Margins Under Pressure: MCO and the 2026 Hormuz Disruption

By Rwit Chakravorty, Henrique Monaco, and Francis Tsiboe

Input costs are central to farm profitability, yet traditional crop insurance, including supplemental products such as ECO and SCO, provides tools to manage revenue risk but does not directly address input cost risk. The Margin Coverage Option (MCO), introduced by the USDA Risk Management Agency for the 2026 crop year, is designed to address this gap. MCO is an area-based supplemental endorsement that protects operating margins at the county level, covering a decrease in crop prices or yields, an increase in input costs, or a combination of both.

The 2026 growing season provided an immediate test. In early March 2026, Iranian forces targeted ship- ping in the Strait of Hormuz in retaliation for the U.S.-led Operation Epic Fury, effectively halting commercial transit through a waterway that carries 43% of global urea exports and 44% of global sulfur trade. As a result, fertilizer costs spiked. Unlike the 2022 Russia–Ukraine episode, when higher crop prices partially buffered producer margins against rising input costs, grain markets in 2026 provided little offset.

Since the conflict began, corn prices rose only 3.6% and soybean prices declined slightly in the weeks following the closure, exacerbating an already critical margin squeeze (Arita et al., 2026; Chakravorty et al., 2025). The conflict coincided directly with MCO’s harvest input price discovery period, which runs from April 1–30. By the time final input prices were set, urea had risen 65% above its projected level, diesel 80%, and potash 31%. Although final yields and crop prices are not yet known, the increase in input costs has raised both the probability of triggering MCO payments and expected net returns. In that sense, 2026 became the first real-world stress test of MCO’s cost-protection mechanism.

How MCO Works

MCO calculates an operating margin as county-level revenue minus a cost index based on predetermined input quantities and futures-based prices for urea, DAP, potash, diesel, and natural gas. Projected prices for crops and inputs are set in the fall of the previous year. Harvest, or final, input prices are set in April, and harvest crop prices are set in October. A payment is triggered when the actual county margin falls below a coverage threshold. The margin decrease can occur because final input prices are higher than projected, actual revenue is lower, or a combination of both. For MCO-95, the coverage band spans from 95% down to 86% of the expected county margin (Monaco et al., 2025).

MCO payments can be decomposed as:

Payment = Liability ⇥ Payment Factor,

where liability reflects the expected crop value within the coverage band and the payment factor captures how far actual margins fell below the trigger. This decomposition is useful because it separates the scale of coverage, driven by yield levels and prices, from the depth of the margin shortfall when the trig- ger fires.

For the 2026 crop year, MCO was available for corn, soybeans, wheat, cotton, sorghum, and rice. The subsidy rate was increased to 80% under the One Big Beautiful Bill Act, matching ECO, SCO, and STAX subsidy rates. MCO cannot be purchased alongside ECO because their coverage bands overlap. It can be paired with SCO since their coverage bands do not overlap. As of May 4, 2026, preliminary RMA data show 8,677 MCO policies sold for the 2026 crop year. Soybeans and corn account for more than 90% of MCO policies, concentrated in the Iowa–Nebraska–South Dakota intersection for corn and the Iowa, South Dakota, and Illinois region for soybeans.

Probability of Triggering a Payment

Using a simulation framework based on market conditions as of June 11, 2026, RMA expected county yields, historical yield variability, and RMA-implied price-yield correlations, we estimate the probability of triggering an MCO-95 payment for corn and soybeans across all counties with at least one policy sold. Figure 1 presents the geographic distribution of these trigger probabilities.

Figure 1: Simulated Probability of Triggering an MCO-95 Payment, Corn and Soybeans, Non-Irrigated.

Note: Estimated probabilities are based on a simulation using market conditions as of June 11, 2026. The figure reports the simulated probability of triggering an MCO-95 payment. Corn and soybeans are shown for non-irrigated counties included in the simulation. Color scales are crop-specific.

Source: NDSU Agricultural Risk Policy Center using data from USDA Risk Management Agency and futures prices.

Even though final input prices are known, the probability of triggering a payment still depends on final county yields and crop harvest prices. Nevertheless, given the increase in final input prices relative to projected levels, the probability of triggering a payment has increased.

