Arbol Case Study | Plains Cotton Cooperative Association (PCCA)

Summary

The Plains Cotton Cooperative Association (PCCA), established in 1953 and based in Lubbock, Texas, is a farmer-owned cooperative dedicated to marketing cotton for its grower-owners. Handling between 2.5 to 3 million bales annually, PCCA accounts for about 15-18% of the U.S. cotton crop. To manage the financial risks associated with yield variability, PCCA adopted a parametric insurance solution created by Arbol, ensuring financial stability for its members.

Key takeaways

Multi-Region Protection – Coverage across 43 counties in Texas, Oklahoma, and Kansas to mitigate diverse climate risks.
Rapid, Data-Driven Payouts – Quick financial relief based on objective, county-level crop yield data.
Closing Coverage Gaps – Delivered a $4M financial safeguard for PCCA, ensuring stability when traditional crop insurance left the cooperative exposed to yield shortfalls.‍
Scalable Risk Management – Positioned PCCA for future expansion of parametric solutions across its operations.

The facts

The Challenge

PCCA's members face significant climate-related risks across their diverse cotton-growing regions:

Yield volatility due to unpredictable weather patterns
Droughts and extreme heat impacting cotton growth and quality
Potential for flooding and severe storms damaging crops
Increasing production costs and supply chain disruptions
Market volatility and changing consumer demand

As a cooperative representing thousands of cotton growers across multiple states, PCCA needed a comprehensive solution to protect its members against these varied and complex risks.

As a cooperative representing cotton growers across multiple states, we faced the challenge of protecting our members against a wide range of climate risks. We needed a solution that could provide financial stability across diverse growing regions, allowing us to support our members consistently, even in challenging years."

PCCA

Our process

Challenge Identification: Arbol recognized PCCA's need for a large-scale, multi-region financial buffer against cotton yield volatility that could impact their members' production and the cooperative's overall operations.

Solution Design: Arbol proposed a tailored parametric Reference Commodity Yield Index Derivative using the Area Yield Program (AYP). This county-level yield index product was designed to protect PCCA against revenue losses due to low crop yields across multiple counties and states.

How AYP Works:

Customers are paid when the yield index falls below a predefined yield trigger.
Flexibility allows the customer to choose specific crops, data sources, and resolution, as well as set limits of liability and yield triggers.
The data and calculation mechanism were pre-agreed, ensuring transparency and accuracy in determining payouts.

Why AYP:

Gap in Traditional Insurance: While farmers can access government-backed crop insurance and disaster assistance, these programs don’t protect the businesses that depend on their production. When yields drop, cooperatives, processors, and supply chain partners face revenue shortfalls that traditional coverage doesn’t address.
Volumetric Protection: AYP covers volumetric losses that price risk management tools cannot insure, providing comprehensive protection against yield shortages.
Aggregate Limit: One aggregate limit can cover multiple sources of income loss, including lower volumes, additional expenses to import supply, price fluctuations affecting margins, and reductions in sales due to commodity substitution by customers. ‍
Independent Data: Payments are made fairly and objectively, utilizing independent data to ensure hassle-free claims.

Our solution

Implementation: Arbol developed a parametric derivative structure with predefined triggers based on county-level crop yield data. The agreement covered specific locations, ensuring that payouts were aligned with the actual yield performance.

Details:

Product: Commodity Yield Index Derivative
Geographic Coverage: 43 counties across Texas, Oklahoma, and Kansas
Trigger: Based on the USDA Risk Management Agency's Supplemental Coverage Option (SCO) County-Level Crop Yield Index
Maximum Payout: $4,000,000
Contract Period: 2023 Crop Year
Premium: $663,000

The solution accounted for different irrigation practices in each county, with custom weightings for irrigated and non-irrigated cotton production.

Benefits

Comprehensive coverage across multiple growing regions
Rapid payout mechanism based on objective, county-level data
Customized coverage reflecting the specific risk profile of each county
Protection against yield shortfalls without the need for individual loss adjustment
Enhanced financial stability and risk management for the cooperative and its members
Ability to support members even in low-yield years

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the result

Financial Impact: The parametric solution provides PCCA with up to $4 million in protection against low cotton yields across multiple regions, significantly reducing their financial exposure to climate-related risks and enhancing their ability to support members.

Strategic Implications:

Improved ability to maintain consistent operations and member support despite yield volatility
Enhanced reputation as a forward-thinking cooperative committed to member protection
Potential for more stable financial planning and budgeting across diverse growing regions
Strengthened position in advocating for members' interests in the face of climate challenges

conclusion

Future Outlook:

As climate variability continues to impact agricultural production, PCCA is well-positioned to navigate future challenges. The success of this parametric solution may lead to expanded use of similar risk management strategies across their operations and potentially for other crops or services offered by the cooperative.

Managing climate risk across multiple regions is a constant challenge for agricultural businesses and cooperatives. Arbol’s parametric solutions offer reliable financial protection against yield volatility, ensuring stability even in unpredictable conditions. Reach out to learn how we can help safeguard your operations and support your members.

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Protecting Cotton Growers with Scalable, Multi-Region Climate Risk Management