by:  Carl Zulauf, Professor, Ohio State University and Gary Schnitkey, Professor,  University of Illinois, March 2014

Click here to read entire paper (with tables)

Overview:  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- ARC Overview:  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 2 program versions.  One, called 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.

Price Paths:  The first price path is the largest 5-year price decrease since 1974.  It occurred over the 1996-2000 corn crop years.  Average U.S. corn price was 43% lower in 2000 than in 1995, the year before the decline began.  This price path implies prices at $3.76 in 2014, $3.38 in 2015, $2.69 in 2016, $2.53 in 2017, and $2.57 in 2018. The second price path is the largest 5-year price increase since 1974.  It occurred over the 2006-2010 crop years.  Average price of corn was 159% higher in 2010 than in 2005, the year before the increase began. This would imply a price path of $6.84 in 2014, $9.45 in 2015, $9.14 in 2016, $7.99 in 2017, and $11.66 in 2018.  The third is the path of prices over the last 5 crop years of 2009-2013.  This results in prices of $3.93 in 2014, $5.74 in 2015, $6.89 in 2016, $7.64 in 2017, and $4.99 in 2018.  Figure 1 presents the price paths that result.   Each is distinct and ends with notably different prices.

Price Component Comparison:  Figure 2 compares the PLC reference price with the ARC implied price component.  The latter is 86% of the Olympic average for the preceding 5 crop years, including using the PLC reference price for the crop year if the reference price is higher than the crop year average price.  Under the 1996-2000 price scenario, the ARC implied price component goes below the PLC reference price.  For the other two price paths, the PLC reference price is less than the ARC implied price component.

Payments: For the price paths shown in Figure 1 and 2, PLC would only make payments under the first scenario where prices are $3.76 in 2014, $3.38 in 2015, $2.69 in 2016, $2.53 in 2017, and $2.57 in 2018.  This price path is high unlikely, and represents a “disaster” type scenario for corn prices. To provide an indication of PLC and ARC-County payments under this scenario, per acre payments are calculated using U.S. yields for PLC and ARC.  In a sense, this makes ARC a U.S. program.  This calculation understates payments by ARC-county because county yields are more variable than U.S. yields.  ARC is a revenue, not price program; and thus can make payments when yields are low as well as when prices are low.

Figure 3 shows payments under PLC and ARC. ARC would make a payment in 2014 of $21 per acre while PLC would not make a payment.  This occurs because the 2014 MYA prices is $3.78, which is above the $3.70 reference price.  The $3.38 price in 2015 results in ARC payments of $68 per acre compared to $46 under PLC. In later years, PLC payments exceed ARC payments.  In 2018, for example, PLC would make a $126 per acre payment while ARC would make a $56 payment.  Under very low corn prices, PLC will make larger payments than ARC-County, particularly in later years of the horizon.

Summary Observations:

►  This post underscores the critical importance of (1) whether price in 2013 is above or below the reference price and (2) the path that prices take over the next few years in deciding which program, PLC or ARC, will provide the most risk protection.

►  While the decision will rest upon more factors than expectations about future price paths, this analysis clearly demonstrates that it is clearly desirable to have more information about price.

►  The preceding point implies that it will be useful to wait until the near the end of the sign up period to see where prices for the 2014 crop year are heading.

This publication is also available at http://aede.osu.edu/publications

by: Carl Zulauf, Professor, Ohio State University and Gary Schnitkey, Professor,  University of Illinois, March 2014

Overview:  Both the recently passed 2014 farm bill and its predecessor, the 2008 farm bill, contained a choice between two types of crop safety net programs.  While similarities exist between the two sets of choices in the two most recent farm bills, notable differences also exist.  This post discusses both the similarities and the differences.

Decision Similarities:

►   The Agricultural Risk Coverage (ARC) program in the 2014 farm bill is a modified version of the Average Crop Revenue Election (ACRE) program in the 2008 farm bill.

●    Both ARC and ACRE establish revenue, not price, targets.

●    The revenue target for both ARC and ACRE is based on multiplying an average of yields and U.S. crop year average prices.  A five-year Olympic average is used for yields (removes high and low) of the five past years under ARC and ACRE.  ARC uses a five-year average Olympic average for price while ACRE uses a two-year average.  Thus, the revenue target moves with the market — increasing when market revenue is increasing and decreasing when market revenue is decreasing.

●    Both ARC and ACRE are shallow loss programs that cover only part of the revenue target:  The coverage range is between 86% and 76% for ARC, compared with 90% to 67.5% (90% minus 25% times 90%) for ACRE.