For corn, the average trigger probability across counties is approximately 68%, with the core Corn Belt, including Iowa, Illinois, Indiana, and Nebraska, showing the highest probabilities. The Plains fringe, including western Nebraska and Kansas, shows somewhat lower probabilities.

For soybeans, trigger probabilities are somewhat more uniform, averaging around 61%, with modest variation across the region. The key message from Figure 1 is that MCO was not marginal for enrolled counties in 2026. Across most of the Corn Belt, a payment is more likely than not given current conditions.

Net Return to MCO Holders

Figure 2 presents the expected net return per acre and per dollar of liability for corn and soybeans. Expected net return is defined as the expected MCO-95 payment minus the farm-paid premium, assuming a farm with the same approved yield as its county’s expected yield. The expected net return per dollar of liability divides this net return by liability. This metric normalizes payments for differences in yield levels and coverage values across counties, providing a consistent measure of MCO expected value relative to insured exposure.

The average expected net return per acre is approximately $35.60 for corn and $22.10 for soybeans, after deducting farm-paid premiums of $10.50 and $6.50 per acre, respectively. Expected net returns per acre for corn and soybeans are higher in Illinois and Iowa and lower in the Plains. For corn, the average net re- turn per dollar of liability is 0.42, ranging from approximately 0.38 to 0.45 across counties. An expected net return per dollar of liability of 0.42 means that expected net returns equal 42% of insured liability after deducting the farm-paid premium. For soybeans, the average is 0.36, with wider geographic variation.

Expected net returns per dollar of liability are highest in Illinois, Indiana, and Ohio and lower in Iowa and Minnesota. These positive returns still reflect timing relative to fall premium-setting, not evidence that MCO premiums were systematically underpriced: the shock hit input prices during the April discovery window, after premiums were already fixed against the prior fall’s projections. Had it arrived earlier, it would have shown up in higher premiums rather than higher net returns.

Figure 2: Estimated Net MCO-95 Return, per Acre and per Dollar of Liability, Corn and Soybeans, Non-Irrigated.

Note: Estimated payments are based on a simulation using market conditions as of June 11, 2026. The top row reports expected MCO-95 payment minus farm-paid premium per acre. The bottom row reports the same net return divided by liability. Positive values indicate that expected payment exceeds the farm-paid premium. Color scales are crop-specific.

Source: NDSU Agricultural Risk Policy Center using data from USDA Risk Management Agency and futures prices

Adoption and Context

MCO adoption in 2026 was still limited. Preliminary RMA data show 8,677 MCO policies sold as of May 4, 2026, compared with 488,266 ECO policies. Soybeans and corn accounted for more than 90% of MCO policies, with adoption concentrated in the western Corn Belt for corn and the central Corn Belt for soy- beans. This low adoption partly reflects MCO’s main competitive constraint: producers must choose be- tween MCO and ECO because their coverage bands overlap. It also reflects timing, since enrollment decisions were locked in before the shock was foreseeable.

The 2026 Hormuz disruption illustrates the type of risk MCO was designed to address. Geopolitical shocks can raise input costs without a comparable increase in crop prices, compressing margins in ways that traditional revenue products may not fully cover. For 2027, MCO adoption will likely depend on whether producers view this experience as evidence of meaningful cost-risk protection, how they compare MCO against ECO’s broader revenue coverage, and whether elevated input prices persist into the next projected price discovery window.

These results should be interpreted as forward-looking estimates under current market conditions. Final payments will depend on county yields and harvest crop prices, which

are not yet known. Actual farm outcomes may also differ from county-level estimates because MCO is area-based and because individual payments depend on approved yields and underlying policy characteristics.

References

Arita, Shawn, Rwit Chakravorty, Jiyeon Kim, Wuit Yi Lwin, and Sandro Steinbach (2026). Strait of Hormuz Closure and Fertilizer Supply Risks for U.S. Agriculture. farmdoc daily 16(48).

Chakravorty, Rwit, Shawn Arita, and Francis Tsiboe (2025). Rising Costs, Falling Prices: Regional Disparities Deepen Farm Financial Stress. ARPC Brief 2025–11. Agricultural Risk Policy Center, North Dakota State University.

https://doi.org/10.22004/ag.econ.388967.

Monaco, Hunter, Gary Schnitkey, Nicholas Paulson, and Carl Zulauf (2025). A New Area-Based Crop Insurance Product: MCO (Margin Coverage Option). farmdoc daily 15(169).