by: Carl Zulauf and Sanghyo Kim, Professor and PhD student, Ohio State University, and Gary Schnitkey, Professor, University of Illinois at Urbana-Champaign
This article compare, for selected crops, state payment indicators for ARC-CO and PLC based on the January 12, 2015 WASDE (World Agricultural Supply and Demand Estimates) mid-price estimate and NASS’s (National Agricultural Statistical Service) crop production annual report. Crops compared are barley, corn, oats, peanuts, long grain rice, medium (and short) grain rice, sorghum, soybeans, and wheat. The term, payment indicator, is used because the calculations use state yield instead of county yield for ARC-CO and farm payment yield for PLC. They are not payment estimates for individual FSA farms. Nevertheless, they help frame perspectives and questions regarding crop program choices. Other discussions of indicated 2014 crop year payments are contained in the farmdocdaily articles of August 13, September 18, October 14, December 18, 2014, and January 22, 2015.
Calculation of Estimated Payment Indicators: ARC-CO makes a payment if county revenue is below 86% of a county’s benchmark revenue. Benchmark revenue involves multiplying 5-year Olympic moving averages (removes high and low values) of county yield times U.S. crop year price. ARC-CO payment is capped at 10% of benchmark revenue. PLC makes a payment if U.S. crop year average price is below the crop’s reference price. Reference prices are specified in the 2014 farm bill.
Both programs use yield per planted, not harvested acre. Yield per planted acre is calculated as production divided by acres planted to the crop, except for corn and sorghum. For these two crops, acres harvested for silage are subtracted from planted acres. For oats, yield per harvested acre is used because of the large share of oats acres planted as a cover crop for forage or hay. Information is not available for all states to make yield per planted acre calculations.
Peanuts are not reported in WASDE. A price estimate for the 2014 crop year is obtained using the monthly prices reported by NASS for the first 5 months of the peanut crop year, which begins August 1, and regression analysis. Explanatory power of the regression equation is 85%. The price estimates used in this analysis are by crop: barley ($5.25/bushel (bu.)), corn ($3.65/bu.), oats ($3.25/bu.), peanuts ($0.2171/pound), long grain rice ($12.20/100 pounds (cwt.), medium (and short) grain rice ($18.50/cwt.), sorghum ($3.80/bu.), soybeans ($10.20/bu.), and wheat ($6.10/bu.). Estimated per acre payments are multiplied by 85% to reflect that ARC-CO and PLC make payments on 85%, not 100%, of program base acres (ARC-IC pays on 65% of base acres).
Share of States with Payments, 2014 Crop Year: Because PLC is a U.S. price payment program, in a given year all states either receive a payment or do not receive a payment (see Figure 1). Level of payment differs only by farm program yields. In contrast, it is common for ARC-CO to make payments for some but not all states, such as is currently indicated for these program crops for the 2014 crop year. The reason is that, as a revenue program, yield helps determine if payments occur. It is unusual for all states in the U.S. to uniformly experience good or bad yields, where good and bad is defined relative to the state’s yield benchmark for the most recent 5 years. Hence, ARC-CO will likely make a payment for some but not all states unless U.S. crop year price is far above or far below the price benchmark for the most recent 5 years. In short, PLC and ARC-CO have different, often notably different, payout structures.
Figure 1 also presents the share of states for which no payment is indicated for both ARC-CO and PLC for 2014. Lack of an indicated payment by both programs implies 2014 will have little influence on the choice of program. Conversely, 2014 may influence the decision if payments are indicated for one or both programs. For only two crops, corn and sorghum, does the program paying more vary across states. ARC-CO generally makes more payments than PLC for corn with the opposite occurring for sorghum. Nevertheless, for 24% of states with corn, indicated payments are higher for PLC. For 36% of states with sorghum, indicated payments are higher for ARC-CO.
Indicated per Acre Payment, 2014 Crop Year: Figure 2 presents 3 averages: per acre average PLC payment and average ARC-CO payment for all states, as well as per acre average ARC-CO payment only for states with an indicated ARC-CO payment. Average payment for all states is highest for PLC peanuts and PLC long grain rice. ARC-CO payments can be large for individual states. For example, ARC-CO has an indicated payment of $94 per acre for Texas medium grain rice (only medium grain rice state with a payment). This potential for large individual state payments by ARC-CO is also implied by the difference between the average ARC-CO payment only for states making ARC-CO payments vs. the average for all states. This difference commonly exceeds 300%.
► ARC-CO and PLC have different payment structures. All areas either receive or do not receive a PLC payment because payments are based on U.S. average price being less than a U.S. reference price. ARC-CO payments vary more widely by area. As a revenue program, ARC-CO payments depend on yield as well as price variation. Yield rarely is uniform across the U.S. Some areas have higher than normal yields; other areas have lower than normal yields.
► Also illustrating the important role of yield, despite ARC-CO’s high indicated average payment per acre for corn, PLC currently is indicated to make higher payments than ARC-CO for some states.
► Corn is the key to program cost for the 2014 crop year. It will have the highest base acres, and for many areas, indicated ARC-CO payment per acre is close to its maximum. However, it is not clear how many farms will elect ARC-CO for corn.
► During debate on the 2104 farm bill, Congress selected PLC reference prices for long grain rice and peanuts that were closer to market prices over the 2008-2012 period than for other crops. A commonly cited reason for this decision for long grain rice was to use PLC to provide payments that would replace the roughly $95/acre direct payment rice gave up. At least for 2014, Congress appears to have accomplished this objective as indicated payments by PLC is $90/acre. It is less clear what the policy drivers were in regard to peanuts, but, in the context of only the 2014 crop year, present indications are that peanuts is likely to be the biggest beneficiary of the 2014 farm bill replacing the 2008 farm bill. It gave up roughly $45/acre in direct payments and, at least for 2014, has indicated payments of $128/acre in PLC payments. Again, within the narrow confines of the 2014 crop year, corn is the second most favored crop. It gave up average direct payments of roughly $25/acre vs. current indications of average state ARC-CO payments of $40/acre, although not every area has more indicated ARC-CO payments than direct payments. The other crops currently have lower indicated average ARC-CO and PLC payments than the direct payments they gave up. Note, these conclusions may change over the life of the 2014 farm bill.
► CAVEAT: Considerable uncertainty remains over 2014 crop year payments by ARC and PLC. A key reason is that considerable uncertainty remains over the 2014 crop year average price. For a more extensive discussion of this topic, see the January 8, 2015 farmdoc article, “2014 Crop Program Decision: March WASDE Price Uncertainty,” by Carl Zulauf and Andrea Hershey.