►   The Price Loss Coverage (PLC) program in the 2014 farm bill is a modified version of the price countercyclical (PC) program in the 2008 farm bill.

●    Both PLC and PC have target prices set by Congress for the length of the farm bill.

●    Both PLC and PC make payments when the U.S. crop year average price is below the target price.

●    Both PLC and PC make payments on historical base acres, although the distribution of base acres by crop may differ.  The 2014 farm bill allows farms to update the distribution of base acres to reflect the average acres planted to individual crops for the 2009 through 2012 crop.  Total base acres on the farm, however, are the same for both bills.

►   Both decisions are framed by a period of farm prosperity, but with widespread concern that the prosperity may end abruptly and badly for the farm sector.

Decision Differences:

►   The 2008 farm bill reduced direct payment by 20% if a farm chose ACRE.  Farms that elected ACRE were thus required to give up a known payment for an uncertain payment.  The 2014 farm bill has no similar requirement since direct payments have been eliminated.

►   The 2008 farm bill had no floor on the ACRE price component.  It could thus decline as low as the market price declined.  In contrast, the 2014 farm bill has a floor exists for the ARC price component.  The ARC price component can never be less than the PLC reference price, but it can be higher.

►   The 2008 farm bill used yield for the state in which the farm was located to determine the ACRE revenue target.  The 2014 farm bill uses yield for the county in which the farm is located or the farm’s yield itself to determine the ARC revenue target.  ARC thus provides more protection against low yield (individual farm yields are more closely related to its county yield than its state yield).

►   The 2008 farm bill reduced a crop’s loan rate by 30% for farms that elected ACRE.  This reduction was a significant consideration for farms, especially large farms, which use nonrecourse loans to cash flow post-harvest expense payments or manage taxes.  The 2014 farm bill has no similar provision, meaning farms electing ARC will have the same loan rates as farms electing PLC.

►   Under the 2008 farm bill, an asymmetric decision existed.  Once a farm elected ACRE, the decision was irrevocable through the 2012 crop year.  However, if ACRE was not elected, the decision could be revisited the next crop year.  The net result was an incentive to not choose ACRE unless a payment by ACRE was highly likely.  No similar asymmetric decision exists under the 2014 farm bill.  Farms must choose between ARC and PLC for all crop years from 2014 through 2018.  Once made, the ARC or PLC election is irrevocable for both programs through the 2018 crop year.

►   ACRE had to be elected for all covered crops on the farm.  In contrast, ARC at the county level and PLC is elected by individual covered crop, unless ARC-Individual is selected, in which case the option applies to all crops.  Thus, a farm may choose ARC for some covered crops on the farm and PLC for other covered crops on the farm.

►   Under the 2008 farm bill, the traditional direct and countercyclical program (DCP) was the default option.  Thus, ACRE had to be elected.  In other words, if a farm did not report a decision to the Farm Service Agency, it was deemed to have elected DCP.  The 2014 farm bill does not contain a default program option.  It does say that, if all producers on a farm do not have the same election, no payment is made for the 2014 crop year and the farm is defaulted to PLC for all covered crops for the 2015 through 2018 crop years.

►   ACRE’s revenue target could not increase by more than 10% or decrease by more than 10% from the ACRE revenue target for the previous crop year.  No cup and cap exist on the annual change in the ARC revenue target, although as noted above the ARC price component can never be less than the PLC reference price.

Summary Observations:

►   Both the 2008 and 2014 farm bills gave crop farms a choice between a revenue program whose target can move up and down with the market and a price program whose target is fixed for the farm bill.

►   For a variety of reasons the decision between price and revenue programs is more balanced in the 2014 farm bill.  Included among the reasons is that the election of the 2014 revenue program results in no difference in direct payments, a floor on the price component of the revenue target, use of county instead of state yield, and the same loan rate as the price program.

►   The revenue program enhancements can be viewed as being paid for, at least in part, by a more narrow revenue coverage range.

►   Farmers need to appreciate the differences between the 2008 farm bill revenue-price program decision and the 2014 farm bill revenue-price program decision and to adjust their decision making framework accordingly.

This publication is also available at http://aede.osu.edu/publications

by: Carl Zulauf, Professor, Ohio State University, February 2014

Overview:  This post builds upon the recent farmdoc posts, “2014 Farm Bill Farm Safety Net:  Summary and Brief Thoughts” by Carl Zulauf (available here) and “Evaluating Commodity Program Choices in the New Farm Bill” by Jonathan Coppess (available here).  The focus is considerations in choosing among the three crop safety net options: (1) Price Loss Coverage (PLC) – a target price program; (2) county Agricultural Risk Coverage (ARC) – a county revenue program, and (3) individual ARC – an individual farm revenue program.  A reference table at the end of this article contains a brief, comparative list of key program parameters for each option.

