October 3, 2019
Enrollment for federal crop support programs is underway at USDA Farm Service Agency offices. Producers have been waiting several months for program sign-up to start since the 2018 Farm Bill was passed last December.
They now can make their choice between the Agriculture Risk Coverage and Price Loss Coverage programs and visit their FSA office to complete the election and enrollment process. However, there are still a few months before the March deadline to analyze the programs and the outlook before committing to a program for the 2019 and 2020 crop years.
As noted in previous columns and other reports, the commodity programs under the new farm bill look a lot like the previous farm bill, but with very different market and outlook conditions. That could dramatically change the ARC vs. PLC decision, but it should not be a foregone conclusion without going through some analysis.
Before analyzing which commodity program is best, the first choice is whether to update farm program payment yields. Each farm (FSA farm serial number) has a base acreage that can’t be updated and a program payment yield that can be updated.
The update itself is a choice between keeping the existing payment yield or updating it to 90% of the 2013-17 average yield multiplied by a factor equal to the ratio of the 2013-17 national average yield divided by the 2008-12 national average yield.
This factor allows for a yield update but backs up the result to the same period of the last yield update in 2014, and effectively limits the benefit of a yield update mostly to producers that had a poor yield history going into the last yield update.
There is a minimum factor of 90% that holds for corn and soybeans (grain sorghum is 90.77% and wheat is 95.45%). Combining the 90% component of the yield update equation with the factor essentially means the potential updated yield is equal to 81% (90% x 90%) of the 2013-17 average yield for corn and soybeans (81.69% for grain sorghum and 85.91% for wheat).
Compare the potential updated yield to the existing payment yield, and the decision whether to update is straightforward. However, note that any updated payment yield only takes effect beginning with the 2020 crop year.
With payment yields determined, a producer can better analyze the PLC vs. ARC program choice. A producer can choose PLC or ARC-CO on a farm-by-farm, commodity-by-commodity basis.
While current prices and projections suggest substantially more enrollment in PLC than in 2014 for most commodities, soybeans remain a major question given that prices have fallen, but not yet to the level of PLC program support. Using soybeans as an example illustrates the choices ahead for producers and the trade-offs they should consider when enrolling in farm programs.
The September projection from USDA supply and demand reports pointed to a marketing year average price for soybeans of about $8.50 per bushel for the 2019 crop year. At that level, the PLC payment rate would be zero because the market price is above the reference rate of $8.40 per bushel.
The USDA report no longer includes a range or confidence interval around the price projection, but looking back at the same report a year ago, the range was $1.50, meaning a margin of 75 cents one either side of the projected price.
In the unlikely but possible scenario that the average soybean price fell a full 75 cents below current projections to $7.75, the PLC payment rate would be 65 cents ($8.40 − $7.75). Calculated on a statewide average payment yield (before any updates) of 45 bushels per acre, the PLC payment would be $27 per paid acre or $22.95 per base acre (paid acres equal 85% of base acres).
Thus, while no PLC payment is expected for the 2019 soybean crop at current price levels, the possibility of a PLC payment exists if the price drops from $8.50 to a level below the reference price of $8.40, something that could happen almost 50% of the time based on current probabilities.
Note that this is also the reason why any probability-based farm bill analysis, such as the online decision tools from FSA, will indicate an average PLC payment even when the projected price is above the reference price. If there is at least some probability that prices will fall below the reference price, then there will be some possible outcomes with PLC payments, and they will show up in the average over all simulated outcomes even when the average price is above the reference price.
ARC at the county level (ARC-CO) works as it did in the previous farm bill to provide revenue protection for crops in the farm’s base acreage. The new trend-yield adjustment for the yield benchmark is the same one used for crop insurance and will strengthen the ARC-CO guarantee.
There also is an extra year lag in the data used for the guarantee to ensure the numbers are known at the time of future sign-ups. Including the extra lag means the 2019 ARC-CO protection is based on the Olympic average benchmark yields and benchmark prices from 2013-17.
If one assumes projected yields equal to the trend-adjusted benchmark yields, then the ARC-CO guarantee effectively protects revenue equal to trend yields multiplied by 86% of the benchmark price. For soybeans, the benchmark price based on the 2013-17 history is equal to $9.63, and the ARC-CO guarantee would kick in around $8.28 per bushel at trend yields.
