The Agricultural Act of 2014 introduced new crop insurance policies to manage agricultural risk, especially to cotton farmers. A representative farm panel was used to elicit the yield distribution of the farm, county, and correlation. Results suggest that the optimal underlying insurance policy is Revenue Protection at a 75% coverage level for both high- and low-productivity farms even with a Yield Exclusion provision. The Stacked Income Protection Plan benefit is mostly attributable to a higher insurance premium subsidy. For any crop, efficient agricultural risk management can be achieved through understanding the guaranteed yield and its relation to the farm and county yield.

We develop a model for a representative risk-averse cotton farmer to analyze the impact of crop insurance policies (Revenue Protection [RP], Yield Protection, Stacked Income Protection Plan [STAX], and Supplemental Coverage Option [SCO]). The model is calibrated and numerically optimized to quantify the effects of different insurance policy combinations on input use (moral hazard), insurance coverage levels, premiums, and certainty equivalent. When the farmer elects only RP, the optimal coverage rate is 80%. Under RP and STAX, the optimal RP coverage rate is 70% and the STAX coverage rate is 90%. RP and STAX is the optimal policy combination based on certainty equivalents. The RP and SCO combination has the lowest impact of input use.

The new Farm Bill could lead to significant changes for commodity producers.The potential impact of these changes on cotton producers is examined. Inparticular, the difference between the existing Direct and Counter-CyclicalPayment Program and the new Stacked Income Protection Plan (STAX) for cottonproducers is discussed. An illustrative example is provided to show howpayments to cotton producers could potentially differ for a specific yearunder various programs. Detailed information on STAX calculations and a STAXpayment calculator is included to assist with the development of Extensionprograms targeted to cotton producers, landowners, and bankers.