In early October, USDA's Farm Service Agency announced more than $9 billion in farm program payments to producers across the country for commodity and conservation programs, specifically the Agriculture Risk Coverage (ARC) program, the Price Loss Coverage (PLC) program and the Conservation Reserve Program (CRP). These payments will provide substantial cash flow for producers and agricultural lenders this fall, with more than $600 million in projected ARC and PLC payments to Nebraska producers alone. But the outlook ahead is for a quickly shrinking farm income safety net, even as there is no promise of a turn-around in agricultural markets, putting pressure on producers to continue managing their operations and finances carefully in the months ahead.

Government program payments have helped cushion the drop in farm income over the past four years. As farm income in Nebraska declined from a record level of nearly $7.5 billion in 2011 and 2013 to an estimated $3.8 billion in 2016 (with some projected recovery in 2017), farm program payments increased to fill part of the gap. Government payments to Nebraska producers grew from less than $500 million in 2011 to more than $800 million in 2016 (with conservation programs generally around $150 million annual during that period before a decline in 2016).

The fixed, direct payments under the farm programs prior to 2014 provided around $300 million annually to Nebraska producers with an additional $140 million in payments from the Average Crop Revenue Election (ACRE) program paid on the 2012 crop in 2013. By comparison, the ARC and PLC programs have provided between $600 and $700 million in payments to Nebraska producers in 2015 and 2016 for the 2014 and 2015 crop years. And, as noted, the payments on the 2016 crop that were distributed starting in October should total to substantially more than $600 million again, helping producers with profitability and cash flow this fall.

But the existing safety net is set to substantially shrink in the remaining years of the current farm program. Based on current yield and price projections for the 2017 crop, Nebraska producers will continue to receive ARC and PLC payments in the fall of 2018. The total could be closer to $200 million, perhaps just one-third of what has been received each of the past three years. By 2019, PLC and ARC payments on the 2018 crop could be just $40 million based on average yield and long-run baseline price projections.

Program working as intended
The explanation for the significant, but declining, safety net is that the program is working exactly as designed. As created in the 2014 Farm Bill, the ARC program protects 86% of a benchmark revenue level calculated from the five-year Olympic average national market year average price and the five-year Olympic average yield per planted acre for every covered crop, county and practice (irrigated and non-irrigated) in the state.

Coming off of high price levels in the 2009-2013 period, the Olympic average price in the ARC benchmark and guarantee started relatively high for 2014 for most commodities as compared to the fixed PLC reference price levels. That was a primary reason that more than 95% of the corn and soybean base acres were enrolled in ARC. The relative difference in the PLC and ARC protection was smaller for grain sorghum and wheat. Correspondingly, enrollment was more evenly split between the two programs for both crops.

The high Olympic average prices provided strong protection and substantial payments for both the 2014 and 2015 crops as prices continued to fall. Multiple lower-price years eventually started bringing the price averages and the ARC guarantees down for the 2016 crop, but even lower price levels translated into continued substantial payments. The price averages and ARC guarantees for the 2017 crop are even lower, and continued low prices will only translate into modest ARC payments based on current projections. By 2018, the price averages and ARC guarantees will have fallen far enough that ARC payments are projected to all but disappear.

More shock absorber than safety net
In sum, the ARC program has provided short-term revenue protection for producers from the sharply falling prices of the last three years. But, as an average revenue safety net, it has moved with the market and, by 2018, would appear to provide relatively little protection from current price and revenue levels. In that regard ARC has been more of a shock absorber by slowing the decline and allowing producers time to adjust, but not providing a high safety net that indefinitely insulates producers from market conditions.

In contrast, PLC has provided a traditional price-based safety net with a fixed reference price and continuous support, as long as prices average below the reference levels. Payment rates and total payments have increased for PLC, but it has been a much smaller contributor to farm income in Nebraska due to both the smaller payment rates in the early years of the current farm bill as well as the limited base acres in the state that were enrolled in the PLC program.

With the outlook through the 2018 crop year for a declining farm income safety net, producers will need to carefully manage farm income and farm finance with more attention to the market and less to the government program. That doesn't mean producers can ignore the farm program going forward, as the heat of the debate over the next farm bill should happen in the coming months. There are numerous commodity program issues up for debate, including the oft-mentioned question of which yield data should be used for the county-level ARC program (ARC-CO). The fundamental issue for producers may not be in how the program is designed or reformed, though, but in whether producers will have a new choice in 2019 between PLC and ARC. At that point, fundamental preferences for an average-revenue versus fixed-price safety net may have to be weighed against price and revenue projections and expected farm program support going forward.

Information on the current payment projections, expected future supports and potential farm bill policy developments are all detailed on the university's farm bill website. As program information is regularly updated and as educational efforts gear up for both the development and eventual implementation of a new farm bill, the website will continue to have current information available for producers and for all stakeholders in the ag policy arena.

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