I read your comments to mean she is being taught at her level at home and that she is 2-3 years above what her age peers are taught in school. As long as she isn't being held back at home, I don't think it matters what number grade you really give her. It sounds like in 4H, club sports, and other things, you feel the appropriate challenge for her is with her age peers. A lot of kids here are advanced in some academic areas but may not be advanced (or may even be behind) in other areas, such as sports.
You probably aren't getting a lot of personal feedback because the answers often are highly location specific. Whether she can just take the extracurricular likely depends on local law in addition to the personalities of the specific teacher and principal involved. Where we live, if a homeschooler is involved in a extracurricular in one school, he or she cannot do a club sport at another. Coaches and teachers are also given wide latitude as to who they want on their teams, so long as the student meets the eligibility requirements of whatever organization runs the competitions.
I think what others are trying to warn you that if you minimize challenges in the short term in order to work toward a long term goal of scholarship funds, prestigious awards, or college admissions, there is a strong possibility that the act of minimizing those challenges may have consequences that could adversely impact those long term goals...
I think most on here would encourage you to focus on the kid you have now and ensuring that he or she is as happy and challenged as possible. (Keep in mind the phrase, "don't borrow worries/trouble" that may never come to pass.). As you are homeschooling, you can meet your child's academic needs. That is great! Whether she needs a higher grade number to compete in a music competition is something you have to answer locally. It does sound like she may have to choose between the club sport and this particular musical opportunity.
The potential awards related to a test such as the Explore are tricky if scholarship funding is essential to attend college or you see it as the only way to reach peers or other resources... For what it is worth, timing is worth considering too. For example, some gifted kids might actually score higher on the SAT as a 7th grader then they would as a 12th grader because intellectually they are more in tune with the math on the SAT (or other sections) at the earlier age, so putting it off doesn't help them. Another example, a friend of mine took the MCAT his first year as an undergraduate and did really well. He was happy to use those scores applying to medical school as a senior and said openly he may not have done as well putting it off until others traditionally take it, because he was closer to the material. (Or at least he may have had to study taking it later...)
For what it's worth, here are my two cents... She has been playing this instrument for 2 months. I would not change the academic and club sport situation that seems to be working well for what might just be a passing fancy. I would encourage her to continue with the instrument and revisit next year. If she loves the instrument enough to compete next year, then she will only be more competitive due to the practice time and you will know she is doing it because she wants to and not because it is new or she wants to please an authority figure. The coach should be just as happy to have her the next year. Also, highly competitive extracurricular activities require major time commitments from both the student and family, I am hesitant to commit to that time load without a clear passion from the student...
