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Thursday, January 30, 2014

Which is for you:  PLC or ARC?



 

What will be the relationship between corn and soybean prices over the next five years?  Will substantial corn acreage and yields keep prices low?  Will Chinese demand for US soybeans keep soybean prices higher than the 2.5 average compared to corn?  Will high prices for nitrogen fertilizer push typical corn acres into soybeans?  And the ultimate question is which farm program should be applied to which crop?  The decision will need to be made soon, not only for the 2014 crop, but the 2018 crop as well.  As your teenage daughter would say, OMG!

 

The new farm program, which will be in place for the next five years, after the expected Senate approval of the Farm Bill and President Obama’s promised signature, offers choices that farmers may have, but their choices will be effective until September 30, 2018.  While that is similar to the ACRE program of the last Farm Bill, the choices in the new farm program can be split from one crop to another.  For example, the Price Loss Coverage (PLC) and its system of reference prices can be applied to soybeans and the rolling average revenue support system of the Agricultural Risk Coverage (ARC) plan can be applied to corn.  There are benefits and pitfalls in both, and those must be weighed carefully before sign-up says Carl Zulauf, agricultural policy economist at Ohio State University.   

 

Zulauf says, “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.”

 

Price Loss Coverage

The PLC plan, developed by the House, uses reference prices, formerly known as target prices, and payments would occur if the average market price for the crop year is less than the reference price.  Those prices are $5.50 for wheat, $3.70 for corn, and $8.40 for soybeans.  While those may seem low to Cornbelt farmers, the reference prices for southern commodities are relatively higher.

 

Unlike the ARC plan, the PLC plan carries eligibility for a special crop insurance policy called Supplemental Coverage Option, which pays part of the deductible, but an operator must shoulder the risk for a minimum of 14% of the loss. The so-called “shallow loss coverage” comes with 65% of the premium subsidized for the county-based policies.

 

Agricultural Risk Coverage

The ARC plan, developed by the Senate, may be a more preferred program for Cornbelt producers.  Payments would occur when actual crop revenue is below the ARC guarantee for the crop year, and that guarantee is 86% of a county-based yield formula multiplied by a national average price.  ARC also offers an individual farm plan for the entire farm, not crop by crop as the county plan offers.  The ARC payment is based on national average prices over the prior five years with the high and low discarded.

 

 

Zulauf says both plans use a system of base acres, and payment is made on 85% of the base acres. While the FSA office will retain the base acres for the farm, operators will be able to shift crop bases due to recent planting trends if desired.  And since yields have been changing, the PLC program allows for payment yields to be updated to 90% of the average yield for planted acres over the past 5 years.

 

When calculating payments, operators must also calculate payment limitations.  For farm program payments, legal limits are $125,000 for each person actively engaged in management operations.  While that can be doubled for a spouse, USDA will be boosting its effort in the coming year to better define on each farm who is actively engaged in farming and management of the farm.  However, any operator with an adjusted gross income over $900,000 will be ineligible for farm program payments.

 

Summary:

The Farm Bill provides for two choices for a farm price and revenue support plan, one based on target prices per commodity, the other based on revenue risk from year to year.  Farmers will have to study the two and make careful choices.  Zulauf says, “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 more normal, potentially 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.” 

 

Posted by Stu Ellis on 01/30 at 10:52 PM | Permalink

Comments

Stu, I have quite a few question regarding the new insurance options, I apologize in advance smile Also, it looks like it won't let me add blank lines in between topics so I tried to separate them as best as I could. -------- Both plans state that they can cover up to 85% of base acres. They also state that their respective coverage levels. Do you need to multiply them together to get your actual coverage. For example, in ARC, if I have coverage on 85% of my base acres and 86% of the price and yield Olympic average, am I really only revenue guaranteed up to 73% of the expected revenue per acre? --------- What agency do the figures for the olympic averages for the price and yields come from? ---------- The ARC plan states that if you elect farm specific coverage, instead of county coverage, you can't elect it crop by crop. What do that mean? Does that mean you can't have PLC for corn and farm-specific ARC for soybeans? Or does that mean the farm specific ARC plan uses a blended revenue guarantee for all covered acres using both corn and soybeans (which sounds extremely complicated) -------- With regards to ARC payments, how does that work with farmers with multiple entities? For example, my father and uncle farm two different entities. One entity has a seed distribution business that is owned solely by my father and uncle, the other is a farm only entity that my grandfather owns the majority of. Does the revenue of each entity need to be added together then divided the number of active operators to find the adjusted gross income? Does the revenue from the seed business against the 900K limit? Are the insurance payments made to the individual farmers or to the entities themselves? ----------Thanks in advance for your time. Since this is no new, I'm sure there are plenty of questions you have as well. Jevon These are great and legitimate questions. Let me confer with a colleague and get some accurate answers. I don't want to mis-state anything, so stand-by and you will get an answer from the fellow who wrote the Farm Bill. ~Stu

Posted by: Jevon Reile at February 6, 2014 5:05AM

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