Considerations

►   The decision, to be made in 2014, covers 5 crop years, 2014-18.  It is not a one year decision.

►   Payments are made on historical base acres, not current planted acres.

►   Operators can keep the current distribution of base acres among program crops or update the distribution to reflect the distribution of acres planted to program crops over 2008-12.  The distribution closer to the distribution of expected 2014-18 planted acres will reduce the chance a crop’s revenue will be less than the cost of production due to potential government payments.

►   Table 1 presents key prices for the crop safety net decision, including the U.S. loan rate, PLC reference target price, and current estimate of the U.S. 2013 crop year price,.  An estimate of the implied ARC price also is provided for the 2014-2018 crop years.  The estimate assumes the current expected price for the 2013 crop year continues through the 2018 crop year.  The 2013 price is the midpoint of the price range reported in the February 2014 World Agricultural Supply and Demand Estimates (WASADE) (http://www.usda.gov/oce/commodity/wasde/).  The ARC implied price is 86% (ARC’s coverage level) times the Olympic average (removes high and low price) for the five preceding crop years.

►   Note, ARC is a revenue program.  Thus, ARC’s implied price is only a rough, simple indicator of potential payments.  Above normal yields reduce the chance of ARC payments, hence ARC’s implied price.  Below normal yields increase the chance of payments, hence ARC’s implied price.

►   For each year, ARC’s price component is the higher of the crop’s 5-year Olympic average price or the crop’s reference price (see above).  Thus, ARC’s price component can never be less than the PLC reference price.

►   In Table 1, the relationship between the PLC reference price and the estimated ARC implied price for 2014-18 differs notably by program crop.  This difference suggests payment entities may choose different programs for different crops, a feature allowed in PLC and county ARC but not in individual ARC.  Thus, operators may want to consider diversification of program choice as a risk management strategy.

►   Expectations about prices over the 2014-18 crop years will likely be an important consideration.  Expectation that market price will stay above the PLC reference price in most years will likely lead to an initial look at ARC.  In contrast, expectation that market price will be below the PLC reference price in most years will likely lead to an initial look at PLC.

►   Because 2009 was a low price year and an Olympic average discards the high and low prices, ARC’s implied price will not change much in 2015 compared with 2014.  Moreover, ARC’s implied price in 2016 does not change by much and often increases if the 2013 crop year price continues during the 2014 and 2015 crop years (see Table 1).  Thus, ARC may provide more risk protection than expected.  However, if market prices decline notably in 2014 and 2015 from current levels, ARC’s implied price will decline notably by 2017 and 2018.  This discussion underscores the importance of expectations about the path of prices through 2018.

►   PLC’s reference price provides a potential floor on a crop’s per unit revenue because PLC makes price deficiency payments if market price is between the reference price and loan rate.

►   The last three bullet points suggest that a key decision factor may become the prices for the 2014 crops during the last week of program sign-up.

►   A second key decision factor may become the known yield of a 2014 crop harvested before the sign-up deadline as well as expected yields of 2014 crops yet to be harvested.

►   Payment limits could be a bigger issue than in the past because risk management programs can make large payments when a risk occurs.  Moreover, these years are never known in advance and these payments may be needed due to the low revenue resulting from the occurrence of a risk.  It is worth underscoring that peanuts has a separate payment limit but all other program crops have a combined, single limit of $125,000 per payment entity.

►   The Supplemental Insurance Coverage Option (SCO) is available only to crops in PLC.  The county-based SCO could be an important consideration is this decision, but individual farm insurance is more specific to an individual farm’s risk than is county insurance.  Moreover, SCO’s subsidy rate of 65% exceeds the subsidy rate for the commonly-chosen enterprise insurance only at the 85% coverage level (53% subsidy).  When combined, these considerations suggest that the use of SCO could be limited to the 80% to 86% range of insurance coverage.

►   Individual ARC is in essence a whole program crop farm safety net for all FSA farms that an individual payment entity elects into individual ARC.  Because of this feature and because payment will be made on only 65% of base acres, it seems reasonable to speculate that individual ARC may be most attractive for relatively small farms with contiguous acres in a microclimate and soil profile not representative of the county and in areas with variable yields.

Summary

The 2014 farm bill encourages farmers to think strategically about their farms through at least 2018.  An important strategic risk management question is the ability of a farm to withstand multiple years of low farm prices and revenue.  Managing multiple-year risk involves a set of interrelated considerations, including the expected path of prices and revenue until 2018.  The multiple year nature of this assessment points to the value of consulting decision calculators.

