In early 2021, producers may be looking to a new growing season and cropping decisions ahead with more anticipation, given the recent rally in many commodity prices. However, there are still numerous management and program decisions to make to help address risk and establish a safety net to protect the year ahead.

Producers have multiple tools to manage production and marketing risk, including the ongoing 2018 Farm Bill commodity programs, existing and new crop insurance policies, and of course, marketing tools to build their risk management strategies.

Commodity programs

The Price Loss Coverage and Agricultural Risk Coverage (ARC) programs continue for 2021, but with a new decision for producers for 2021 (and every year thereafter) if they wish to change enrollment. The programs haven’t changed, but changing market conditions could change producer preferences. Consider corn as an example with new-crop December 2021 futures price trading around $4.50 per bushel as of late January.

The PLC program offers income support if and when the national marketing year average price drops below the effective reference price of $3.70 for corn. Given current price expectations, that may not occur, but there is at least some probability of this happening. The PLC program effectively provides a free put option to cover price losses below a $3.70 national marketing year average cash price all the way down to the $2.20 national average loan rate, which would cover further losses.

However, the PLC program only pays on the producer’s farm program payment yield, which generally lags current expectations and then only on 85% of base acres. So it only covers a portion of expected production, even assuming the crop is planted on base acres.

By comparison, the ARC program at the county (ARC-CO) or individual (ARC-IC) level provides revenue protection for 2021 tied to a benchmark revenue equal to a benchmark price times a benchmark yield. The benchmarks are based on Olympic averages from 2015 to 2019.

The benchmark yield is trend-adjusted and should approximate expected yield for 2021. However, the national marketing year average prices from those years were all below the reference rate of $3.70, thus the benchmark price is $3.70 per bushel.

ARC guarantees 86% of the benchmark revenue, effectively covering losses below 86% of $3.70, or $3.18, assuming no yield variance. ARC only covers losses up to 10% of the benchmark or about 37 cents down to $2.83. Thus ARC provides price protection similar to a free put option fence strategy from about $3.20 to $2.80 assuming no yield variance, although it too only pays on 85% of base acres, thus only covering a portion of expected production.

Crop insurance

The established crop insurance options of Yield Protection (YP), Revenue Protection (RP) with the harvest price component, and Revenue Protection with the Harvest Price Exclusion (RP-HPE) remain in place, as do the area yield and revenue plans and the Whole Farm Revenue Protection plan.

The Supplemental Coverage Option (SCO) established in the 2014 Farm Bill also remains an option for producers not enrolled in ARC, while the newly created Enhanced Coverage Option (ECO) is available to all and adds more county-level coverage on top of a farm-level policy.

With most producers using RP and most choosing the trend-adjusted yield option, producers are effectively protecting their crop from revenue losses below a given percentage of trend yield times the higher of the base or harvesttime futures price.

With current new-crop corn futures trading about $4.50 per bushel as noted, a producer choosing 75%, 80% or 85% coverage is effectively protecting against revenue losses below $3.38, $3.60 or $3.83 per bushel, respectively, assuming trend yield — similar to a put option strategy at $3.40, $3.60 or $3.80 on full production, assuming no variance from trend yield.

The SCO and ECO coverage provide county-level protection tied to county-level yields and the same price component as individual coverage. Given that county yields are generally not as variable as farm-level yields and are certainly not perfectly correlated, the county-based coverage is not likely to substitute effectively for protecting substantial farm-level yield risk.

But, it may provide a convenient tool to bump up the effective price protection via crop insurance. SCO protects from 86% down to the producer’s underlying coverage level, while ECO covers from 90% or 95% down to 86%.

Given the $4.50-per-bushel price level and coverage tied to an underlying RP policy, a 95% ECO policy effectively protects price losses below $4.28 assuming county trend yields, and provides protection down to 86% or about $3.87 before SCO, and then RP would kick in. Again, this is similar to a put option fence strategy between $4.30 and $3.90, assuming no yield variance from trend.

Analysis

All of these examples focus on the effective price components of the farm program and crop insurance tools to give a simple comparison for illustration. However, all of the tools except PLC specifically cover yield risk as well, so the effective price protection adjusts for yield results — higher/lower yields result in lower/higher effective price protection.

Looking back at the ARC vs. PLC decision, the analysis generally shows higher payment projections for PLC at the present time. You can analyze your specific situation with the national online decision tools available via the FSA website under the Resources tab on the FSA ARC/PLC Program page at fsa.usda.gov.

While PLC may win the projected payment analysis, remember that ARC provides more comprehensive revenue protection than PLC’s price-only protection. However, neither ARC nor PLC cover 100% of expected production due to the payment acre limit (85% of base acres) and the 10% payment band in ARC or the lagged payment yield in PLC.

Crop insurance does provide yield or revenue protection on planted acres based on a producer’s actual production history, which can approximate expected yields under the trend-adjusted yield option. As a result, the RP policy effectively provides price protection similar to a put option at a percentage of the base price depending on a producer’s coverage election, assuming trend yield.

SCO and ECO offer county-based add-on coverage to a producer’s underlying crop insurance and look like attractive methods to ratchet up price protection similar to higher strike price put options, again discounting the yield protection component in the policies.

Decide carefully

Producers should analyze their farm program and crop insurance choices carefully. By coupling a sound crop insurance decision to either ARC or PLC and then considering the value of SCO and ECO as an add-on, producers could bump up their effective price protection over what farm programs and underlying crop insurance could do alone.

This discussion of the price components of farm programs and crop insurance is not meant to diminish the need or value of sound marketing strategies. Whether covering futures price risk through futures and options strategies or utilizing cash-marketing contracts to hedge futures, basis, or local cash price levels, producers have the decision not only of what tools to use, but also of how much of expected production to price. It is just important to remember that all of the available tools can work together and can sometimes substitute for one another.

These decision deadlines will be coming up quickly for producers. Farm program enrollment at FSA is due by March 15, while crop insurance decisions for spring-planted crops are also due March 15 with crop insurance agents.

In the meantime, we also know that additional ad hoc assistance is coming to producers from legislation passed in December with more potentially proposed at present time. While that could benefit cash flow, it shouldn’t generally affect 2021 production, marketing or risk management decisions.

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