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ARC and PLC: Corn price path

Farms will have to decide between the Agricultural Risk Coverage (ARC) and Price Loss Coverage (PLC) programs. The decision covers the 2014 through 2018 crop years. Because the decision covers all 5 years, can only be made once, and is irrevocable; a key consideration will be the expected path of prices through 2018. This post will illustrate the importance of this consideration using 3 distinct 5-year time paths for U.S. corn. Each time path has occurred in the last 20 years.

PLC makes payments if U.S. average price for the crop year is below the crop's reference price. The reference price for corn is $3.70/bushel. ARC has two program versions. One, ARC-county, makes payments for a crop if actual revenue for the farm's county is less than the county's ARC revenue guarantee. The other, called ARC-individual, makes payments when the entire farm's average revenue for all its program crops is below the farm's ARC revenue guarantee.

For both versions of ARC, coverage level is 86% and coverage is capped at 10%. Thus, coverage is between 76% and 86% of the ARC revenue guarantee. The yield and price components of the ARC revenue guarantee are calculated using an Olympic average (removes high and low values) of the 5 preceding crop years. However, when calculating the Olympic average, a crop year's price cannot be less than the PLC reference price. For example, if the U.S. average crop year price for 2014 is $3, calculation of the Olympic average price for 2015 corn will use $3.70 for 2014, not $3. Thus, a floor exists on the price component of the ARC revenue guarantee. In essence, it cannot be less than $3.18 (86% times $3.70). Both ARC-county and PLC makes payments on 85% of base acres. ARC-individual pays on 65% of base acres.

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