This publication is also available at http://aede.osu.edu/publications

Table 1.  Price Parameters for U.S. Crop Program Options, 2014-2018 Crop Year

Footnote: units are $/bushel for all crops except peanuts ($/pound) and rice ($/100 pounds)

Comparative Reference Table:  Key Parameters by Crop Program Option, 2014 U.S. Farm Bill

Carl Zulauf, Ohio State University, February 2014

by: Carl Zulauf, Professor, Ohio State University, January 2014

Overview:  This post contains a summary of key farm safety net provisions.  Details are minimized to focus on key features.  A few brief observations conclude the post.  Mistakes are possible given the short turn-around time and interpretation of bill language.  Apology is extended for any mistakes.

Title 1.  Commodity Programs

►   Direct payments are repealed except for reduced transition payments to cotton for the 2014 crop and even smaller payments for the 2015 crop under specified, limited conditions.

►   Programs authorized for the 2014-2018 crop years and through December 31, 2018 for dairy.

►   A crop farm has a one-time, irrevocable opportunity to elect either Price Loss Coverage (PLC) or county Agricultural Risk Coverage (ARC) on a crop by crop basis.  The producer may also elect individual farm ARC, but this election applies to the entire farm.  If no choice is made, the farm defaults to PLC.  All producers on a farm must make the same election or face potential loss of payments for the 2014 crop and are placed in PLC for the 2015-2018 crops.

►   PLC payments occur if U.S. average market price for the crop year is less than the crop’s reference price.  Reference prices are: wheat, $5.50/bushel; corn, $3.70/bushel; grain sorghum, $3.95/bushel; barley, $4.95/bushel; oats, $2.40/bushel; long grain rice, $14.00/hundredweight (cwt).; medium grain rice, $14.00/cwt.; soybeans, $8.40/bushel; other oilseeds, $20.15/cwt.; peanuts $535.00/ton; dry peas, $11.00/cwt.; lentils, $19.97/cwt.; small chickpeas, $19.04/cwt.; and large chickpeas, $21.54/cwt.

►   County ARC payments occur when actual crop revenue is below the ARC revenue guarantee for a crop year.  County ARC guarantee is 86% of county ARC benchmark revenue.  Coverage is capped at 10%, meaning coverage is between 76% and 86% of the county ARC benchmark revenue.  County ARC benchmark revenue is based on the Olympic average (removes high and low values) of county yields and U.S. crop year average prices for the 5 preceding crop years.  For each year, ARC’s price component is the higher of the crop’s 5-year Olympic average price or the crop’s reference price (see above).  Thus, ARC’s price component can never be less than the PLC reference price.

►   Individual farm ARC is a whole program commodity farm program, not individual crop program.  In essence, it is based on the farm’s average covered commodity experience.

►   For both PLC and county ARC, payment acres for a crop are 85% of the farm’s base acres for the crop plus any generic base acres (former cotton base acres) planted to the crop.  Individual ARC payments acres are 65% of the sum of the farm’s total base acres and any generic base acres planted to covered crops on the farm.

►   Total base acres on a farm are the same as current base acres.  However a farm can elect to reallocate base acres among the farm’s covered crops according to each covered crop’s share of the farm’s total acres planted to covered crops over the 2009-2012 crop years.

►   The Secretary of Agriculture is to develop procedures for identifying and eliminating base acres on land that has been subdivided and developed for multiple residential units or non-farming uses and is unlikely to return to agriculture uses.

►   PLC payment yields can be updated to 90% of average planted yield for the 2008-12 crop years.

►   The 2008 Farm Bill’s nonrecourse marketing loan and loan deficiency payment program and associated loan rates are extended, except for modifications to the loan rate for cotton, which now can range between 45 and 52 cents per pound.

►   The Dairy Product Support and MILC programs are replaced with a Dairy Production Margin Protection Program based on the difference between the price of milk and feed cost of producing milk.  A producer elects a coverage level between $4 and $8 per cwt.  No premium is paid for the $4 coverage level; premiums are paid for higher coverage levels.  Premium schedules are specified for production of 4 million or fewer pounds and for production greater than 4 million pounds. No supply control provision is included.

►   A Supplemental Agriculture Disaster Assistance program is funded permanently.  It includes a Livestock Indemnity Program for livestock losses from adverse weather or attacks by federally reintroduced animals; a Livestock Forage Program for losses resulting from drought or fire; a program of emergency relief to producers of livestock, honey bees, and farm raised fish not covered by the two previous programs; and a Tree Assistance Program for natural disasters.

