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Commodity programs vs. crop insurance programs

Policy Report: With the March 15 deadline looming, producers must take a hard look at both commodity and insurance programs to decide what works best.

Bradley D. Lubben

February 8, 2024

6 Min Read
young rows of plants emerging in soil
AROUND THE CORNER: With planting time around the corner, farmers are faced with decisions in both commodity program options and crop insurance. Curt Arens

At a Glance

  • March 15 is an important deadline for decisions on safety net tools.
  • Comparisons between PLC and ARC could be more difficult this year because of changing safety net levels of these programs.
  • Comparing program decisions could become a normal process if some new ideas are implemented into the next farm bill.

Crop producers face a March 15 deadline for decisions on two important safety net tools — commodity programs and crop insurance programs.

This column has covered the ongoing farm bill debate and the annual commodity program decision between Agricultural Risk Coverage and Price Loss Coverage several times over the past year.

It has also addressed the broad crop (and livestock) insurance program available to producers with substantial federal support. A couple of current developments provide a reminder of the role of both programs and the choices ahead for producers.

Producers must elect ARC or PLC for 2024 by March 15 at the USDA Farm Service Agency office, or they will have to keep the same election they had in 2023.

There are reasons to study the ARC-versus-PLC decision closely as changing prices over the past few years mean changing safety net levels for both ARC and PLC in 2024. The relative support levels provided by the two programs may be closer this year than they have been either way in past years.

PLC is up

The effective reference price for PLC for corn in 2024 is $4.01 per bushel, up substantially from the $3.70 statutory reference price, due to the formula included in the 2018 Farm Bill that raises the reference price when the moving average price climbs high enough.

Related:Farm bill extension pushes off debate, but not farmer decisions

By comparison, the “effective” ARC price for corn for 2024 is $4.17 per bushel, the price point at which the ARC program would kick in for revenue losses assuming no yield loss from benchmark yields. (ARC pays for revenue losses below 86% of the benchmark revenue based on moving average benchmark yields and prices.)

Those effective protection levels would take a 10% price loss to trigger PLC or a 7% revenue loss to trigger ARC from current projections based on fall 2023 price projections for 2024 from the Food and Agricultural Policy Research Institute and benchmark yields.

The comparison for grain sorghum and soybeans shows a similar calculation, where ARC may require a smaller loss to trigger, while PLC may require a smaller loss for wheat.

That comparison helps to define the decision between ARC and PLC for producers, but it ignores the potential impact of the Supplemental Coverage Option, a county-based insurance policy that can add on top of the producer’s underlying insurance coverage.

SCO coverage is based on the underlying policy (yield or revenue) and covers losses from 86% down to the underlying protection level purchased by the producer. If the producer purchased RP or RP-HPE coverage at 75%, SCO would cover the band from 86% down to 75%, but base it on county-level revenue results, not farm level.

In that way, SCO mimics the protection provided by ARC at the county level (ARC-CO), which protects from 86% to 76% based on county-level revenue results. Given that SCO and ARC-CO look similar on paper, the original legislation approving SCO limited its use only to producers not enrolled in ARC.

Decision time

Thus, the decision for producers is not necessarily ARC versus PLC, but may be ARC versus PLC plus SCO. Whether producers want to forgo the potential higher protection levels in ARC for a PLC program, and then purchase SCO, is an individual decision driven by individual producer considerations, but the option exists and may be worthwhile.

Combining the deep price loss protection from PLC with the shallow yield or revenue protection from SCO (at a premium cost) may be comparable or may even be preferable to choosing the shallow revenue protection in ARC.

SCO has not been widely purchased to date, with less than 5% of Nebraska crop acres insured with SCO in 2023, but it may be attractive, and given the federal premium subsidy, it may be affordable protection.

Given the focus on the 2024 ARC-versus-PLC decision and the potential role of SCO, it is worth noting a couple of important issues between commodity programs and crop insurance programs. The commodity program support described above is based on support levels set in statute or driven by a moving average price that can provide multiple or inter-year price protection.

The commodity program support levels climb slowly when prices move higher, meaning programs provided little downside protection as prices trended higher and have provided little in payments over the past few years.

But, if and when commodity prices trend lower, the moving average support levels mean the programs can provide substantial protection against further downside price risk, at least until the moving averages catch up with lower prices.

Crop insurance

By comparison, the crop insurance programs provide protection only for the current year based on price levels in a base period just prior to the purchase deadline. The February average of the new-crop futures contract is used to set the base insurance price for spring-planted crops with a March 15 crop insurance deadline.

When current markets are above moving averages, crop insurance can inherently provide more price protection than commodity programs, but crop insurance can’t provide price protection over multiple years and may offer less support than commodity programs when current prices are below moving averages.

When current price projections match up with the moving averages, the PLC effective reference price, the effective ARC price and the crop insurance price may be very similar, and the commodity program and crop insurance alternatives may look a lot alike.

But, when those prices differ, either commodity programs or crop insurance programs may offer better support. Using corn again as an example, the current new-crop futures quote of about $4.80 per bushel would imply SCO protection at 86% that would kick in at $4.13 per bushel, assuming expected yields.

That suggests that SCO and ARC look like close substitutes in 2024 for corn. For soybeans, the current new-crop futures quote of about $12 per bushel implies SCO protection at 86% that would kick in at $10.32 per bushel, as compared to the effective ARC price of $9.56 per bushel.

The farm program math and the current price outlook suggest producers will want to carefully analyze their decision on farm programs and their related decision on crop insurance. Analyzing which programs and which tools provide better support will be an ongoing need year in and year out.

New ideas

Comparing commodity program and crop insurance program decisions could also become a feature of farm programs if a recent farm bill policy proposal were to come to fruition. One idea put forward in the farm bill debate would offer higher federal support (premium subsidy) levels for supplemental crop insurance tools such as SCO, but would then force producers to choose between commodity program participation and supplemental crop insurance coverage.

Whether that idea ends up in a formal 2024 Farm Bill proposal in Congress remains to be seen. Whether producers find the choice attractive is likely tied to the current market situation and outlook and the question of whether commodity programs or crop insurance programs provide higher effective support in a given year.

The current decisions and the farm bill proposals are a reminder that both commodity programs and crop insurance programs are an important part of what currently is the federally supported farm income safety net.

Producers will need to keep close attention to this year’s decisions due in March, as well as the continuing development of farm bill language that could affect future safety net decisions and participation.

Lubben is the Extension policy specialist at the University of Nebraska-Lincoln.

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Farm Bill

About the Author(s)

Bradley D. Lubben

Lubben is a Nebraska Extension associate professor, policy specialist, and director of the North Central Extension Risk Management Education Center in the Department of Ag Economics at the University of Nebraska-Lincoln. He has more than 25 years of experience in teaching, research and Extension, focusing on ag policy and economics. Lubben grew up on a grain and livestock farm near Burr, Neb., and holds degrees from UNL and Kansas State University.

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