If the county had an average trend-yield benchmark of 56 bushels per acre (consistent with a 45-bushel payment yield), the benchmark revenue would be $539.28 per acre (56 x $9.63), the guarantee would be 86% of the benchmark or $463.78 per acre, and the maximum ARC-CO payment would be limited to 10% of the benchmark or $53.93 per acre.
If the county produced exactly its trend yield of 56, then the same low price of $7.75 considered above for the PLC analysis would produce revenue of $434 per acre (180 x $3.10) and a resulting ARC-CO payment rate of $29.78 per acre ($463.78 − $434) or $25.31 per base acre (paid acres equal 85% of base acres).
As noted, PLC would kick in when the marketing year average price falls below the reference rate of $8.40, while ARC-CO would kick in when revenue falls below the guarantee effectively equal to trend yields and $8.28. PLC would kick in faster, but ARC-CO would actually protect the combination of price and yield declines, so the answer of which one is better is not a simple choice.
Another option that should not be overlooked during the sign-up is ARC at the individual farm coverage level (ARC-IC). ARC-IC generally works in the same manner as ARC-CO, but instead of the protection being tied to county results for the crop in the farm’s base acreage, it is tied to the farm’s actual acreage mix in the current year.
For example, a farm with a mix of corn and soybeans in 2019 would generate an ARC-IC benchmark revenue based on actual corn and soybean revenue results using farm yields and national marketing year average prices for 2013-17. Using the same proportions as the current acreage mix, the historical revenues would be used to calculate the Olympic average revenue that creates the farm’s revenue benchmark.
From that point, the ARC-IC guarantee is equal to 86% of the benchmark, just like ARC-CO. Actual revenue per acre is calculated from the actual planted acres on the farm and then compared with the farm’s ARC-IC per-acre guarantee.
Then, if any payments are due, they are paid on 65% of the base acres instead of 85% as with ARC-CO, in part because of the expected increased frequency of a farm falling below its guarantee as compared to a county.
Because of the complexity of the formula and the lower payment rate, ARC-IC was not a common choice in 2014, particularly given the one-time decision for the entire 2014-18 period. However, under the new farm program, ARC-IC may be more relevant on a year-to-year basis and may be particularly relevant for some producers in the 2019-20 election period given losses that have already occurred in 2019.
If a farm (FSA farm serial number) was completely prevented plant in 2019 and certified as such with FSA, the farm’s per-acre revenue is calculated as $0 against the farm’s ARC-IC guarantee. If all of the producer’s farms enrolled in ARC-IC were 100% soybeans and 100% prevented plant for 2019, and they happened to have the same $539.28-per-acre benchmark revenue guarantee as the county in the previous example, the maximum ARC-IC payment rate of $53.93 per acre would be paid out on 65% of the base acres for an effective payment of $35.05 per base acre.
However, if only some of the farm’s acreage was prevented plant and some of the acres were planted, the results of just the planted acres would count in the revenue calculations, negating the losses on the prevented plant acres for purposes of ARC-IC. While that is a potential limit of the ARC-IC program, any substantial yield losses on the remaining acres still could result in large or even maximum ARC-IC payment rates for 2019.
The ARC-IC decision is complicated by the technical details of the prevented plant calculation, as well as the reality that the decision now covers both 2019 and 2020. Potential large payment rates for 2019 could overshadow the likelihood of no payments in 2020 and make ARC-IC attractive but would have to be compared with two years of potential support under PLC and ARC-CO. Depending on production conditions, ARC-IC could still be relevant in 2020 as well, so it could be premature to write off 2020 protection entirely.
All of these options and details are a reminder of the complexity and the importance of the decision now facing producers. The online analysis tools available under the resource section on the FSA website at www.fsa.usda.gov provide more in-depth analysis depending on your specific crop mix, program yields and price expectations.
Nebraska Extension and Nebraska FSA offices also are collaborating on a series of producer education meetings across the state in November and December to walk through program details and analysis to help producers make more informed decisions before the March enrollment deadline. Further details are available online at farmbill.unl.edu or through offices of both agencies.
Lubben is an Extension policy specialist at the University of Nebraska-Lincoln.
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