►   So-called permanent laws of 1938 and 1949 are not repealed.

►   Payments indirectly or directly received by a person or legal entity under Title I are limited to $125,000.  Limit for a person and spouse is $250,000.  A separate payment limit for peanuts is retained.  Only Title 1 crop program not included in this single payment limit is the benefit derived from forfeiting nonrecourse loans.

►   USDA is to write new regulations defining “active engagement in farming.”

►   A single farm and nonfarm adjusted gross income (AGI) limit of $900,000 exists for certain commodity as well as conservation programs.

Title 11 – Crop Insurance

►   Supplemental Coverage Option (SCO) provides farms the option to purchase county level insurance that covers part of the deductible under their individual yield and revenue loss policy.  Coverage level cannot exceed difference between 86% and underlying individual policy coverage level.  Subsidy rate is 65%.  SCO is not available if enrolled in ARC.  Implementation must begin by the 2015 crop year.  A slightly different Stacked Income Protection Plan (STAX) is offered for cotton.

►   The higher subsidy levels for enterprise insurance are made permanent.

►   A new revenue-minus-cost margin crop insurance contract is authorized.  The initial target is rice for the 2015 crop year.

►   Several provisions encourage data sharing, with a focus on U.S. Department of Agriculture agencies.  One objective is to increase availability of county-based insurance products.

►   When calculating a farm’s APH insurance yield, the plug yield remains 60%.  But, a producer can chose to exclude a yield for a crop year in which the county planted acre yield was at least 50% below the average county yield over the previous 10 consecutive crop years.

►   Budget limitations are placed on renegotiations of the Standard Reinsurance Agreement, including budget neutrality with regard to the crop insurance programs.

►   Insurance benefits are reduced if a farm tills native sod for production of an annual crop.

►   Enterprise unit insurance is to be offered separately by dryland and irrigated acres of a crop.

►   Beginning farmers and ranchers are eligible for a higher subsidy rate on insurance.

►   Insurance subsidies are not reduced for high income payment entities.

►   The Risk Management Agency is given a clear mandate to focus on developing insurance products for underserved commodities, notably specialty crops.  Immediate priorities are revenue insurance for peanuts, margin insurance for rice, and a specialized irrigated policy for grain sorghum.  Studies are authorized of insurance for swine and poultry catastrophic disease, poultry business interruption; and food safety.  Insurance for organic crops is to offer price elections that reflect the retail or wholesale price, as appropriate.  Index-based weather insurance pilot programs are a priority.

First Look at PLC – County ARC Comparison

The PLC – ARC decision involves many considerations, but a key one is the level of downside protection.  Figure 1 presents a very crude, first look at this consideration in the context of the PLC – county ARC decision (individual ARC is not considered here).  Figure 1 compares the estimated implied guarantee price for ARC to the PLC reference price for the 2014 crop year.  The ARC implied reference price equals ARC’s coverage level of 86% times the Olympic average U.S. price for the 2009-2013 crop years.  This comparison suggests that for 2014 ARC’s’ price coverage level is more favorable for corn and soybeans while PLC’s reference price is more favorable for peanuts, rice, and barley.  The figure implies the same farm may choose different programs for different crops, a feature this farm bill allows.  However, Figure 1 is only a starting point because the decision involves all 5 crop years between 2014 and 2018 and comparing price (PLC) vs. revenue (ARC) programs, fixed (PLC) vs. moving average (ARC) programs, and other important differences.  Farmdocs will offer more detailed and complete discussion of these decision options in the future.

Summary Thoughts

►   Much has been made of the delay in completing this farm bill, including the implication that the farm lobby has lost power.  I suggest caution.  It is quite an accomplishment to complete a farm bill in the current divided political environment.  Few initiatives have gotten this far.

►   This farm bill was the first to be distinctly impacted by multilateral international trade agreements.  Other than the marketing loan program, cotton will eventually have no safety net against multiple year low returns.  Such an outcome was unlikely without the World Trade Organization ruling in the U.S.-Brazil cotton case.  It should give pause to U.S. farm safety net supporters about the consequences if programs become too generous.

►   Due to its size but also expansion in this farm bill, cost and performance of crop insurance will likely be a notable focus of the next farm bill debate.

►   Last, this farm bill did not settle the question of what is the best policy for multiple year assistance, price or revenue and fixed vs. moving targets.  The next farm bill will continue this debate but with experiences that at present appear likely to be based on a period of more normal to low income.  In other words, the context of the next farm bill debate will likely significantly differ from the context of this farm bill debate, raising the potential for different outcomes.

This publication is also available at http://aede.osu.edu/publications