected to remain at the Statutory Reference Price of $14.00/cwt. The 2024/2025 MYAP price will likely not fall below $15.00/cwt based on the average of the November 2024, January 2025, and March 2025 Rough Rice futures contracts, suggesting the PLC program will likely not trigger a payment for rice in the 2024/2025 marketing year.
However, there is an opportunity to lock in higher price guarantees through area crop insurance administered by the Federal Crop Insurance Program. In a previous Southern Ag Today article, Fischer and Outlaw (2024) suggest leveraging area crop insurance products such as the Supplemental Coverage Option (SCO) and Enhanced Coverage Option (ECO) with PLC for winter wheat. One price risk management strategy for rice producers would be to leverage a Revenue Protection plan of insurance with SCO, ECO, and PLC. Assuming RMA County yields for rice remain the same or fall compared to their historical average, SCO can provide additional price protection from your individual coverage level up to 86% and ECO can cover from 86% up to 95%. It is worth noting that SCO and ECO will come at a premium cost additional to any underlying Yield Protection or Revenue Protection premium cost.
In Figure 1 below, I provide a visual example of the downside price risk protection SCO and ECO insurance products can provide with an RP policy at the 80% coverage level using an RMA Projected Price of $15.50/cwt. While a rice producer can opt to only choose PLC and forego the crop insurance coverage, PLC faces a maximum payment rate of $7.00/cwt, it provides no farm-level yield risk protection (which is a key feature of all RP crop insurance policies), and it is unlikely to trigger in the 2024/2025 marketing year, as noted above.
Figure 1. Using RP with SCO and ECO crop insurance products to provide a price guarantee for rice.
Biram, Hunter. “The Coordinated Decision of PLC and Federal Crop Insurance in Managing Price Risk in Rice.” Southern Ag Today 4(7.1). February 12, 2024. Permalink